What Happens if the Government Shuts Down?

September 25, 2023

What Happens if the Government Shuts Down?

How will your life change in a shutdown? RE agents should fast-track any government-related tasks, such as flood ins., if they have a post-Sept. 30 closing scheduled.

WASHINGTON – The federal government has experienced 14 shutdowns since 1980. If Congress fails to pass a full-year spending bill or a stopgap “continuing resolution” (CR) to keep the government open, there could be another shutdown on Oct. 1. But what does this mean, and how does it impact everyday Americans and the economy?

What is a government shutdown?

A shutdown occurs when there is neither a full-year spending bill nor a CR in effect for a department or agency whose budget has an expiration date. For many parts of government, that expiration date occurs at least once per year at the end of the fiscal year, which runs from Oct. 1 to Sept. 30. If a deal is not in place by Oct. 1, some federal agencies and programs will lack approved annual funding from Congress, requiring agencies to stop all programs or activities that are not critical to national security or the protection of lives or property.

The alternative to full-year spending, a CR, keeps programs and activities funded for a specific period of time as determined by Congress – usually weeks or months at specific funding levels, often the same as the prior fiscal year.

How might a 2023 shutdown differ from previous shutdowns?

A 2023 shutdown might look more like the 2013 shutdown than the 2018-2019 shutdown, both in scale, timing, and impact.

Although the 2018-2019 episode was the longest in history (34 days), it was only a partial shutdown. Some agencies and departments had received full-year funding from Congress by the time the shutdown began on Dec. 22, including the Departments of Agriculture, Commerce, and Homeland Security, while other agencies and departments did not have full-year funding and, as a result, had to stop some activities and programs. The 2018-2019 shutdown also took place in December and January after the expiration of a CR, rather than at the start of the fiscal year.

The 2013 shutdown affected all departments and agencies funded by annual appropriations, since Congress had passed no full-year spending bills before funding was set to expire. The shutdown started on Oct. 1, the first day of fiscal year 2014. The effects of a 2023 shutdown would also be similar to the 2013 shutdown, at least in the early weeks.

A shutdown on Oct. 1, 2023, could also affect a number of programs whose multi-year authorization to spend taxpayer dollars expires, including support for farmers and nutrition aid under the farm bill, air traffic control efforts at the Federal Aviation Administration (FAA), and the ability to purchase flood insurance through the National Flood Insurance Program. These expirations are a separate matter than a government shutdown, but all face an October 1 deadline.

What happens during a shutdown, what shuts down, and what stays open?

A government funding gap requires departments or agencies affected by the gap to take several steps to “shut down.” Several funding gaps in the 1970s did not lead to a shutdown of programs and activities, in part because guidance at the time did not require agencies to stop activities. But any gap lasting longer than a day or two since 1980 has led to a shutdown.

When there is a shutdown, a department, agency, or program must:

  • Stop all projects and activities, usually within three to four hours
  • Furlough employees whose work activities have not been exempted from the shutdown
  • Halt pay for all government employees and contractors, whether they are working (exempted) or not
  • Sign no further contracts for goods and services

Not all parts of the federal government are affected by a shutdown. Major programs and benefits like Social Security and Medicare are generally unaffected because Congress has approved these programs to spend without an expiration date what is known as “mandatory spending.” Mandatory spending makes up $7 of every $10 spent by the federal government.

The other $3 in $10 is generally approved on a year-to-year basis by Congress, referred to as “discretionary spending,” and consists of 12 appropriations (i.e., spending) bills covering different departments and programs of the government. For example, one bill funds the Department of Defense, while another funds the Departments of Labor, Health and Human Services, and Education.

Discretionary spending includes funding for:

  • The nation’s military, including salaries and benefits
  • Public health programs, including disease detection and prevention
  • Some veterans benefits
  • Farm loans through the Department of Agriculture
  • Transportation funding to build and repair roads, highways, and bridges, as well as maintain air traffic control at the nation’s airports
  • Income support programs designed to help those most in need, including low-income women and children

Many of these important programs and services are at risk of being interrupted during a government shutdown, though activities that protect human lives or property such as military operations at the Department of Defense can continue.

When Congress has passed some but not all of the 12 regular appropriations bills, there can be a partial shutdown that affects only the departments and programs without either a full-year spending bill or a CR. For example, during the 2018-2019 shutdown, activities at the Departments of Defense, Labor, Health and Human Services, Education, Energy, and Veterans Affairs plus the legislative branch were not affected by the shutdown since lawmakers had already passed full-year spending bills for those parts of government.

Who decides what government functions stay open and what functions shut down?

Article I, Section 9, Clause 7 of the Constitution states, “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” This means federal departments and programs cannot spend money unless Congress passes a law providing them with the funds to do so.

A 19th century law, the Antideficiency Act, also prevents federal agencies from spending taxpayer dollars in the absence of specific authority from Congress. The law was originally created in response to departments spending beyond their budgets and then returning to Congress to make up the difference. Subsequent 1980 and 1995 guidance from Justice Department officials has affirmed that the Antideficiency Act requires a shutdown of unfunded programs and activities.

The Office of Management and Budget (OMB) issues instructions and guidance to departments and agencies that may be affected by a government shutdown. OMB also requires them to develop and update contingency plans they can execute in the event of a shutdown that list the estimated time “to complete shutdown activities,” along with estimates of the number of employees expected to be exempt from a furlough (and required to continue working without pay).

