What Occurs When the US Government Stops Spending?

Federal government shutdowns can cause major disruptions, affecting thousands of workers who may face furloughs and delayed paychecks. Taxpayers could struggle to have their questions answered, airport lines may become longer during busy travel periods, and many national parks could close their gates.

Despite this, critical government operations, including national defense, benefit distribution, and postal services, will continue without interruption.

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The distinct situation of a partial government shutdown in the U.S. — caused by a divided government, a malfunctioning budget process, and a constitutional framework requiring consensus among the House, Senate, and president on funding — affects federal agencies in various ways.

Legislation from the 19th century essentially prohibits federal agencies from spending beyond the amounts appropriated by Congress. As Congress usually allocates funds annually, this sets the stage for a potential shutdown every October 1, marking the beginning of a new fiscal year. This year, as in prior years, Congress has passed a temporary funding extension through December.

Nevertheless, exceptions apply. Agencies responsible for health, safety, and property protection, including military personnel, homeland security, and food inspections, are permitted to operate.

The president has constitutional responsibilities to uphold. Consequently, several offices within the White House, such as the Office of the Pardon Attorney and the U.S. Trade Representative, will remain operational.

Furthermore, various independent federal bodies, including the Federal Reserve and the Consumer Financial Protection Bureau, which do not depend on annual Congressional appropriations, will continue functioning using their own funding sources.

For those planning to travel by train or send packages during the holiday season, both Amtrak and the U.S. Postal Service will continue their services during the shutdown.

The Office of Management and Budget instructs each executive agency to draft a contingency plan for potential shutdowns, referred to as a “lapse in appropriation.” Here are some key aspects:

Federal employees

About 40% of federal employees will be furloughed and barred from working due to regulations prohibiting agencies from accepting volunteer labor. Essential personnel will work without compensation.

High-ranking officials confirmed by the Senate will be exempt from furloughs.

As a measure during the 35-day shutdown that began in December 2018, Congress passed legislation ensuring federal workers — both furloughed and essential staff — receive back pay once the shutdown ends. However, paychecks will be paused during the shutdown, often resulting in increased absenteeism.

Moreover, constitutional officials — including the president, members of Congress, and judges — are entitled to their salaries as dictated by the Constitution.

Travel

The Federal Aviation Administration and Transportation Security Administration will maintain their crucial safety roles. However, travelers may face delays as air traffic controllers and TSA agents will be working without pay, which has historically contributed to increased absenteeism during previous shutdowns.

U.S. consulates and passport offices will operate as long as they have access to fee revenues.

Parks and museums

Most national parks are likely to close, restricting visitor access and negatively impacting businesses within the $800 billion outdoor recreation industry. Generally accessible sites may remain open, but without regular staff and resources, leading to issues like unclean restrooms and litter.

Institutions such as the Smithsonian and the National Gallery of Art may close if the shutdown persists.

Cemeteries, monuments, and visitor centers managed by the American Battle Monuments Commission will also be shut down.

Inauguration

Donald Trump speaks during the 58th presidential inauguration in Washington on January 20, 2017.

The inauguration of a new president is constitutionally mandated and will take place even if a funding lapse occurs leading up to the January 20 event. Congress has already designated $3.7 million for the inaugural ceremonies, and all enhanced security measures surrounding the events will also remain intact despite the shutdown. Inaugural balls and other celebrations are funded privately through the Trump-Vance Inaugural Committee, which has garnered million-dollar pledges from corporations like Amazon.com Inc. and Meta Platforms Inc., along with personal contributions from influential individuals such as Ken Griffin of Citadel Securities and Sam Altman of OpenAI.

Health and social security

Medicare benefits will continue uninterrupted, alongside both new and ongoing Social Security checks. However, some administrative procedures — such as benefit verifications, corrections to earnings records, and the issuance of replacement cards — may experience delays.

The National Institutes of Health’s hospital in Bethesda, Maryland, will remain operational to treat existing patients, and research programs will continue where their interruption could compromise ongoing clinical trials.

Safety-net food assistance programs will also stay in effect.

Medical services at veterans’ hospitals and clinics will carry on, along with initiatives focused on suicide prevention, medical and prosthetic studies, and burial benefits.

Nevertheless, other veterans’ benefits, particularly those related to education, job training, and loans, may encounter delays.

National defense

Uniformed military personnel are exempt from furlough and will continue their duties without pay, while the majority of civilian employees in the Defense Department will be furloughed.

The Pentagon may maintain certain contracting operations supporting service members in accordance with an historical law known as the Feed and Forage Act. Funerals and tours at Arlington National Cemetery will also be unaffected.

