After a lengthy state/district work period in August, the U.S. Senate will return this week, followed by the U.S. House of Representatives next week. In the immediate term, the two chambers must reach agreement on funding the government before the September 30 deadline in order to avoid a shutdown. Beyond that, there are numerous important legislative items facing a lapse in authorization that senators and House members would like to complete before the end of the year.
Outlined in this memo are the current state of play on funding, an analysis of expiring policy authorizations, and a discussion of the impacts a potential shutdown would have on the economy and politics.
Shutdown Watch
State of Play
Congress will have roughly three weeks to pass a spending bill when members return from August recess. Regardless of the rhetoric, it likely will be impossible to pass a long-term spending bill that encompasses the 12 appropriations bills in such a short time frame. Therefore, a continuing resolution (CR) is the most likely and logical vehicle to prevent a government shutdown. House Speaker Kevin McCarthy, Senate Majority Leader Chuck Schumer, and President Joe Biden have all expressed support for a CR running through early December. While House Republican leadership believes they are in a "good spot" with getting a CR through the House, we shouldn't discount the possibility of a government shutdown in October.
Some House Republicans have already expressed their opposition to a "clean" CR. On August 21, the House Freedom Caucus (HFC) put out a statement opposing any continuing resolution that "continues Democrats' bloated COVID-era spending and simultaneously fails to force the Biden administration to follow the law and fulfill its most basic responsibilities." While Speaker McCarthy will tout the fact that House appropriators marked up bills to FY22 levels and put forth a "strong" Homeland Security Subcommittee bill that forces the administration to address border security concerns, some feel that will not be enough to appease the HFC; and while a clean CR could pass the House on a bipartisan vote, the speaker would run the risk of further angering a very vocal contingent of Republican House members by reaching across the aisle for votes.
The administration's request for $40 billion in supplemental funding is part of the broader spending debate. Just before the August recess the White House sent Congress a $40 billion request for supplemental funding: $24 billion for Ukraine, $12 billion for the Disaster Relief Fund, and $4 billion for border and immigration purposes. Last week, the White House increased the request by another $4 billion to account for the recent fires in Hawaii and damage from Hurricane Idalia. While the Senate likely has the votes to pass such a supplemental, the request for Ukraine funding will meet resistance in the House.
While House Republican leadership works to get consensus on a CR, they will likely bring up several bills that bolster Republican arguments surrounding the government funding debate. We expect to see bills that address the Pipeline and Hazardous Materials Safety Administration (PHMSA) and environmental regulations, as well as a Homeland Security Appropriations bill that funds additional U.S. Customs and Border Patrol (CBP) agents and provides over $2 billion to continue construction of the border wall.
The Senate will focus on passing appropriations bills, which Democratic leadership will use as proof points to blame Republicans. When the Senate returns in September, they will continue to work through nominations as well as a vehicle to fund the government. Leader Schumer has already started to lay fault with House Republicans for an impending shutdown, stressing the need for bipartisan appropriations bills and a disaster supplemental. As a result, we could see a "minibus" package of appropriations bills brought to the Senate floor in September that includes bills passed out of the Senate Appropriations Committee on a bipartisan basis. Schumer has not ruled out originating a CR in the Senate to put pressure on the House, but such a move would require bipartisan support.
Cromnibus Rumors. Recently, there have been rumors of a "cromnibus," or a combination of a CR and an omnibus spending bill, circulating in the House. This likely would fund the Defense and Military Construction and Veterans Affairs Subcommittees' appropriations bills for a full year, while other agencies would operate on a short-term continuing resolution. It is unlikely that the White House and the Senate would support such an approach. In the past, Democrats have been willing to support so-called cromnibus bills, but only if significant portions of non-defense discretionary programs are funded along with defense. In the unlikely event that a vehicle like this passes, it would mean that leadership expects a shutdown in December and wants to ensure that active-duty servicemembers and veterans are not affected. Regardless, any September vehicle to fund the government will likely last until December, at which point House Republicans will try to pass the rest of their appropriations bills. This will inevitably leave Congress at odds again on funding the government around the holidays, likely resulting in a government shutdown.
If the consensus is a shutdown will happen at some point, the question becomes, "How and when does it end?"
We will likely end with a deal that yields some combination of minimal discretionary spending cuts, language on domestic energy permitting, and possible border security-related provisions. There may be some extraneous items added to solidify votes from specific members as well, but it is unlikely that President Biden will make any substantive changes to what he views as his accomplishments. A deal like this would ultimately garner enough bipartisan support to pass both chambers of Congress, with the more partisan members of each party voting in opposition. The White House, Democrats in both chambers, and a sizeable block of Senate Republicans will likely resist further spending cuts below what President Biden and Speaker McCarthy agreed to as part of the debt limit deal earlier this year.
The length of a shutdown will depend on how Speaker McCarthy balances progress in negotiations to reopen with displays of solidarity among the Republican conference. The last shutdown, while only "partial," lasted 35 days, and we see no reason why an upcoming shutdown couldn't last as long as that, if not longer.
