This latest development adds to a year where government choices about trade, taxes, immigration, and other issues have created uncertainty for the economy and markets.
If you're investing, you might wonder how politics could affect your money, especially if you're worried about the budget deficit (when the government spends more than it takes in) and national debt (the total amount the government owes). Looking at what happened in the past, and understanding why markets usually move past these events, can help you stay calm during times of political disagreement.
Political drama in Washington can create uncertainty, but past experience shows that government shutdowns usually don't affect financial markets much. While shutdowns can be difficult for government workers, they haven't historically had much impact on financial markets. For people investing for the long term, these situations show why it's important to keep your political views separate from your financial plans. This matters most when daily news focuses on controversial topics that haven't historically affected investment portfolios.
Each year, the federal government must approve a budget for the next fiscal year, which starts on October 1. While the government passed the "One Big Beautiful Bill Act" earlier this year that outlined tax and spending policies, a budget is still needed to assign actual dollar amounts to different departments and agencies. When this doesn't happen by the deadline, the government shuts down, meaning government services stop and employees are sent home without pay temporarily.
Congress rarely passes budget bills on time. This isn't too surprising given how divided politics has become in Washington, where finding agreement has gotten harder. Over almost fifty years, Congress has only managed to pass spending bills before the fiscal year deadline a few times, making last-minute negotiations normal rather than unusual. One solution Congress often uses is called a "continuing resolution," which temporarily funds the government while lawmakers work out the details. This time, lawmakers were unable to come to terms on this temporary agreement.
As the chart shows, government shutdowns have happened regularly since 1980 under presidents from both parties, with little long-term impact on financial markets. The chart shows this was true even during the most contentious shutdowns, including during the Reagan administration, Clinton's 21-day shutdown in 1995, Obama's 16-day shutdown in 2013, and Trump's 35-day shutdown from late 2018 to early 2019 - the longest on record. For investors, shutdowns have generally been temporary disruptions rather than serious threats to economic growth.
While funding the government right now is the immediate concern, these budget fights show deeper differences about the role of government and financial responsibility. With federal debt (the total amount the government owes) now around 120% of GDP (Gross Domestic Product, which measures the size of the economy), many people agree that the government needs to be more careful with spending, but there's fundamental disagreement about how to do this.
What makes this situation different is that the administration has asked agencies to prepare plans for permanent workforce reductions beyond typical temporary furloughs (sending workers home temporarily). This is different from previous shutdown patterns and could create longer-lasting effects on the job market and government spending. Note that furloughed federal workers do automatically receive back pay once the shutdown ends, a policy that was put in place during the negotiations that ended the 2018 to 2019 shutdown.
For some investors, the threat of a government shutdown may seem similar to other fiscal issues such as the debt ceiling. The debt ceiling becomes a problem when spending the government has already approved needs to be paid for, but the Treasury Department isn't allowed to borrow above a certain limit. The only solution in these cases is for Congress to raise the debt limit, or else the government risks not paying its bills (called defaulting). All of these fiscal challenges are one reason the major credit rating agencies (companies that evaluate the government's ability to pay its debts) have downgraded U.S. debt below AAA (the highest rating). Fortunately, the One Big Beautiful Bill Act also raised the debt ceiling by $5 trillion, so this problem can be avoided for some time.
The reason is simple: shutdowns are temporary disruptions that don't change basic economic factors.
Shutdowns can affect economic data reporting, which may temporarily affect important information used by investors and economists such as the Bureau of Labor Statistics' jobs report and Consumer Price Index (which measures inflation). However, this typically only delays the data, with reporting starting again once the shutdown ends. They can also create modest obstacles for economic growth if they last long enough, as federal workers delay spending and government services are disrupted.
As the Economic Policy Uncertainty chart above shows, tariffs and taxes earlier this year created significant challenges for investors. However, with recent clarity around both issues, this measure has fallen toward the longer run average. While a shutdown could always result in greater uncertainty, history shows that even longer government disruptions have not generally impacted investors.