It’s easy to minimize the potential effects of a “partial” federal government shutdown if Congress fails to act on a short-term budget extension by midnight on Friday. After all, such stoppages have already happened 18 times – most recently in 2013 and most famously in 1995 – after which President Bill Clinton warned Congress to “never ever shut the federal government down again.”
Yet shutdowns can, in fact, hurt the economy. Based on previous closures, estimates suggest that a short-term closure could erase at least $24 billion in economic activity and trim the nation’s gross domestic product by 0.4 percent. This is because at least 800,000 federal employees would be “furloughed” without pay, at least until the crisis is resolved, which would likely curtail driving, shopping, dining out and otherwise engaging in the kind of consumer spending that fuels growth.
A longer shutdown could have another nasty surprise for taxpayers.
“If a shutdown were to begin now and goes on for longer than 10 days, it would also prevent the processing of tax refunds by the IRS, which would otherwise be filed beginning in late January, with payments scheduled to go out from mid-February onwards,” Capital Economics said in a research note.
Federal parks and other services could also be shuttered, if not immediately, so there would be no revenue from these operations. Then there’s the costly problem of shutting down operations, which could take days for some government departments, along with the cost and time to restart them.
A bigger problem would be if federal agencies such as the Federal Aviation Administration and the Centers for Disease Control were eventually forced to send workers home. Such temporary layoffs are supposed to be for non-essential personnel, but as much as two-thirds of the CDC’s employees might be unable to work during the height of the current flu epidemic. A shutdown also could delay patient enrolling in clinical trials, predicted Height Securities.
As for the FAA, which has already seen numerous travelers stranded due to breakdowns and hazards at airports, airlines would continue to fly, but likely “suspended activities.” These include the personnel necessary for security background investigations, financial operations and budget functions, inspections and the development of safety standards, according to the Department of Transportation.
More broadly, a shutdown could give the U.S. a financial black eye just when global leaders gather next week at the World Economic Forum in Davos, Switzerland. While the U.S. maintains its stellar AAA credit rating, the “main implication for U.S. creditworthiness would depend on whether it foreshadowed a further destabilization of U.S. budget policymaking, or brinkmanship over the federal debt limit,” said credit rating company Fitch Ratings.
But even if Congress kicks the budget can down the road for another month with a controversial short-term extension, the expectation in the eyes of the world is that it could get even worse. While stock markets remained stable on Friday, shares tend to tumble sharply after a government shutdown. Stocks lost 3.3 percent after the 2013 shutdown and 6.7 percent following the crisis in 1978.
So, do stock pundits know something we don’t? “Without a long-term deal, the Treasury will exhaust its bag of accounting tricks … by early March,” predicted Capital Economics. “At that point there is a risk the Treasury will default on its debts or fail to make a scheduled Social Security payment.”