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A fractured Congress will reconvene on September 2. A possible government shutdown awaits. Failure to pass federal funding for the new fiscal year, starting October 1, would shutter many agencies. And right now, lawmakers are far from agreement. The odds of a shutdown are less than 50%...For now. That may change.
Lawmakers are aware that shutdowns usually hurt both parties, politically, but they left Washington for summer break in a sour mood, with optimism for a deal waning. Democratic support in the Senate is needed to keep the government open, as 60 votes are required to pass annual appropriations bills.
With the GOP controlling 53 seats, Democrats hold a key bargaining chip. Dems are under pressure to play hardball, as many in their base are still furious at the party for letting Republicans dictate the funding package last spring, which avoided a shutdown at the time. Democratic lawmakers feel they’re between a rock and a hard place. Supporting a Republican funding bill written without Dem input would enrage their base. Opposing such a bill would score political points, but risks triggering a shutdown and possibly getting the blame from voters.
Adding to the fraught mood on Capitol Hill is a GOP rescissions bill passed in July that clawed back $9 billion in funding previously OK’d by Congress, a move that President Trump pushed hard for. With the White House hinting it wants to enact another rescissions bill, Dems fear that any spending deals they broker with their GOP counterparts could be undone later. Privately, many Republicans are also uncomfortable with the concept of rescissions on the grounds that Congress, not the White House, holds the power of the purse. Such bills are historically rare.
Senate Minority Leader Chuck Schumer and Trump will play the key roles in heading off a shutdown. They reportedly have not spoken directly in months, and the tensions between the long-time New York foes appear to be escalating. A deal is possible if they break the ice, though Trump would get the better of it, as Republicans control Congress and most Hill Republicans are Trump loyalists.
We expect lawmakers to avoid a shutdown, somehow, some way, as the economy would temporarily suffer and Wall Street wouldn’t react kindly if funding runs out and most federal agencies go dark. Expect the agreement to keep nondefense 2026 spending equal to or less than this year’s level, though there will be exceptions, such as increased border security funding. Still, expect Congress to approve only a temporary funding extension that lasts a few weeks, as partisan disagreements and Trump’s tough bargaining make a year-long deal in September unlikely, kicking the shutdown threat down the road.
This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.
