A shutdown could occur if Congress fails to provide funding for the fiscal year that begins Oct. 1.
Credit rating agency Moody’s warned that the US government shutdown would negatively affect the country’s credit, one month after Fitch downgraded the US rating by one notch against the backdrop of the debt ceiling crisis.
US government services will be disrupted and hundreds of thousands of federal employees will be furloughed without pay if Congress fails to provide funding for the fiscal year that begins October 1.
The potential shutdown would be further evidence of how political polarization in Washington, D.C., is weakening fiscal policymaking at a time when pressure on the sustainability of U.S. government debt is mounting due to rising interest rates, Moody’s analyst William Foster told Reuters on Monday.
“If there is not an effective fiscal policy response to try to offset those pressures… the potential is there to have an increasingly negative impact on the credit profile,” Foster said. “This could lead to a negative outlook, and possibly a rating downgrade at some point, if these pressures are not addressed.”
Moody’s has given the US government an “Aaa” rating with a stable outlook – the highest credit rating it gives to borrowers. It is the last major agency to receive such a rating after Fitch downgraded the US government’s AAA rating by one notch in August to AA+ – the same rating assigned by Standard & Poor’s Global in 2011.
A lower credit rating means that the United States may appear less creditworthy and may have to pay higher interest rates on its debt.
US fiscal policy ‘less robust’
“Fiscal policymaking is less robust in the United States than in many of its AAA-rated peers, and another shutdown would be further evidence of this weakness,” Moody’s said in a statement.
The economic impact of the lockdown is likely to be limited and short-lived, with the most immediate economic impact due to reduced government spending. Of course, the longer the lockdown lasts, the more negative its impact will be on the broader economy, Moody’s said.
U.S. Agriculture Secretary Tom Vilsack warned Monday that the government shutdown threatens food aid for about 7 million low-income women and children who rely on benefits.
Vilsack said some benefits could be affected within days or weeks if Congress fails to provide funding for the fiscal year that begins Sunday.
Congress has so far failed to pass any spending bills to fund federal agency programs in the fiscal year that begins Oct. 1 amid a GOP dispute.
The shutdown will not affect government debt payments, but will come just a few months after political brinksmanship around the U.S. debt limit threatened to trigger a default on U.S. sovereign debt.
That crisis, although it was eventually resolved before any debt payments were made, was a major factor that prompted Fitch to cut its rating for the United States by one notch last month.
“In this environment of higher interest rates for a longer period of time and increasing pressures on the debt sustainability front, it is very important that fiscal policy can respond,” Moody’s Foster said.
“And it seems to be increasingly challenged by things like the government shutdown and coming out of debt control, because it’s a polarizing political dynamic in Washington.”