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      US government shutdown reflects deepening political polarisation in credit-negative development
      WEDNESDAY, 01/10/2025 - Scope Ratings GmbH
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      US government shutdown reflects deepening political polarisation in credit-negative development

      The latest government shutdown in the United States occurred as a result of policy disagreements between Republicans and Democrats on issues such as healthcare, but it reflects the country’s deepening political polarisation.

      By Eiko Sievert, Sovereign and Public Sector

      The administration’s increasingly unconventional policy approach has placed pressure on the long-standing checks and balances of the US governance system and are seen as credit negative for the US sovereign rating outlook (AA/Negative).

      In recent months, questions about the independence and credibility of key institutions have intensified. The Federal Reserve has faced growing political scrutiny, culminating in the attempted dismissal of Governor Lisa Cook, and testing the boundaries of presidential authority with respect to oversight of independent institutions. Similarly, legal professionals and firms perceived as adversarial to President Trump’s policy objectives have been subjected to public pressure, while concerns have also emerged around the impartiality of economic data following the dismissal of Erika McEntarfer, the former Commissioner of the Bureau of Labor Statistics.

      Broader challenges have also arisen from heightened criticism of academic institutions and the press which risk eroding public trust in the country’s system of checks and balances. Of additional concern is the increasing normalisation of military deployments in American cities, with the stated aim of preserving public order. Civil authority could particularly be undermined when such deployments become more frequent even without state governors’ consent.

      Overall, this deterioration in governance standards is set to further increase political polarisation in the years ahead. The deeper these political divisions become, the greater the risk that key policy compromises may not be reached by the relevant deadline.

      This also applies to future debt-ceiling standoffs, particularly if the Republican party were to lose control of the House and/or Senate after the 2026 midterm election. Despite a USD 5 trillion increase in the debt ceiling agreed as part of the ‘Big Beautiful Bill’, a further increase will likely be needed by 2028 given the weak fiscal outlook. We expect deficits of around 6% of GDP and an increase in national debt to 127% of GDP in the next five years.

      Our baseline remains that the risk of a technical default by the U.S. due to political disputes is not very likely, but the risk continues to increase and would have a significant impact if it occurred.
       

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