Government shutdowns and the appropriations calendar

Federal agencies may only spend money that Congress has appropriated. When an appropriation lapses, the Antideficiency Act makes it unlawful for an agency to obligate funds or to accept voluntary services - so agencies stop, not because anyone decides to close them but because continuing would be illegal.

That means a shutdown is partial by nature. Activities funded by permanent appropriations continue: Social Security payments, Medicare, and anything paid from mandatory spending rather than the annual bills. Functions deemed necessary to protect life and property continue too, staffed by employees who work without pay until funding resumes. Everyone else is furloughed.

It is also partial in a second sense. Congress passes twelve separate appropriations bills, and it can enact some and not others. The 2018 to 2019 shutdown, the longest on record at 35 days, affected roughly a quarter of federal spending because most departments already had funding. A market asking whether the government shuts down needs to say what fraction counts.

Federal employees split into two groups: furloughed, and excepted - required to work without pay. Since a 2019 law, both receive back pay once funding resumes, which changed the politics considerably by removing the threat of permanent lost wages while leaving the cash-flow disruption in place. Contractors have no such guarantee.

For anyone trading data-driven markets, the effect that matters most is statistical. A lapse suspends most federal statistical agencies, so the CPI report, the jobs report and GDP releases can be delayed or cancelled outright. A prediction market that settles on a data release with no fallback clause becomes unsettleable during a shutdown - and that has happened.

The macroeconomic cost is real but recoverable. The Congressional Budget Office estimated the 2018 to 2019 shutdown reduced quarterly output measurably, with most of it recovered afterwards. Markets have historically treated shutdowns as noise rather than as a macro event, and that judgement has been broadly correct.

The fiscal year starts on 1 October. To avoid a lapse, Congress must enact all twelve appropriations bills by 30 September, or pass a continuing resolution that extends existing funding to a new date. In practice the twelve bills are almost never all enacted on time, so the operative deadline is whatever date the most recent stopgap names.

That is what makes shutdown risk episodic and datable. Every continuing resolution creates a new cliff, and those cliffs are the events markets price. A stopgap that runs to mid-December creates a mid-December question; one that runs to the end of the fiscal year removes the question until the following autumn.

The Senate is the structural chokepoint. Appropriations bills need sixty votes to end debate, so unlike confirmations, funding cannot pass on a bare majority. That single procedural fact means a shutdown requires bipartisan agreement to avoid, no matter which party holds the chamber.