Government Shutdown Odds Are Rising, Goldman Warns

Having been quite confident that Trump would be able to pass some form of Tax reform as recently as two weeks ago, Goldman’s Washington analyst, Alec Phillips, is turning increasingly more pessimistic on the prospects that Trump’s economic agenda will gain traction in Congress, especially now that attention has seemingly shifted to Trump’s bombing policies in Syria (and perhaps North Korea in the not too distant future).

In a note over the weekend, the Goldman strategist writes that “following the failure to pass the American Health Care Act (AHCA), which would repeal the Medicaid expansion and tax hikes enacted in the Affordable Care Act (ACA) and reduce the tax subsidies for health insurance under that law, Republican leaders in the House have struggled to develop an alternative health proposal that might find enough support to pass. At this point, it still appears possible that the House could pass a revised version of the bill at some point in May. However, the compromises that might be made in the House to gain support are apt to reduce support in the Senate, and the process in that chamber would take much longer than even the drawn out House process, in our view.”

He also observes that lawmakers and market participants have refocused their attention on tax reform, “though a number of other issues are likely to delay activity on tax legislation for another several weeks.” This includes another potential attempt to pass health legislation, the possibility of a government shutdown, a debt limit deadline later this year, and geopolitical developments.

Which brings us to the key topic: the prospect of a government shutdown in less than three weeks. This is what Phillips says when discussing the risks of a government shutdown on April 29.

Congressional appropriations expire April 28. If Congress does not pass an extension, the federal government will partially shut down. The economic consequences of a short shutdown are minor, since lost federal pay is usually made up retroactively and government procurement and private sector activity would be largely unaffected.

However, a shutdown would send another signal to markets that Republicans may not be able to enact their agenda, lowering expectations for tax reform and an infrastructure program.

We believe Congress is more likely to meet the deadline, but see a one in three chance of a shutdown.

The “freedom caucus” in the House may be unwilling to vote for a spending bill, denying Republicans a majority without Democratic votes. However, Democrats might be unwilling to provide those votes as they often have in the past, in light of the decision to change Senate rules to confirm Neil Gorsuch to the Supreme Court over Democratic opposition.

That said, there is not yet a clear issue Democrats are likely to point to in defense of a shutdown, as Republicans did in the 2013 shutdown when they demanded that Obamacare be defunded. If such an issue emerges—Republican leaders have already indicated they plan to keep funding for the border wall out of the bill to avoid such an issue—then the odds of a shutdown would rise considerably.