When the Government Shuts Down, Who Pays?

Federal functions that Americans depend on every day are on the chopping block—at least temporarily—as Congress stumbles toward Saturday's deadline to fund government operations.

If it fails to approve the 12 appropriation bills or stopgap funding measures, food and drinking water safety inspections could come to a halt. The Head Start program for preschoolers from low-income families may be jeopardized. National parks could close.

That's just the beginning, says a UMD expert on public budgeting. A shutdown would have broad ripple effects on the lives of ordinary citizens and would cast a far-reaching shadow across the American economy and politics. We sat down with Philip Joyce, a professor in the School of Public Policy whose research delves into how the U.S. Congress and other bodies spend public money, to get a clearer picture of what’s at stake.

What are the key financial implications of a federal government shutdown?

In the short term, there is a lot of waste as federal agencies are preparing to shut down. The time that they spend on this is time that they do not have available to do the work that the American people are paying them to do. In the past, even those people who cannot work during the shutdown have always been paid retroactively, which means they are eventually receiving money for work that was not done, and that they could not do. Because federal agencies are not permitted to process payments to those people who receive money from programs funded from appropriated spending, those recipients feel the financial effects of a shutdown. If you are a federal grant recipient or a contractor, you may find that there is an interruption of your funding, which then results in failing to deliver your services.

What are the immediate consequences for individuals who rely on government services?

Some services continue unabated. For example, people already receiving Social Security checks or veterans benefits will continue to receive those payments, because Social Security benefits are not affected by a government shutdown, which only affects appropriated spending. Post offices will remain open. People will not be able to sign up for new benefits, obtain passports, get into national parks or be able to access a wide range of other government services.

How does a government shutdown affect the overall economy?

The 2019 five-week federal government shutdown cost the U.S. economy $11 billion, according to a report by the nonpartisan Congressional Budget Office. This was due to lost output from federal workers, delayed government spending and reduced demand. Although most of the damage to the economy was reversed as federal workers returned to their jobs, the CBO estimated that $3 billion in economic activity was permanently lost.

What could make a government shutdown less damaging?

There is nothing that can be done to mitigate the negative effects of a shutdown other than the White House declaring a higher percentage of the government to be excepted from the shutdown—what used to be called “essential.” The Trump White House did this (for example, national parks remained open) in order to minimize the apparent cost of the shutdown. It would surprise me if the Biden administration uses the same strategy, because they would rather make transparent the effects of not enacting appropriations.

Given our close proximity to Washington, D.C. and the large number of federal employees who reside in the DMV, what impact does a government shutdown have locally??

In a government shutdown, employees in those agencies that are affected fall into two categories: so-called “essential” employees who must continue to work but cannot be paid, and so-called “non-essential” employees who cannot work and will not be paid. While in the past all of these employees have been paid retroactively, clearly going without a paycheck for the duration of the shutdown creates substantial hardships, particularly for those (presumably lower-income) employees who are living paycheck to paycheck and do not have access to savings. There is little that can be done to soften the blow for these employees. Moreover, in the past employees who worked under contract have NOT been paid retroactively, therefore the hardship may be particularly difficult for them.

While these employees are not being paid, they are less likely to spend money in restaurants, grocery stores and other businesses. This is likely to damage the local economy.

What recommendations would you offer to policymakers to avoid or minimize the economic and financial disruptions caused by a potential government shutdown?

Do your job. Pass the appropriation bills on time. It is that simple. In the absence of that, don’t hold federal agencies and recipients of government funds hostage to political disagreements. If regular appropriations cannot be passed on time, there should be continuing resolutions (short-term appropriations) passed that will not result in a lapse in funding. Funding the government is job No. 1 of the Congress and the president, and failing to do so is an abdication of that basic responsibility.

Earlier this year, we heard of the risk of the government defaulting on its debt obligations and that it would be catastrophic to the economy. How is a government shutdown different from a default?

In a default, the government has insufficient money to pay its bills. What happens, literally, is that the Treasury Department has to decide which legal financial obligations to honor and which to not honor. For example, should the government pay Social Security recipients but not soldiers in the field? A shutdown results from the affected agencies literally having no authority to spend money. Of the two, a shutdown—which is, to be clear, a bad thing—is better than a default, in terms of its lasting damage.

What’s one thing you’d like people to know about the federal budgeting process?

Often the assumption among the public and the press seems to be that it is only government shutdowns that are evidence of the irresponsibility of political leaders with respect to the budget. But it has been 25 years since we had a fiscal year where all of the appropriation bills were passed and signed into law before the beginning of the fiscal year. These chronically late appropriations create their own costs and also compromise the performance of federal agencies and programs. So while ending the shutdown is the immediate concern, returning to a timely budget process is equally important.