Feds' Lost Spending Will Contribute to Shutdown's $3B in Permanent Economic Damage

The U.S. economy will suffer a permanent $3 billion hit as a result of the partial government shutdown, according to an estimate by the Congressional Budget Office, in large part due to lost economic activity by impacted federal employees.

More immediate effects will be much more severe, with the economy seeing $11 billion in lost productivity in the fourth quarter of 2018 and the first quarter of 2019. Much of that will be recouped in the subsequent months of 2019, CBO found in its report, though some of the losses will never be recovered.

Federal agencies delayed a total of $18 billion in discretionary spending, about half of which resulted from unpaid checks to employees and the other half from non-purchased goods and services. All federal employees affected by the shutdown will receive back pay: about $3 billion will go to furloughed workers and $6 billion to those forced to work during the appropriations lapse.

CBO made clear that while the macroeconomic impacts were real, federal employees—and the businesses they frequent—felt the most acute pains from the longest-ever shutdown. The overall impact to the 2019 gross domestic product will likely be around 0.02 percent, CBO estimated.

“Underlying those effects on the overall economy are much more significant effects on individual businesses and workers,” CBO wrote. “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. Some of those private-sector entities will never recoup that lost income.”

Some of the lost spending by furloughed employees will never be made up, CBO projected. Federal agencies are likely to make up their own missed spending by the end of the fiscal year, but the mix of goods and services will change. The government also lost out on revenues, the analysts said, which they may never recoup. The Internal Revenue Service lost about $2 billion due to a lack of compliance activity, while the National Park Service lost a small amount of fees it will never recover. Agencies like the Securities and Exchange Commission and Federal Trade Commission will recoup the fees it failed to collect, CBO said.

The analysts found little impact from a loss of grants provided by federal agencies, which identified other means to dole out money. Those agencies used “funding that had been appropriated in earlier years and was available for obligation,” CBO said. It noted, for context, that nearly half of all discretionary spending appropriated in 2017 was made available for multiple years and 15 percent was made available indefinitely. The analysts said they did not observe any significant drop-off in this type of federal spending during the shutdown, so they did not account for it in their report.

CBO said it had difficulty in determining more indirect negative effects of the shutdown, such as businesses missing out on federal loans, permits and certifications. That could have led to delays in hiring decisions and other investments.

Federal employees may see some tweaks to their own bottom lines over the coming months. CBO predicted that many employees will “temporarily increase their spending on goods and services,” though not necessarily on the same things they would have bought had they never faced delayed pay. Feds are also likely to face greater withholdings on their retroactive paychecks, which will be paid in a lump sum, but will be made whole when they file their tax returns next year.

Larry Kudlow, director of the White House’s National Economic Council, dismissed CBO’s report as dealing with “small fractions of numbers.” He said the real impacts were only on the “hardships for individuals,” not the economy as a whole.

“We frequently disagree with CBO, with all due respect,” Kudlow said. “They’re doing the best [they] can [but] no, I don’t acknowledge that right now.” He added, “Now that the government is reopened, the switch goes right back on. There is certainly no permanent damage to the economy.”