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This assessment was issued to clients of Dragonfly’s Security Intelligence & Analysis Service (SIAS) on 31 July 2023.
National press outlets have warned about this scenario amid a current deadlock in Congress over agreeing to a budget for 2024. It has until 30 September to do this. A similar situation in 2019 led to a 35-day partial government shutdown, during which several US agencies considerably reduced non-essential services domestically and abroad. In the unlikely event that a shutdown occurs, we assess that disruption to public services used by businesses would be the main impact on the private sector.
A government shutdown occurs when Congress or the President fails to pass a budget for the upcoming year. And a current deadlock around agreeing to a federal budget for 2024 has fuelled press speculation that this will occur. Legislators so far have failed to reach a budget deal, mostly because House Republicans are trying to pass a smaller budget than they agreed to during cross-party debt ceiling negotiations in June, according to media reports. Congress is scheduled to restart budget talks in September after the House recess during August.
To avoid a shutdown, Congress must approve a combined version of the budget and send the final bill to the President by 30 September, who must then either sign it or veto it (see the graphic). The negotiations will probably be particularly hostile in the House, given the slim majority that Republicans hold. This means that in order to pass a budget bill, House Republicans will either require the support of every one of its caucus members or it will have to draft a bill that would garner bipartisan support.
Despite the ongoing deadlock, a government shutdown appears unlikely. In signs that there is a concerted effort to find an accord, press reports suggest that senators from both parties are in the process of agreeing to a funding bill. And in an interview with NPR on 28 July, a senior Republican member of the House Appropriations Committee, which is tasked with passing a federal budget, said a shutdown ‘[is] not an option’. Even if a resolution is not found by the federal fiscal deadline, Congress has the constitutional power to approve temporary funding to avert a shutdown.
In our analysis, US legislators will want to avert a shutdown. This is because disruption to public services would likely displease voters. Polling data about voter reactions to the partial federal shutdown in 2019 shows that it was highly unpopular; President Donald Trump’s disapproval rating rose to new highs at the time, and most respondents blamed President Trump and Republicans. Another shutdown would be likely to impact legislators’ reelection prospects for the 2024 general elections.
A federal shutdown would almost certainly cause widespread disruption to public services; businesses with government contracts would be particularly vulnerable. Precedents from past shutdowns suggest that this led to tens to hundreds of thousands of federal workers in various US agencies being furloughed, forcing agencies to operate with a reduced staff. For businesses, this means that a considerably reduced public workforce would likely lead to operational delays in processing official travel documents, small business loans, and government contracts.
There is a strong possibility that domestic supply chains would experience operational disruption during a government closure. Media reports suggest that this would mainly consist of delayed food safety inspections, reduced airport operations, delayed clearance of international freight shipments, as well as the delayed publication of official economic data. Precedent from the 2019 shutdown suggests that these forms of domestic supply chain disruption would remain for several months, even after the shutdown has ended.
Image: US President Joe Biden speaks about his economic plan “Bidenomics” at Auburn Manufacturing Inc. in Auburn, Maine, United States, on 28 July 2023. Photo by Brendan Smialowski/AFP via Getty Images.