By Ramasamy Jayaprakash

Copyright thehindubusinessline

The US federal government’s fiscal year starts from October 1st to September 30th of the following year. A funding legislation (budget, for easy understanding) outlining the spending limits for all the branches of the federal government should be passed by both houses of the US Congress and signed by the President. This legislation would enable the federal government to meet its expenses for the fiscal year. In case a full-year funding legislation is not passed, a continuing resolution (CR) can be passed for a short term, usually covering the expenses for a few weeks to few months, at the previous year’s spending levels.

So, to keep the federal government funded, a funding legislation should be passed before September 30th or before the expiry of the previous CR by both houses of the US Congress and signed by the President. If a funding bill is not passed in time, the US federal government goes into a shutdown.

What happens in a shutdown?

All the federal government functioning that are considered non-essential comes to a halt. Without a funding bill, the federal employees working in the non-essential services will be left without pay. Since voluntary services without pay are considered illegal, those services to go into a shutdown, and those federal employees are ‘furloughed’. Furlough means a temporary, unpaid leave of absence for non-essential federal employees. Furloughed employees are typically given retroactive pay when the shutdown ends.

Non-essential services that come to a halt include museums, public parks, national parks and monuments, IRS taxpayer services, processing of federal grants/loans, non-emergency federal research etc. Agencies such as the National Institutes of Health (NIH) and the Centers for Disease Control and Prevention (CDC) have also suspended or delayed research and public health work.

Meanwhile, essential services continue to work, often without pay. When a funding bill is passed, they will receive their pay in arrears. The essential services include active-duty military personnel, Border Patrol, ICE agents, FBI and federal law enforcement officers, Air Traffic Controllers, TSA officers in airports, US Postal service, medical officers, etc. Social security benefits, Medicare payments, Medicaid for existing beneficiaries continue, but processing of applications for new beneficiaries stops.

Why funding legislation is difficult to pass?

To pass a funding legislation, a simple majority is enough in the House of Representatives. However, in the 100-member Senate, a three-fifths majority is required, which translates to at least 60 votes. If a party does not have 60 votes, it would rely on some members of the other party to support the legislation which often includes amendments to the bill, negotiations and compromises.

Currently, President Donald Trump’s Republican party controls both the House and the Senate. It has a 219-212 majority in the House of Representatives, which is enough to pass a spending bill. In the Senate too, the party has a 53-47 majority, but it falls short of the 60 seats/votes required for the passing the spending bill due to the requirement of a special majority for such bills.

A continuing resolution funding the Federal government was passed in the House of Representatives on September 19th. But it failed to pass the Senate as the lack of Democrats’ support meant that it did not garner the 60 votes required to clear the filibuster. Interestingly, the entire federal fiscal year of 2025 (Oct 1, 2024 to Sep 30, 2025) was funded only through various CRs as the parties could not agree on a full-fledged funding legislation.

Why has the US government shut down now?

Government shutdowns happen mostly due to political and ideological differences between Congress members from the Democratic and Republican party. This time too, the differences in political, ideological and economic aspects among the parties have caused the shutdown.

US President Donald Trump wants significant reductions in government spending. His second term began with Department of Government Efficiency (DOGE) that promised to do just that but has not yielded the results that were promised. Now, with the funding legislation, Trump wants to significantly cut down on spending on Medicare, Affordable Care Act, Medicaid, foreign aid etc. which Democrats suggest would significantly increase the insurance premiums and healthcare costs for the Americans.

Have such shutdowns happened in the past? How long have they lasted?

Yes. The modern budget process began in 1974 with the enactment of Congressional Budget and Impoundment Control Act, 1974. However, a stricter interpretation of Antideficiency Act in 1980 has led to the shutdowns as we know it today with furloughs. Prior funding gaps from 1976 to 1979 did not result in shutdowns or furloughs. Since 1980, there have been 15 US government shutdowns, and the longest one was in 2018-19 during Trump’s first term as President.

What is the impact of the shutdown on the US?

The impact on the US economy could be based on the duration of the shutdown. J.P. Morgan has said, “Each week, a shutdown subtracts about 0.1 per cent of annualised GDP growth via reduced government activity. There could be a sentiment channel as well if the duration of the shutdown enters uncharted territory.” While some loss can be recovered, a prolonged shutdown could lead to larger and more permanent losses in income and GDP.

With federal agencies like the Bureau of Labor Statistics suspending operations, publication of official economic data — including the US jobs report and the Consumer Price Index (CPI) report — will be delayed. This means the Federal Reserve would have to steer blindly in its Federal Open Market Committee (FOMC) meeting for deciding rate cuts on October 28 and 29.

Does it impact the US dollar?

Yes. The shutdown causes uncertainty. The dollar index has already fallen by about 0.50 per cent in the last 5 days. With a prolonged shutdown, it could fall further. During the previous shutdown in 2018–19, the dollar index fell by about 2 per cent.

Is India likely to be impacted by this shutdown?

Yes, but the severity of the impact could vary based on the duration of the shutdown and the ad hoc policies Trump may propose. Per usual, the shutdown would cut funds to the US Department of Labour, resulting in delays in processing H-1B visas and green cards for Indians. However, visa interviews and Consular services would see minimal impact as these services are fee-based and would not usually be interrupted. A prolonged shutdown could restrict these services too.

The US shutdown could cause ripple effects on the global supply chains, which could potentially affect India and other Asian factories. Indian stock markets may see minor short-term effects.

Published on October 4, 2025