Can the federal budget be passed without the threat of a government shutdown?

As has often been the case in recent years, Congress waited until the last minute to approve legislation to keep the federal government operating. A funding deadline of December 20, 2024, had nearly expired when the House and Senate approved a so-called continuing resolution (CR) to maintain government funding and appropriate funds for additional purposes.

Final action came after President-elect Donald Trump urged Congress to reject a compromise package that was proposed just days earlier. That bill was scrapped and ultimately replaced with a modestly altered version of the legislation, which easily passed both the House and Senate on December 20. President Joe Biden signed the measure into law, allowing government operations to continue uninterrupted through March 14, 2025.

Although the funding issue commanded news headlines just days before action was required, markets appeared to pay little attention to the matter. During the same week, markets were far more focused on the most recent Federal Reserve interest rate cut (announced on December 18), and diminished expectations for 2025 rate cuts.

“To this point, ongoing budget issues are in the background as far as markets are concerned,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Now, markets are far more focused on potential policies of the incoming Trump administration.”

Persistent budget challenges

Budget battles are nothing new in Washington. Since 1980, the federal government has partially shut down on at least 10 different occasions, with shutdowns lasting for extended periods in only three of those cases. If Congress doesn’t again address the budget by the mid-March 2025 funding deadline, nearly six months will pass from the current fiscal year’s beginning, at a minimum, before Congress settles on a final budget.

While federal government spending agreements can be contentious, federal spending declined in recent years after peaking in the immediate wake of COVID's emergence in 2020. However, current projections indicated higher spending for fiscal 2024 and 2025.

“We’re likely to hear numerous expenditure-cutting proposals,” says Haworth. “The market isn’t looking too hard at that, because it takes a lot to get anything substantial through Congress.”

While the recent funding extension maintained existing funding for all federal government departments into fiscal 2025, Congress also appropriated $100 billion in disaster relief related to recent hurricanes and in financial assistance to farmers.

Congress also faces an estimated mid-2025 deadline to extend the federal government’s debt limit. The debt limit affects the U.S. Department of the Treasury’s ability to issue additional debt to finance government expenses. Debt issuance is required to fund deficit spending that exceeds current tax receipts. President-elect Trump urged Congress to dispense with its requirement to extend the debt ceiling going forward or to extend the current limit into 2027, but that provision was not included in the CR. It means that in 2025, the new Congress will need to again deal with the debt ceiling issue along with approving a final budget.

The next Congress convenes on January 3, 2025. President-elect Trump begins his second term on January 20, 2025.

A strained political environment

The political realities of the makeup of Congress add to budget process challenges, according to Kevin MacMillan, head of state and federal government relations at U.S. Bank. “In 2025, the Republicans will have slender majorities in the House of Representatives and the Senate, leaving only a narrow path to the ultimate budget resolution.” In fact, a Republican-drafted funding measure that included extending the debt ceiling for two years failed in a House vote, with dozens of Republicans voting against the measure.

“A small but vocal group of House members sees the budget process as an opportunity to object to further government funding and pursue other aspects of their political agenda,” says MacMillan.

Federal government shutdown precedents

Federal government shutdowns are not a new phenomenon. Since 1980, the federal government has partially shut down on at least 10 different occasions. Between 1980 and 1986, four shutdowns occurred lasting only one day. Three other shutdowns extended just 3-5 days. Since 1995, however, three government shutdowns occurred that lasted much longer.

Source: United States Congressional Record.

Economic and market considerations

The biggest concern for investors is the risk of an extended government shutdown. “How big a hit a shutdown costs the economy depends on how long the government is closed,” says Beth Ann Bovino, chief economist for U.S. Bank. “One week can be managed as a nuisance, but the longer the government is closed, the more it hurts the economy.”

“The long-term impact of past shutdowns hasn’t tended to be broadly significant for capital markets,” says Haworth. “Even if there is a temporary decline in economic activity, it hasn’t been a major concern for investors.”

Source: U.S. Bank Asset Management Group.

In all three instances of extended shutdowns, markets managed positive performance during and immediately after the shutdown. In two of the three instances (1995 and 2013), markets performed positively in the months leading up to those shutdowns. In 2018, markets were down prior to the shutdown, but other contributing factors may have been at play, including the Federal Reserve’s decision to hike short-term interest rates during that period.

“A variety of issues impact the markets, even during stressful times like government shutdowns,” says Haworth. He also notes that given the frequency of government shutdown threats, the market response tends to be muted. “The market won’t start pricing these in until we actually see a shutdown, and a financial impact from it,” says Haworth.

Keeping your investment strategy on track

While political issues such as the debt ceiling dispute, the federal government budget impasse as well as the new administration’s potential major economic initiatives garner significant headlines, it’s important for investors not to allow these issues to distract them from long-term investment objectives.

Talk with a wealth professional to discuss your current portfolio to make sure your assets remain properly positioned to meet your financial goals consistent with your time horizon and risk tolerance.