US govt shutdown: What does it mean and what are its impacts?

Since 1981, there have been 14 government shutdowns in the United States with the longest in 2018-19

Web Desk
Monday, September 25, 2023
The dome of the US Capitol is seen beyond a chain fence during the partial government shutdown in Washington, US, January 8, 2019. —Reuters

On October 1, large portions of the US government face the prospect of temporary closure if Congress fails to approve spending bills due to an ongoing dispute involving far-right Republicans and other lawmakers.

To comprehend the implications of a government shutdown, it's essential to delve into its causes, effects, and distinctions from a debt limit standoff.

Reason for shutdown?

Annually, Congress must allocate funding to 438 government agencies before the fiscal year concludes on September 30. Failure to pass these bills in a timely manner results in the affected agencies being unable to operate normally.

Since 1981, there have been 14 government shutdowns, some lasting only a day or two, with the most extended one spanning 34 days from December 2018 to January 2019 due to a dispute over border security.

Typically, lawmakers temporarily extend current funding levels to provide more time for negotiations.

Impacts of shutdown?

A government shutdown entails the furloughing of hundreds of thousands of federal workers, who go without paychecks. This situation disrupts a wide range of services, including financial oversight and national park maintenance.

However, essential workers, although unpaid, continue working, ensuring that services like mail delivery and tax collection proceed. While short shutdowns have limited immediate impacts, extended ones can harm the broader economy, especially when federal employees miss paychecks.

Goldman Sachs estimates that a shutdown reduces GDP growth by approximately 0.15 percentage points weekly but sees a corresponding increase after the shutdown concludes. The 2018-2019 shutdown cost the economy around $3 billion, equivalent to 0.02% of GDP, according to the Congressional Budget Office.

'Essential' functions?

Each federal department and agency maintains a contingency plan to determine which employees must continue working without pay. During the 2018-2019 shutdown, nearly 800,000 of the federal government's 2.2 million employees were furloughed.

The Department of Homeland Security aimed to retain 227,000 out of 253,000 workers, primarily border security agents and the Coast Guard.

The Department of Justice specified that 85% of its 116,000 employees would be essential, including prison staff and prosecutors, allowing criminal litigation to continue while pausing most civil litigation.

Air travel remains relatively unaffected, though airport security screeners may experience increased sick leave during shutdowns. The status of the nation's 63 national parks during a shutdown is unclear, as past administrations have taken varying approaches.

Some states, like New York and Utah, funded and staffed their parks during the 2018-2019 shutdown.

The Internal Revenue Service, responsible for tax collection, previously furloughed up to 90% of its staff, but its current contingency plan designates all employees as essential.

While all military personnel remain on duty during a shutdown, roughly 429,000 civilian Pentagon employees face furloughs.

How is shutdown different from debt limit standoff?

A government shutdown results from Congress not allocating additional funds to the budget. In contrast, a debt limit (or debt ceiling) standoff involves Congress setting a cap on how much money the government can borrow.

Failure to raise the debt ceiling could prevent the US Treasury from meeting its financial obligations, potentially leading to severe consequences, including global financial market turmoil and a domestic recession.

Sometimes, Congress quietly raises the debt ceiling, while at other times, it becomes the centre of a contentious fiscal policy debate before being raised at the last possible moment, as witnessed in June.