A shutdown is possible if Congress fails to provide funding for the budget year that begins October 1.
A US government shutdown would have a negative impact on the country’s credit rating, credit rating agency Moody’s warned, a month after Fitch downgraded the United States by one notch due to a debt ceiling crisis.
America’s government services would be disrupted and hundreds of thousands of federal workers would be laid off without pay if Congress fails to provide funding for the budget year that begins October 1.
A possible shutdown would be further evidence of how political polarization in Washington DC is weakening fiscal policymaking at a time of increasing pressure on the affordability of US government debt due to higher interest rates, Moody’s analyst William Foster told Reuters on Monday.
“If there is no effective fiscal policy to offset these pressures … then it is likely to have an increasingly negative impact on the credit profile,” Foster said. “And that could lead to a negative outlook, and possibly a credit downgrade at some point, if these pressures are not addressed.”
Moody’s has an ‘Aaa’ rating for the US government with a stable outlook – the highest credit rating it assigns to borrowers. It is the last major agency with such a rating after Fitch in August downgraded the US government’s triple-A rating by one notch to AA+ – the same rating assigned by S&P Global in 2011.
A lower credit rating means the US may appear less creditworthy and may have to pay higher interest rates on its debt.
US fiscal policy ‘less robust’
“Fiscal policymaking in the US is less robust than in many Aaa-rated US countries, and another shutdown would be further evidence of this weakness,” Moody’s said in a statement.
The economic impact of a shutdown would likely be limited and short-lived, with the most immediate economic impact coming from lower government spending. The longer the shutdown lasts, the more negative its impact on the broader economy will be, Moody’s said.
U.S. Agriculture Secretary Tom Vilsack warned Monday that a government shutdown will jeopardize nutrition assistance for the nearly 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 spending bills to fund federal agency programs for the fiscal year that begins Oct. 1, amid a Republican-Republican feud.
The shutdown would not affect government debt payments, but would come just a few months after political disarray over the U.S. debt limit threatened to lead to a default on the U.S. government debt.
That crisis, even though it was ultimately resolved before any missed debt payments, was a major factor that led Fitch to downgrade its U.S. rating by one notch last month.
“In this environment of longer interest rates and increasing pressure on debt affordability, it is even more important that fiscal policy can respond,” said Moody’s Foster.
“And it looks increasingly challenged because of things like the government shutdown and the fact that the debt limit has been lifted, because there are such polarized political dynamics in Washington.”