US Budget Tussle Means Risk of Avoiding Govt. Shutdown Only Temporary - Fitch

WASHINGTON (Sputnik) - The US has avoided a partial government shutdown with a fourth budget-related fiscal resolution passed in just over six months, but a divided Congress means any comfort for the nation would be temporary, Fitch Ratings said.

"The passage of another continuing resolution avoids a partial U.S. government shutdown, but does not signal improvement in budget policymaking," Fitch said in a statement on Monday.

In January 18, Congress passed legislation to keep on funding federal government departments at existing levels. Deadlines to avoid a shutdown have been pushed to March 1 and March 8, while there are ongoing efforts to agree on appropriations bills for this fiscal year, which began on October 1 last year.

The latest continuing resolution follows last-minute agreements to suspend the debt ceiling in June 2023 and continuing resolutions in September and November to avert partial government shutdowns, Fitch said.

"This shows some capacity for bipartisan agreement on funding, avoiding a shutdown’s economic and social consequences. However, it underscores how divided government has made reaching consensus on fiscal matters challenging. The 2023 general government deficit may have exceeded 9% of GDP, highlighting the inability of stopgap policymaking to address fiscal deterioration," Fitch said.

Current developments indicate that political dynamics will continue to dictate budget discussions at least until the November 2024 elections, Fitch said.

"We do not expect any significant fiscal consolidation measures to be passed before then. Possible supplementary spending bills, for example to provide additional support to Ukraine or Taiwan or on border security, could increase spending further. It is unclear how far brinkmanship will ease after the elections given high political polarization," Fitch said.

Such outcomes, and whether divided government continues, will also be important for any new legislation, including possible extension of the tax cuts in the 2017 Tax Cuts and Jobs Act, and the resolution of the debt limit in January 2025, it said.

Fitch observed that steady deterioration in governance over the past 20 years, including on fiscal matters, was a key driver of our August 2023 downgrade of the United Stats to AA+/Stable, combined with expected fiscal deterioration over the next three years, and high and growing general government debt.

"Only twice in the past 13 years has Congress passed all required spending bills before Oct. 1, often relying on continuing resolutions. Brinkmanship has hindered progress tackling medium-term challenges from prior tax cuts and rising social security and Medicare costs," Fitch said.

Meanwhile, fiscal challenges have been compounded by higher interest rates, highlighted by the 49% increase in net interest payments in public debt in the fourth quarter of 2023 from a year earlier. Rising interest costs contributed to the federal government deficit doubling in calendar year 2023, to an estimated 7.8% of GDP, as did higher Social Security outlays and deposit insurance costs, after fiscal adjustments to the impact of student loan forgiveness in 2022 and 2023, it said.

All these pose additional risks for the nation to avoid further shutdown scenarios, given the inability of Congress to agree on medium-term fiscal measures, Fitch also said.