Fiscal policy back in focus as another govt. shutdown looms

The threat of another government shutdown looms as Nov. 17 — the last day of government funding — quickly approaches. Newly elected House Speaker Mike Johnson (R-La.) has proposed a two-step spending bill, that if passed would extend government funding to January 2024 and funding for other departments into February.

Jeannette Lowe, Strategas Securities Managing Director of Policy Research, weighs in on Johnson’s stopgap spending bill and Moody’s recent lowering of the US credit outlook.

Lowe notes that this environment is a “huge change in the US fiscal picture” and predicts Congress “may not do anything” as lawmakers shift their focus onto 2024 reelection efforts.

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

Video Transcript

- So let's assume, Jeanette, that we avoid the shutdown. The government stays open, everything is fine. But everything isn't fine, is it? I mean, you've got all the credit agencies now pointing to this consistent dysfunction in Washington as a problem. You have the increasing drumbeat of the fiscal house of the United States being perhaps in jeopardy, debt servicing costs are going up, the Treasury has to issue a lot of debt. What's the big picture here?

JEANNETTE LOWE: Right. So when we were looking at the potential for a government shutdown on October 1, we were thinking about the fact that Moody's had been saying that they could put the US on a credit watch if we went to a government shutdown. We obviously did avoid a government shutdown on October 1. We haven't reached a government shutdown here, but Moody's still put us on a credit watch.

So that is one step closer to a, a credit downgrade. And of course, Moody's is the third of the credit rating, credit rating agencies that has yet to do so. So what we're looking ahead to is that this is a huge change in the US fiscal picture. So for the last 25 years, we've had a fiscal policy tailwind, Congress has been able to raise taxes or cut spending, and we haven't really had to worry about debt servicing costs.

But with the Fed having to fight inflation, having high interest rates has led to really high debt servicing costs, and we are now looking at debt servicing costs nearing the amount that we spend on defense spending. So this is really taking up a big chunk of the budget. It's going to start to squeeze out other spending levels.

And Congress is starting to look at this, and starting to think about how to manage it, but most policymakers haven't really had to worry about this, and it's going to be a real change for the fiscal policy for the country moving forward. Now, we think that Congress may not do anything before the 2024 election, just because this is the norm in Washington to focus more on getting reelected rather than taking those tough decisions to bring the fiscal house in order.

But what we've been focusing on is that net interest costs have reached 14% of tax revenues. They're now actually at 15%. But historically what we've found is that once you reach that threshold, threshold, the fiscal environment moves from one of stimulus to one of austerity. And that's going to make a big difference going forward in the years to come.