Financial crisis avoided last minute

shutdown, delay, debt limit
Rep. G. K. Butterfield (D-NC) walks down the steps of the House side of the Capitol building after a bipartisan bill passed by the House and the Senate reopened the government and raise the debt limit, on October 16, 2013.
Credit: Getty Images

Editor’s note: The following analysis was provided by Joseph Lake of Economic Intelligence Unit.

The past two weeks have dealt a large political blow to the Republican Party, particularly its ultra-Conservative Tea Party wing. Not only were its efforts to repeal Obamacare defeated, but the fiscal crisis it created overshadowed the fact that the roll-out of the healthcare exchanges, a crucial part of Obamacare implementation, has so far been a failure.

As a fully-fledged debt ceiling crisis was avoided, the electoral impact of the past two weeks will be modest. Given the short memories of voters, it will be largely forgotten by the time the mid-term elections roll around in November 2014.

The public relations defeat for the GOP was unnecessary, especially as they actually won the most important fiscal debate this year—on the size of government – but they have lost the optics battle by trying to repeal Obamacare, a battle that was always going to be futile. The continuing resolution has locked in the lower level of spending from the sequester which Democrats had wanted to reverse. So, while the Democrats won the battles over the debt ceiling and shutdown, the Republicans had already won the war on the overall level of government spending.

The economic damage done during the two-week government shutdown will be limited. We think that it dented economic growth in the fourth quarter but not by enough to cause us to reduce our forecast of 1.6% growth for the year.

The deal struck by Congress only funds the government through January and merely raises the debt ceiling until February, but a repeat of the October showdown in early 2014 is unlikely. Burnt by the defeat and badly splintered, the Republican Party will regroup and realise that there is little to be gained from another round of brinksmanship so soon after the last one. Moreover the Democrats have learned that they can win these showdowns if they remain united and call the Republican bluff.

We think the odds of a budget ‘grand bargain’ are slim and we expect the US government to continue lurching from one periodic fiscal crisis to the next, damaging its reputation around the world but, crucially, not enough to undermine the role of US Treasury bonds as an investor safe haven in times of global risk.


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