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Government Shutdown

Updated on April 8, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Government Shutdown?

A government shutdown is a situation that occurs when funding legislation is not passed and signed into law by the legislature of the federal government. As a result, federal organizations suspend all non-essential operations until new financing legislation is approved. However, vital services and mandatory spending programs continue to function.

What is a Government Shutdown?

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Even though the government put in place shutdowns to save money, they are an expense of their own. This is because the charges or fees collected during the period stop. Similarly, the contingency plans involve costs and several federal employees become jobless. Moreover, they have an impact on the gross domestic product.

Key Takeaways

  • A government shutdown occurs when federal government financing legislation is not approved by the legislature and made law.
  • All non-essential operations by federal organizations halt until a new financing bill is passed. This is major to cut down government expenses.
  • Each federal department develops a shutdown plan that details which government operations are suspended and how many employees must take a temporary leave of absence without pay, or “furlough,” during the shutdown.
  • It invariably affects various government departments, but the country’s citizens bear the major brunt.

Government Shutdown Explained

Government shutdowns occur when the legislature fails to pass a funding bill. Many federal government agencies and programs run from the funding allocated by Congress. Therefore, Congress must pass annual budget legislation for the upcoming fiscal year. If they fail, the government calls for shutdowns to save costs for a government to operate.

In such situations of federal government shutdown, federal agencies shut down all non-essential functions until the passing of new legislation and signed into law for funding. However, programs that require mandatory spending and essential services continue regardless. Every federal agency customizes a plan and decides what to shut down with the help of guidelines from previous shutdowns, and the Office of Management and Budget (OMB) coordinates it.

Programs that require mandatory spending do not need funding allocations every year. They may have initially received an allocation for the necessary amounts for years together. However, the discretionary components of the funding may face impacts. For example, the Federal government shutdowns of 1996 and 2013 saw the cut of certain facilities to provide social security cards. As a result, even though the authorities gave out social security checks, services such as new enrollment, verifying benefits, change of address, etc., faced furlough. Moreover, no one could predict what services would be affected and when.

Similarly, government agencies during American government shutdown such as environmental and food inspections had to halt those inspections. They had to close national parks; even if they were open, there were no visitor services. There was trash buildup in many places. The airlines were affected. As a result, checkpoints were closed, and travelers were inconvenienced. Health and human services also suffered. There were restrictions on new patient admissions and grant application processing at the National Institutes of Health (NIH). The Internal Revenue Service also received a hit. There were mortgage delays, loan approval delays, and billions of tax refunds.

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Examples

Let us understand the concept of federal government shutdown with the help of some suitable examples, as given below:

Government Shutdown In the U.S. (Year-wise Timelines)

The United States has seen many shutdowns, and let’s check out some of the more recent ones:

1990

The congress government shutdown happened under the presidency of George H.W. Bush. It was a result of Disagreement over several of his proposals for the 1991 appropriations bill, which included significant tax hikes despite Bush’s campaign commitment against any new taxes and substantial reductions in funding for benefit programs, including Medicare, to fight deficit reduction. The House attempted to override his veto but was unsuccessful, leading to a shutdown resulting in millions of workers’ furloughing.

1995

The congress government shutdown history was under the presidency of Bill Clinton. Clinton rejected a republican-sponsored continuing resolution, resulting in a shutdown. The resolution mandated a budget balance within seven years and increased Medicare costs. It also revoked environmental regulations. Clinton did, however, promise to balance the budget following the shutdown in seven years.

1995-1996

The longest shutdown lasted from 16 December 1995 to 9 January 1996. The reason was the debate over which economic predictions to use to assess if the White House’s budget proposal will balance the Congressional Budget Office’s or the Office of Management and Budget’s. Clinton then devised a plan that the CBO determined would balance the budget.

2013

Shut down was under the presidency of Barack Obama. Republicans pressured the White House to agree to decrease discretionary spending caps. At the same time, conservatives insisted that any funding legislation postpone the Affordable Care Act (ACA) adoption by a year. After the shutdown, they later passed a spending plan that most rejected and which did not defund the Affordable Care Act (ACA)

2018

20-22 January and 9 February

Both shutdowns were under the presidency of Donald Trump. After the Trump administration chose to cancel the DACA program, which prevented the deportation of undocumented immigrants who entered the U.S. as children, democrats, encouraged by outside activists, hoped to compel the Trump administration and Congress to safeguard beneficiaries of the program. However, they immediately abandoned it afterward and agreed to support the government (as well as the Children’s Health Insurance Program).

The second one in February lasted a few hours. Some of the republicans were unhappy about budget caps exceeding what part of the 2011 fiscal cliff deal was. As a result, the bill faced a delay before passing, which caused it to be brief and avoid any possible federal government shutdown.

2019

Two merged appropriations bills the government passed at the start of FY2019 were already in place in five of the 12 regular appropriations bills. As a result, two Continuing Resolutions (C.R.s) paid the remaining seven regular appropriations measures. Unfortunately, these seven regular appropriations acts’ financial gaps forced the closure of several federal programs and initiatives. As a result, a 34-day funding gap occurred (the longest).

Economic Impact

Senate bill government shutdown causes major economic losses. According to the Congressional Budget Office (CBO), the 2018–2019 closure decreased GDP by a total of $11 billion, $3 billion of which the government could never recover. In addition, reduced demand postponed government spending and lost output by federal personnel.

