Government Shutdown: Definition, Example, Impact on Economy

What Is a Government Shutdown?

A government shutdown happens when nonessential U.S. government offices can no longer remain open due to a lack of funding. The lack of funding usually occurs when there is a delay in the approval of the federal budget that will finance the government for the upcoming fiscal year. The shutdown remains in effect until funding legislation is passed.

During a government shutdown, many federally run operations will halt. Some organizations may still stay open by running on cash reserves, but once these funds run out, they will also close.

While shutdowns can also occur within the state, territorial, and local levels of government, the term "government shutdown" is usually used to refer to the federal government.

Understanding a Government Shutdown

During a government shutdown, the U.S. federal government is required to reduce agency activities and services and cease any non-essential operations (including furloughing non-essential workers).

Some agencies remain open during a government shutdown. These services are those that, if suspended, would endanger the health, life, or personal safety of the public. Essential employees in departments covering the safety of human life or protection of property also remain employed. However, these employees may not earn a paycheck during the time of the government shutdown unless a specific spending bill is passed to fund those work hours.

Essential employees include those working in the Drug Enforcement Agency (DEA), the Transportation Security Administration (TSA), Customs and Border Protection (CBP), and the Federal Bureau of Investigation (FBI). In addition, Both the Federal Reserve and the Postal Service will both continue their operations because neither receive federal funds.

During a government shutdown, the disbursement of payments from government sources to citizens for veterans’ benefits or unemployment insurance will continue. These programs receive money from specially earmarked budgets and funds from advanced Congressional appropriations. Furloughed federal employees may also apply for temporary unemployment, but the processing of claims may be prolonged.

Government shutdowns can affect many government processing functions. Nonessential agencies who cannot self-fund through the collection of fees or other revenue sources may be forced to furlough, or give unpaid leave, to their employees. Most of the public will see the effect of the government shutdown in the lessening of services they may expect or receive. Perhaps the most visual of these closings is in the shutting down of national parks and monuments.

However, the real effects of a government shutdown are widespread. It may take longer or be impossible to process new loans for homes, businesses, and education. New applications for Social Security benefits and the processing of unemployment insurance will also slow. Death benefits and travel reimbursements will not be paid to the surviving family of service members killed during their military service.

There are various other impacts of a government shutdown. This includes the delay or halting of the United States Department of Agriculture's inspection of some food products and the preclusion of the Consumer Product Safety Commission (CPSC) from recalling unsafe products, and travelers may be unable to receive new passports (which are issued by the U.S. Department of State). In addition, the Centers for Disease Control and Prevention (CDC) may be unable to identify and track outbreaks of illness.

If the government shutdown remains in place long enough, more agencies will close or reduce the services they provide to the public as a whole, and a larger portion of the American population will begin to see the direct effects.

Impact on the Economy

As government operations slow or stop altogether, the effects may also spread to businesses in the private sector. It's possible that the entire economy may lose money as a result of this disruption in government operations. However, the overall cost and lasting impact of a government shutdown on the economy may vary. For example, the government shutdown of 2013, which lasted for 16 days, was estimated to have cost the U.S. economy $24 billion in losses.

Furloughed federal employees may individually curtail their spending. Collectively, this can have an impact on local businesses; if a substantial number of federal workers are furloughed and not spending as expected, the companies that typically serve them may see a revenue decrease.

Companies that cater to the needs of federal agencies—office supply businesses, for example—will see the impact in reduced sales. Business such as hotels, restaurants, and other hospitality services that cater to the visitors of U.S. national parks and monuments, will lose business during a shutdown. 

Furthermore, banks, while not government-controlled, are not able to access the information they need to process loan applications during government shutdowns. For example, banks must be able to verify the income submitted on the applicant's tax records during a loan application process. This can also produce reverberations in the economy as a whole because the fees that banks charge to process loans impact the bank's revenues, and, ultimately, the inability to finance a new home will impact the housing market as a whole.

Special Considerations

The funding of the U.S. government's budget is a long and complicated process that involves the coordination and cooperation of many stakeholders, including the president, the House of Representatives, the Senate, and the federal agencies and departments that will receive the funding. Many events may delay the budget's approval, including economic downturns, political politics, and the efforts of lobbyists.

Every year, governmental agencies submit budget requests to the White House to continue operations. The president and his staff review and revise these funding requests, and then petition Congress to provide the requested funds. The House and Senate Congressional Appropriations Committees will consider the president's funding request.

The committees will also typically make adjustments to the amounts the agencies initially asked to receive. After they reach a consensus on budget amounts, a bill goes to both the House of Representatives and the Senate. After a debate, there is a floor vote. Next, the bill is returned to the White House to be signed into law or vetoed.

Real World Example

At midnight on Dec. 21, 2018, the United States entered a government shutdown. President Trump and members of Congress were unable to agree on funding for the fiscal year 2019. This government shutdown impacted approximately 800,000 federal employees. In a fact sheet released by the Senate Appropriations Committee, it was revealed that more than 420,000 federal employees were expected to work without pay, and more than 380,000 federal employees would be placed on furlough. This shutdown lasted 35 days, the longest government shutdown in U.S. history.