Cost of US govt shutdown

According to recent new analysis produced by the Congressional Budget Office, the longest US government shutdown has had a negative impact on the economy by  $11 billion and a $3 billion in permanent damages.

Background

A government shutdown occurs when Congress fails to pass, or the President fails to sign appropriations legislation funding federal government operations and agencies. Since 1976, when the current budget and appropriations process was enacted, there have been twenty gaps in budget funding, eight of which led to federal employees being furloughed. The stand-off forced about 800,000 federal workers to go without pay temporarily; only essential employees were still required to work without pay until the government reopened.

The shutdown started on 22 December 2018 after the Democrats refused to include funds for President Trump’s border in the continuing resolution to pay for the operations of the Federal Government. Democrats, who have taken over the House of Representatives after the November 2018 mid-terms, and some fellow Republicans insisted they will not give Trump the $5 billion he needs to construct the wall.

Analysis

An estimated new analysis by the Congressional Budget Office reveals that 35-day US government shutdown cost the economy $11 billion and a permanent $3 billion in damages. The office also showed that 0.2 per cent of the nation’s annual economic growth forecasts had been shaved off because of the shutdown.

Ultimately, the CBO estimated that economic growth would slow this year to 2.3 per cent as compared with the 3.1 per cent rate last year due to the benefits of the new tax law as it begins to fade. The growth is also expected to decelerate further in the coming years, to an average annual rate of 1.7 per cent through to 2023.

The report said: "Among those who experienced the largest and most direct negative effects are federal workers who faced delayed compensation and private-sector entities that lost business.” The CBO also said that some of these private sector entities would never recoup from this massive loss.

The shutdown ended on the 26th of January after the President signed a bill to reopen the government for three weeks. President Donald Trump, who pompously professed to negotiate considerable deals in the White House, came out of a government shutdown battle politically scarred and outsmarted by U.S. House of Representatives Speaker Nancy Pelosi.

However, he has warned that he would resort to a new shutdown if both the sides fail to strike a deal regarding border security that he supports. The White House economic advisor Larry Kudlow also pushed back against the CBO report.  He said: "I'm not here to rail on CBO," and that "they have a different point of view."

The CBO also revealed that in 2019 alone, the US deficit is expected to be about $900bn, or 4.2 per cent of total US output. Following which during 2020-2029, the deficit is expected to average $1.2tr or about 4.4 per cent of GDP each year. The CBO added that the US government spending is not a new issue. They had always been spending more than they could take in.

President Trump had initially refused to concede his main demand for funding the border wall and even threatened to keep the government shutdown going for “months or even years”. He also alternately threatened to impose a state of national emergency to tackle what he describes as a major humanitarian crisis at the US-Mexico border. The Chairman of the Federal Reserve, Jerome Powell had also issued a warning about the economic costs of the ongoing government shutdown. Powell said: “If we had an extended shutdown then I do think that would show up in the data pretty clearly.”

He added that an extended shutdown would also make it harder for the Fed to get a clear view of the economy’s performance since some government agencies that are responsible for key economic indicators have been affected by the closures.

Counterpoint

Though the analysis is comprehensive, it does not incorporate some indirect effects of the shutdown, such as the halt in some federal permits and reduced access to loans.

The CBO also pointed out that despite the large burden and the cost, the federal government would be able to recover most of the loss once the federal workers return to their jobs.

Assessment

Our assessment is that these figures play a crucial role in measuring the impact that a government shutdown would have on an economy. We feel that this is a learning experience for both the government and the opposition to think of the consequences before forcing a shutdown. It is crucial for the President to propose a balanced border security bill that will not result in a second shutdown. 

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