These plans must be updated by agencies every few years, and the list of activities that stay open and shut down differ from agency to agency. This means that no two shutdowns are the same, and the negative impact on government operations and the economy will vary from shutdown to shutdown.

A 2023 shutdown would likely be broad in nature, since Congress has not enacted any full-year spending bills into law.

Who is affected by a shutdown?

Everyday Americans are affected when they cannot access services that are shut down. This includes veterans benefit programs. Had the 2013 shutdown lasted just one more week, 5.1 million veterans would not have received compensation checks they earned. Other essential services, such as air travel managed by the FAA and airport security managed by the Transportation Security Administration, may continue to operate but at lower levels of services, since only some employees are exempt from furlough and required to continue working.

Government employees are affected when they are either furloughed without pay, or forced to work without pay because they are exempt from furlough, until the shutdown is over. Over two million people work for the federal government. Missed paychecks can put financial stress on their households and have a ripple effect that hurts local economies across the U.S.

Small businesses can be hurt by a shutdown in at least two ways. First, the federal government spends tens of billions of dollars on contracts with small businesses for a wide variety of goods and services (nearly $163 billion, or 27% of all contract dollars, in FY2022), and these contracts can be halted during a shutdown. Second, a shutdown can halt operations at the federal Small Business Administration (SBA), which provides billions of dollars of direct and guaranteed lending and other support to small businesses across the country.

What is the economic impact of a shutdown?

Government shutdowns hurt the U.S. economy. The Congressional Budget Office (CBO) estimates that the 2018-2019 shutdown, lasting 34 days, resulted in $3 billion in permanent lost economic growth. About 300,000 federal employees were furloughed during that shutdown, and hundreds of thousands more had to work without pay until the shutdown ended in January. The 800,000 total employees at agencies affected by the 2018-2019 shutdown made up around 40% of all government workers. (In 2018, Congress passed funding for other agencies.) The effects would have been more severe had some departments and agencies covering five of the 12 regular spending bills Congress must pass on an annual basis not already been funded with full-year appropriations.

Previous shutdowns resulted in even more employees being furloughed: 850,000 during the 2013 shutdown, and 800,000 in the early parts of the 1995-1996 shutdown. Though the government has never had a months-long shutdown, such a disruption could result in billions of dollars of lost economic activity. Even a weeks-long shutdown can have permanent negative economic effects north of $1 billion.

A lengthy shutdown in 2023 could also delay the release of economic data from the Bureau of Labor Statistics and the Bureau of Economic Analysis, such as unemployment figures and gross domestic product (GDP) estimates, at a precarious time for the U.S. economy. Fiscal policymakers in Congress and monetary policymakers at the Federal Reserve rely on this data to make evidence-based and data-driven decisions, while investors rely on the data to make smart investments. Significant delays in releasing this data could make it more difficult for policymakers and investors to steer the U.S. economy through a time of high inflation and uncertainty.

How much a shutdown hurts the U.S. economy depends on a number of factors, including how long the shutdown lasts and what parts of government the shutdown affects. Generally speaking, longer and broader shutdowns inflict more economic damage.

When was the last government shutdown?

The last government shutdown was from December 2018 through January 2019, and was also the longest government shutdown in history, lasting 34 days.

Overall, there have been 14 shutdowns since 1980. A majority –11 of 14 – were relatively short, lasting less than a week. The other three were longer than two weeks.

Is a shutdown different than reaching the debt limit?

Yes. The causes of a government shutdown and a breach of the debt limit are different, and so are their potential effects on the U.S. government and the U.S. economy. While a government shutdown is when some departments and agencies of government no longer have an approved budget from Congress, the debt limit instead restricts the total amount of money that the federal government can legally borrow. When the debt limit is reached, the Treasury Department can no longer borrow money to cover government operations.

As opposed to a government shutdown, which generally only affects programs and departments with an annual budget (i.e., discretionary spending), failure to address the debt limit in a timely manner could affect all types of government spending (i.e., discretionary and mandatory), including programs like Social Security, Medicare, and Medicaid.

History shows that government shutdowns are damaging but not catastrophic, with relatively predictable outcomes. In contrast, defaulting on obligations as a result of the debt limit would be unprecedented, with consequences that are likely far more disruptive, damaging, and severe. Even a short-term default could lead to higher borrowing costs, increased unemployment, stock market losses, and GDP contraction.

The government is not at risk of reaching its debt limit on Oct. 1, 2023. The Fiscal Responsibility Act, which became law earlier this summer, suspended the debt limit through Jan. 1, 2025.

How can policymakers prevent government shutdowns?

The best way out of a government shutdown is for Congress to reach an agreement on full-year spending or, failing that, a stopgap CR. A CR in 2023 could buy lawmakers time to reach a bipartisan agreement on full-year spending before the end of the calendar year.

In the long run, Congress needs to reform the budget process so that lawmakers more regularly pass spending bills on time. Over the past 40 years, Congress passed all 12 annual spending bills before the Oct. 1 deadline just four times. In most years, lawmakers have needed multiple CRs to keep the government open and buy more time to pass a full-year spending bill a total of 200 CRs over the past 47 years, an average of more than four per year. Clearly the current process is not working, which is why BPC is working with lawmakers and experts in both parties to build a budget process that is more efficient, timely, and effective.

© 2023 States News Service