Goldman Sachs predicts government shutdown ‘more likely than not’ this year

Goldman Sachs in a report released Sunday predicted a government shutdown was “more likely than not” this year, pointing to the slim House majority and a lack of agreement on key spending issues.

The report also indicated that the consequences of Congress failing to act before the end of the fiscal year on Sept. 30 would be less severe than the consequences that would have resulted from Congress failing to suspend the debt limit in May. For that reason, according to the report, a government shutdown looks even more likely.

“Unlike the debt limit, where Congress reached a deal because the potential hit to the economy from an impasse would have been so severe, a shutdown would be much more manageable from a macroeconomic perspective. However, compared to the debt limit, the less severe economic effect of a shutdown also makes it more likely that Congress fails to act in time,” the report read. 

While the Fiscal Responsibility Act, which suspended the debt ceiling in exchange for some spending caps and other provisions, “should have ended the debate on spending levels,” the report indicated, Republicans in the House are pushing for additional cuts. Some have indicated they would not be fazed by the prospect of a shutdown, if it meant securing further reductions to spending levels.

“A government shutdown looks more likely than not later this year. At the start of the year, we noted a good chance of a government shutdown and made it the base case following the debt limit deal in June, in light of the thin House majority and disagreement on spending levels,” the report read. 

“The odds of a shutdown appear at least as high now as they did then,” the report continued.

A government-wide shutdown at the end of this year, Goldman Sachs predicted, would reduce growth of the economy by about 0.2 percentage points per week, which would also involve modest private sector effects, the report indicated. The report pointed out that markets have not responded strongly to past government shutdowns. 

Goldman Sachs pointed to several policy issues that are likely to make it even more difficult to pass the spending bills before the end of the fiscal year, on Sept. 30 — the most prominent of which is Ukraine funding.

The White House has asked Congress for a $40 billion supplemental spending package that includes $24 billion in Ukraine aid, $12 billion in disaster relief and $4 billion in border and migration efforts. 

Ukraine funding will likely be a big hurdle to overcome, as support for additional aid to Ukraine has been waning, and at least 70 House Republicans recently voted against more funding for Ukraine and “seem likely to do it again,” according to the report.