Additionally, during American government shutdown, the CBO points out that extended shutdowns negatively impact hiring and investment decisions in the private sector because companies cannot access federal loans or apply for permits and certifications from the government. According to a 2019 Senate report, the three Federal government shutdowns in 2013, 2018, and 2019 cost taxpayers around $4 billion. Some possible federal government shutdown indirect effects, such as the suspension of certain federal permits and restricted access to loans, were not part of the analysis.

The analysis predicted that the fourth quarter of 2018’s economic activity would decline by $3 billion, or 0.1 percent. The impact cost $8 billion, or 0.2 percent of GDP, during the first quarter of 2019. The sum of indirect and direct costs in 2013 reached up to $24 billion, or 0.6 percent of quarterly GDP. These data clearly show that shutdowns indeed hurt the economy. According to Goldman Sachs (2018), the quarterly GDP growth can reduce by about 0.2% every week a Senate bill government shutdown lasts.

How Long Will It Last?

This is a question raised by many but it is very difficult to answer. As per the government shutdown history, the entire government start working urgently on various plans and policies in order to avoid a shutdown but, people brace for an impact that typically last for a number of weeks.

In the month of December 2018 and January 2019, there was a shutdown due to problem an dispute related to funding of border wall. The process lasted for about 35 days, however, it was not a complete but a partial shutdown.

Effect On Jobs

It is equally important to understand the effect of this situation on the job market of an economy. Let us study the same.

  • Hiring is delayed – Due to shutdown of various operations of federal agencies, hiring process is delayed. Government wings responsible for clearing permits, doing background checks and providing clearance certificates are not able to do their work, creating a setback in the employment generation procedure.
  • Problems In contract jobs – People employed under government contracts may face a lot of uncertainty because their contracts may be delayed, there may be negotiation of term and conditions that may not favor the employee or there may also be cancellations, leading to loss of jobs during government shutdown likelihood.
  • Economic turmoil – Since the shutdown has a huge impact on the economy and to some extent the stock market, it affects consumer confidence, demand and spending habits. This will negatively affect the business performance and job opportunity.
  • Financial challenge – Job loss is bound to make life difficult, fall in spending and investment, leading to a huge impact on retain market, financial market and all parts of the economy.
  • Challenge for government contractors – Companies who earn revenue form government contracts will face a significant fall in revenue and profits. They will resort to termination of jobs and stop hiring.

But the condition can be controlled to some extent. It is necessary for all market participants to diversify their income sources and not solely depend on government for revenue or employment generation. This will reduce dependence on government contracts. Companies and even individuals should create financial budget and provisions so that they can act as buffer during such emergencies and contingencies.

A very notable positive approach during such government shutdown likelihood is flexible working hours and remote work opportunity. This will help companies retain valuable talent and work will not be affected.

The training process can also be diversified so that candidates or employees are efficient in handing multiple roles, which will not only enhance their skills but also help the companies carry on with their usual operational process without the fear of any work process getting stopped due to lack of skilled personnel. Businesses should provide medical and financial support to their employees in case of such economic turbulence and uncertain situations.

Effect On Stock Market

This is an important topic that many would be interested and eager to know, because it directly affects their investment and returns on their hard-earned money.

Government shutdown may affect the stock market on a temporary basis and for short term only, creating fluctuations. However, there is usually no huge negative impact in the long run.

If the investor has faith and confidence in their own market analysis and investment decision, then such disturbances should not make them change their stance. They should stay anchored to the objectives and financial goals, instead to being concerned about these temporary turbulences.

It is obvious that since the shutdown is affecting the government performance, it is bound to take a toll on the financial health and condition of the economy for years to come, mainly due to rise is debt service cost, tax rates and fall in government spending. This situation will definitely affect the returns form stock market.

Even the condition will affect the credit rating of U.S debts negatively, bringing it down and making even Treasury Bonds risky. But historical data proves that the stock market has not suffered a huge impact due to the same, even though it is necessary for investors to understand the various processes that will help them reduce short term risk, diversification of portfolio and taking a long-term approach being some of them.

Investors can go for sectors like healthcare of defence. This is because these sectors are normally dependent of government contracts and may underperform during shutdown, presenting an opportunity to buy stocks at lower prices.

Frequently Asked Questions (FAQs)

1. When will the government shut down?

The government shuts down when the legislature does not pass the funding legislation. Therefore, Congress needs to pass funding legislation for the smooth functioning of the government.

2. Who is affected by the government shutdown?

The common people are most affected by the shutdowns. However, it may have varied implications, such as loans not being given out and unemployment and payment dues prevailing.

3. What would happen if the government shut down?

Government operations are disrupted by shutdowns, resulting in the suspension of essential services. For example, social security benefit provisions may not be updated, and the closure of institutions and national parks may not be open. All of these are mainly due to a shortage of employees.

4. Does the government shutdown affect social security?

All through shutdowns may not interfere in payments of social security checks, due to shortage of federal employees, any updating, change of address, or even new admissions may be encountered.

This has been a guide to what is Government Shutdown. We explain how long it will last, effect on stock market, jobs & its economic impact with examples. You may also find some useful articles here –

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