Intelligence agencies provide limited information about their operations during a shutdown, but the Director of National Intelligence has indicated that employees are not automatically exempt from furlough.

Labor department

Several agencies within the Department of Labor, including the Bureau of Labor Statistics, will be entirely closed. If the shutdown extends through Inauguration Day, it may also result in delays of key monthly reports such as employment statistics, job openings, inflation rates, and import reports. Policymakers and investors relying on this data may need to seek alternative sources for insights into the economy’s status.

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Health and safety functions, including workplace inspections conducted by the Occupational Safety and Health Administration, will persist. Many benefit programs will remain uninterrupted, thanks to having permanent appropriations, including black lung benefits and COVID-19 assistance.

Treasury department

The Treasury Department has broadly indicated that essential services related to market and economic updates, policy work, and other responsibilities required for the president’s constitutional duties will continue to operate.

Numerous research and regulatory agencies funded through user fees will remain active, such as the Office of Financial Research, the Office of Recovery Programs, and the Financial Stability Oversight Council.

Processing cases before the Committee on Foreign Investment in the United States will be halted, potentially leaving significant business decisions — such as the sale of U.S. Steel to Nippon Steel — uncertain if no recommendations reach President Joe Biden’s desk by that point.

Internal Revenue Service

The IRS will stop responding to the average 46,000 calls it receives daily, while most tax administration functions will cease.

The Treasury will continue to implement tax credits established or expanded through the Inflation Reduction Act. A shutdown does not delay tax withholdings or deadlines for any estimated tax payments due.

Regulatory agencies

The Federal Trade Commission will suspend “the vast majority of its competition and consumer protection investigations.”

The Securities and Exchange Commission will halt its review and approval processes for registrations from investment advisors, broker-dealers, transfer agents, rating organizations, investment companies, and municipal advisors.

The Commodity Futures Trading Commission will continue its essential market oversight functions, citing a legal opinion stressing the necessity of preventing “massive dislocations and losses to the private economy and disruptions to society.”

The Consumer Product Safety Commission may still issue recalls when there is an “imminent threat to human life,” but routine monitoring activities will be paused.

Federal Emergency Management Agency

The majority of emergency relief personnel will remain active. Nonetheless, disaster relief payments are already at risk of delays due to a projected $39 billion shortfall in the Disaster Relief Fund by 2025 if additional funding is not secured.

Energy & environment

The Department of the Interior may process some permits for offshore oil and gas drilling; however, these approvals can vary based on safety considerations and government interests in the relevant properties.

The Environmental Protection Agency can continue certain programs funded by the Inflation Reduction Act and activities supported by alternative funding sources, including cleanup efforts at Superfund sites.

The Energy Information Administration, which publishes status reports on U.S. oil stocks and fuel demand, will maintain its data collection and publication schedule at least initially.

The National Nuclear Security Administration will focus on maintaining and securing nuclear weapons and deployed naval reactors.

The Nuclear Regulatory Commission will suspend its licensing, certification, permitting, and inspection efforts, as well as emergency preparedness drills.

Housing

Mortgage programs managed by the Federal Housing Administration and Ginnie Mae will continue smoothly. Many block grants allocated by the Department of Housing and Urban Development have already been distributed to states, thus avoiding any disruptions.

Subsidized housing programs, including public housing and Section 8 vouchers, do not hinge on annual appropriations; however, they face the risk of running out of funds.

“Nearly all” fair housing initiatives would be suspended, as indicated in the contingency plans.

Small business

Loan availability will depend on their funding sources. Many disaster relief and COVID-19 assistance programs will proceed, while typical loan applications may be delayed. Programs supporting veteran-owned businesses, exports, and mentorship initiatives will halt operations.

Federal Courts

Most judicial activities can continue during a brief shutdown, relying on funds from filing fees and other alternate sources.

Federal Reserve

The Federal Reserve’s operations will remain stable, enabling the central bank to manage interest rates, regulate financial institutions, and conduct economic research as usual.

Congress

While Congress’s ability to fund its operations might eventually diminish, it must continue functioning to address the shutdown. The 27th Amendment to the Constitution prohibits Congress members from changing their pay rates during their terms, ensuring they will keep receiving salaries. They also need staff to assist in drafting legislation.

However, other agencies connected to Congress — like the Library of Congress and the U.S. Botanical Gardens — will close their doors to visitors.

Biden’s last acts

A shutdown could obstruct efforts related to various final policy decisions and regulations by the outgoing administration in President Biden’s final weeks, including contract-making and executing spending from the Inflation Reduction Act.

© 2024 Bloomberg

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