Shutdown Effects
Economy
Previous government shutdowns have undoubtably had a negative effect our nation's economy. While an upcoming shutdown will not be tied to a debt limit negotiation, after the FY2013 shutdown, the Council of Economic Advisers estimated that the combination of the shutdown and debt limit brinksmanship resulted in 120,000 fewer private sector jobs created during that time. Direct economic impacts associated with that shutdown included:
- Federal permitting and environmental and other reviews being halted, including 200 applications for a permit to drill for energy resources
- Import and export licenses and applications being put on hold, affecting trade
- Federal loans to small businesses, homeowners, and families in rural communities being put on hold because of suspensions by income verification services
- Private sector lending to individuals and small businesses disruptions, because banks and lenders couldn't access government income and Social Security Number verification services
- Travel and tourism disruptions at national parks and monuments across the country
The stock market has not necessarily seen drastic shifts during government shutdowns. According to Goldman Sachs, "since 1980, stocks have posted 'very small' returns leading up to and during government shutdowns, generating median losses of 0.1% on days the budget authority expires and staying virtually flat throughout the shutdown periods." During the last 35-day shutdown, "concerns over monetary policy helped push the S&P 500 down 2%." Since the upcoming possible shutdown is not linked to a debt limit negotiation, we may see a less negative impact.
Political Ramifications
Historically, Republicans are blamed for shutdowns. After the FY1996 shutdowns, a Washington Post–ABC News poll showed that 50 percent of Americans blamed congressional Republicans and only 27 percent blamed President Bill Clinton. In 2011, Post-ABC surveys showed 32 percent of the public had a favorable opinion of the GOP and 63 percent had an unfavorable view of the party. The 2019 shutdown had a similar effect, with 53 percent of Americans blaming President Trump and congressional Republicans.
That said, the political cost to Republicans for causing a shutdown has been diminishing since 1996. Shutdowns are becoming more routine, and they are no longer treated by the press as existential crises. Voters are less affected, as essential functions seem to expand with every shutdown, lessening their visible impacts.
Speaker McCarthy has shown an uncanny ability to manage the House Republican conference so far this Congress, and he will need to do it again here. Many on the right are becoming outspoken on the debt and want to use this spending fight to extract reform. However, others in the conference do not see a shutdown as politically tenable in the districts that they represent. That is why we believe that Speaker McCarthy may ramp up other far-right priorities, such as impeachment, to placate the far right in order to fund the government.
The House GOP conference finds itself in an increasingly isolated position. Senate Republicans are holding firm to the budget deal agreed to earlier this year, and Senate Democrats have worked to pass all 12 appropriations bills out of committee. If House Republicans are not able to agree to a funding plan or a stopgap measure, we expect Leader Schumer to hit the GOP hard over it. Senate floor consideration of at least one minibus appropriations package, as we described above, is likely as a means of ratcheting up the pressure.
All of this puts Speaker McCarthy is in a tough spot: to the extent that a shutdown disproportionally harms Republicans politically, it very well could become an unsustainable tactic that would play into Democrats' charges of GOP obstruction and extremism. Furthermore, any means of averting or concluding such a lapse would require support from Senate Democrats, the White House, and ultimately the House minority, which would anger a vocal contingent of House conservatives and exacerbate McCarthy's already tenuous relations with the conference's right flank (and calls to "vacate the chair" could resurface, especially given the 118th Congress's rule change, whereby only one member is needed to bring such a resolution to the floor). While the speaker should have enough votes to keep the gavel, the fallout could fracture the conference even more.
Non-Shutdown Items: NDAA, Farm Bill, FAA, and other Expiring Authorizations
We do not expect any upcoming reauthorizations to be affected by the government shutdown. If Congress were to enact a CR in September, these bills will likely "hitch a ride" and be reauthorized for a certain amount of time.
The Farm Bill is the most contentious bill on this list, and considering that legislative language has yet to be introduced, the bill is almost certainly expected to continue under the current reauthorization. The only question will be, for how long? While it hasn't yet been said publicly, an extension until the next fiscal year could be on the table.
Federal Aviation Administration (FAA) Reauthorization continues to be a fight, with the Senate unable to pass a bill out of the Commerce Committee. Once again, given the time constraints, Congress will need a short-term reauthorization for the FAA.
The National Defense Authorization Act (NDAA) continues to work its way through House and Senate Armed Services Committees, which have made substantial progress in negotiating a final bill. While they may need some additional time to hash out specific details, we expect a reauthorization to be signed into law at some point in the fall.
Conclusion—A Busy Fall Ahead
It is not often that Congress faces a reauthorization trifecta like the one outlined above and, at the same time, must wrestle with a looming government shutdown. On top of that, according to the current calendar, there are only 10 days where both chambers are slated to be in session between now and the end of the current fiscal year, so pressure will be on leaders to figure a way through. In a non-election year, Congress can take many of these efforts right up to Christmas, and we expect that to ultimately happen this time. It portends to be a busy fall, full of brinkmanship and suspense.
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