What Happens During a Government Shutdown?

Written by Nancy Javkhlan on Sunday, 05 November 2023. Posted in Business Analytics

Photo by Andy Feliciotti on Unsplash  

The issue over the Speaker of the House has caused much turmoil in Congress, especially with fear of a government shutdown impending. Although the House was able to compromise on a temporary funding bill under Representative Kevin McCarthy (R), it will expire on November 17th. With this date approaching fast, Congress must face this issue once more but now with McCarthy kicked out and Republican representative Mike Johnson confirmed as the new Speaker. However, what is a government shutdown? How will it impact the US economically?

A government shutdown is when the federal government temporarily ceases its non-essential operations due to a lack of budget funding. This occurs when the government's budget appropriations have not been approved by the legislative body, which in this case, is due to the growing extreme partisanship in Congress. 

During a government shutdown, federal employees temporarily cease working due to a lack of funding for their salaries. However, the impact extends beyond government workers to non-essential government services, including the management of national parks and visa processing, which face the threat of funding cuts. These cuts have a domino effect on various industries, such as tourism, agriculture, and manufacturing. Additionally, small businesses, which play a vital role in local economies, are especially vulnerable during a government shutdown. Factors like reduced consumer spending, increased uncertainty, and delayed government contracts can disrupt their financial stability. In some cases, this disruption may lead to layoffs or even business closures. 

Expanding on the topic of uncertainty, although it is not unique to a government shutdown and occurs in any recession, it does not necessarily lessen the magnitude of its impacts. When business leaders are apprehensive due to economic instability, there will be reduced investments, fewer job opportunities, and financial market instability, all contributing to a slowdown in economic growth. Another concerning aspect is the potential for a credit rating downgrade for the United States during a government shutdown. If the government fails to meet its financial obligations or demonstrates an inability to manage its finances, credit rating agencies may lower the nation's creditworthiness. This scenario triggers higher interest rates, making borrowing more expensive for the government, and the ripple effect can impact consumers and businesses alike. Finally, a government shutdown disrupts the timely release of crucial economic data reports, including employment figures and GDP growth statistics. This delay hinders the ability of policymakers, investors, and businesses to make well-informed decisions. Moreover, it presents challenges for the Federal Reserve in effectively managing the country's money supply.

In summary, government shutdowns inflict severe economic consequences. They adversely affect government workers, small businesses, and the overall economy, contributing to economic uncertainty and potential credit rating downgrades. These disruptions highlight the imperative need for political cooperation to avert such issues and ensure economic stability and growth.

About the Author

Nancy Javkhlan

Nancy Javkhlan

Nancy is a Business Analytics Writer at Girls For Business.

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