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Government shutdown: Could the U.S. implement austerity measures?

Congress is facing yet another potential government shutdown with a new deadline of November 17. Only this time, lawmakers are under further pressure to elect a new Speaker of the House while also contending with a multitude of factors, such as the Fed's higher for longer interest rates, the 2024 election, and the end of benefits from 2017 tax cuts.

Jeannette Lowe, Strategas Securities Managing Director — Policy Research, joins Yahoo Finance to explain the austerity measures — or economic policies focused on relieving budget deficits — Congress may pursue to deal with these circumstances.

"What we are now seeing is net interest costs above 14% of tax revenues," Lowe explains. "Historically that has been the threshold that once you reach above that level, that is where the U.S. starts to move from a period of stimulus to a period of austerity."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

- So lots of moving parts here. If this does perhaps increase the risk of a government shutdown, do you think that also increases the risk of a Moody's downgrade?

JEANNETTE LOWE: Right. So we have been concerned that if we had seen a government shutdown in the current month, that Moody's may potentially put the US on a credit ratings watch. The Monday before we were potentially going into a shutdown, so last Monday, Moody's actually did say that they may intentionally do so because of a government shutdown because the credit rating agencies have been more focused on process rather than finances.

And if this speakership vote, again, takes a long time, if we continue to see a lot of dysfunction, if the House is still not able to move forward any bill in the House to actually pass a budget, or maybe they are but, they can't pass anything that's actually going to be able to go through the Senate, that might put Moody's back into play and have them continue to think about whether or not they should put the US on credit watch, again, particularly as we're looking at US debt rising, net interest costs continuing to go up.

And so that is a concern for US, in particular. And the more dysfunction we see, we think that probability increases.

JULIE HYMAN: You know, and that seems to be more of a concern of markets, as well, not just the Moody's but the debt servicing costs that you referred to. And in your notes to us, you used a word to-- a potential word to apply to the US that I haven't seen in a long time, and that word is austerity.

We have not seen either party really enact anything resembling true austerity in a very long time. Is there any action potential for that?

JEANNETTE LOWE: Yeah, so we have been looking historically at what happens when you have rising net interest costs, and we have been in this period of fiscal stimulus for about 25 years now, where you could raise spending, you could cut taxes, and you weren't really seeing a big impact on US debt servicing costs. That is all changing now after the inflation that we've had, and the Fed's having to raise interest rates and now hold them there.

So what we are now seeing is that we have net interest costs at above 14% of tax revenues. Historically, we have seen that has been the threshold, that once you reach above that level, that is where the US starts to move from a period of stimulus to a period of austerity. And so that is what we are looking to see.

We don't think it's going to flip on immediately, but that is something that is now moving forward. The one thing that complicates this a little bit is the 2024 election. So policymakers tend to not want to impose fiscal austerity ahead of an election because people want to get reelected, but the issues are coming due.

And so this is something that policymakers are going to have to take into consideration. They may not move before the 2024 election. But the other big issue is that when we get into 2025, we potentially have a new president, potentially have Biden still at the helm. There are all of the individual tax cuts that were passed as part of the Tax Cuts and Jobs Act. Those all expire at the end of 2025, too. So there will also be another fiscal cliff coming that kind of adds into all of this-- all of these dynamics.

- Jeanette, thank you for joining us today. That was great. We appreciate it. That was Jeanette Lowe from Strategas.