How a Government Shutdown Will Impact Your Finances

It seems like every year or so, we’re faced with the prospect of a government shutdown.

Since the federal government’s fiscal year runs from October 1st to September 30th, these politically manufactured crises tend to peak around the end of September. We saw this just recently, when a stopgap spending measure was passed in the waning moments of September 30th. (so we may revisit this in mid-November this year!)

This post won’t go into the specifics of “why” there may be a shutdown (at least the specifics of this year’s crisis), but we will explain the broader reasons why shutdowns can happen.

But more to the point, how would a government shutdown affect you? How might it affect your own finances?

It all depends on how long the shutdown lasts. If it’s resolved after just a few days, you may experience no impact at all.

But if it lasts several weeks, certain areas of your financial life may be negatively affected.

Table of Contents
  1. What Causes a Government Shutdown?
  2. What Happens in a Government Shutdown?
  3. How a Government Shutdown Might Affect Your Finances
    1. Federal Employees
    2. Internal Revenue Service
    3. Stock Market Returns
    4. Interest Rates
    5. Travel
    6. Employment
  4. The Bottom Line on Government Shutdowns

What Causes a Government Shutdown?

Under federal law, federal agencies are prohibited from spending money absent appropriations from Congress. There are 12 annual appropriations bills, and if Congress fails to pass all 12, federal agencies must halt all non-essential functions until Congress passes the required appropriations.

A partial shutdown will occur if only some of the appropriations are not authorized. But a full shutdown occurs all twelve go unfunded.

That’s the position Congress finds itself in right now. If they fail to pass a budget for the 2024 fiscal year by midnight on September 30th, a government shutdown will be imposed beginning October 1.

The last time we had a government shutdown was back in 2018 when it was shut down for 35 days, which was the longest it had been shut down in 40 years.

What Happens in a Government Shutdown?

Despite how ominous it all sounds, the government never completely shuts down. In fact, the vast majority of government spending continues, and departments continue to operate.

That includes entitlement programs like Social Security, Medicare, and Medicaid, law enforcement, the military, and other departments considered to be essential to the survival of the nation.

And just because Congress fails to pass a budget by the deadline doesn’t automatically mean we’ll have a shutdown. In previous years, Congress passed a temporary appropriations bill that delayed a shutdown by several weeks or months, giving them more time to hash out a permanent budget to avoid a shutdown altogether – at least until the next budget showdown comes around.

How a Government Shutdown Might Affect Your Finances

Let’s start on an optimistic note and focus on the areas of your financial life that are unlikely to be affected by a government shutdown. These are considered “essential services,” and are not impacted by a shut down:

  • Social Security – benefits will be paid but new applications may be delayed as employees are furloughed
  • Medicare
  • Medicaid
  • Mail delivery from the U.S. Postal Service
  • Employees of the above government agencies, as well as those in law enforcement and the military
  • Interest payments on US Treasury securities

Now for the bad news. While it would be an exaggeration to say that all areas of the economy and finance will be negatively impacted by a government shutdown, many will; it’s just a matter of how much.

Let’s take a look at how a government shutdown will impact significant areas of the economy and your finances.

Federal Employees

The biggest impact will be felt by federal employees – if that’s you, you may be furloughed or required to work without being paid. Usually, you’ll be paid once the government “re-opens.”

This means you’ll have to rely on your savings to tide you over since you won’t be getting your regular paycheck.

Internal Revenue Service

The IRS may be slow in processing your tax return, which also means they’ll be slower to issue refunds. Since mid-October is the due date for filing taxes if you’ve requested an extension, this may impact you if you’re one of these tax filers.

This also means you may have trouble reaching someone at the IRS, since employees may be furloughed. Your taxes are still due though, so don’t think a shutdown means you can wait to file.

Stock Market Returns

Short-term stock market fluctuations are largely driven by emotion, and if there’s one element the stock market despises, it’s uncertainty. A government shutdown, by its very nature, is an uncertain event. The stock market is already looking wobbly in anticipation of a shutdown, but it’s reasonable to expect a more significant reaction if and when it occurs

Remember that any panic over the impact of a government shutdown on the stock market is likely to be overdone. Previous shutdowns have only had a minor impact on stocks, with the market ultimately shrugging it off. 

Interest Rates

Reuters recently reported that the Federal Reserve will unlikely increase the Fed funds rate at a November 1 meeting due to the absence of data normally provided by government sources and used as a basis for interest rate decisions by the Federal Reserve.

That doesn’t mean that interest rates won’t eventually rise. The Fed could merely postpone a promised interest rate increase until the December meeting or the next meeting after the shutdown ends.

This is good news if you have a variable-rate mortgage or personal loan, as it means your interest rate should remain unchanged for a little while longer.

Travel

Many government agencies are involved in different areas of the travel industry. One example is air traffic control operations at major airports around the country.

A shutdown will result in a reduction in the number of these employees, potentially causing major delays at airports. It is also reasonable to expect an increase in airfares as a result.

If you’re a fan of the national parks, those will surely be closed during a shutdown. Since park employees will be furloughed, no one will be available to maintain the parks. During the last (partial) shutdown, President Trump went against precedent and kept the parks open and it resulted in significant damage.

Employment

US Government workers deemed to be non-essential may be furloughed without pay until the shutdown ends. However, pay would be reinstituted retroactively once the shutdown ends. But it’s also possible for employees working in industries and businesses related to government employment to be subject to layoffs if the shutdown takes too long.

Those employees may not receive retroactive pay even if rehired after the shutdown.

There’s an important caveat for US Government employees. Even if you are considered to be an essential worker, you will continue to work, but you will not be paid for the duration of the shutdown. However, your full pay will be restored retroactively when the shutdown ends.

The Bottom Line on Government Shutdowns

As it turns out, government shutdowns – despite the rhetoric in the media – are both common and short-lived. There have been no fewer than 14 shutdowns since 1980, with an average length of eight days each. That means despite the attention government shutdowns draw and the apparent fear they inspire, their impact is temporary.

That said, some government shutdowns have lasted substantially longer. For example, in December 2018 and January 2019, the shutdown lasted for a full 35 days. However, it was only a partial shutdown because Congress had passed five of 12 required appropriations bills.

But with 14 government shutdowns under our collective belts in just the past 43 years, responding to this type of event should be greeted as something of an ongoing routine. That means there’s no reason to pull your money out of the bank, sell off your stock portfolio, or find a new career. 

In just a few days, the government shutdown of 2023 – if it even occurs – will quickly fade into the rearview mirror of life.

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About Kevin Mercadante

Since 2009, Kevin Mercadante has been sharing his journey from a washed-up mortgage loan officer emerging from the Financial Meltdown as a contract/self-employed "slash worker" – accountant/blogger/freelance blog writer – on OutofYourRut.com. He offers career strategies, from dealing with under-employment to transitioning into self-employment, and provides "Alt-retirement strategies" for the vast majority who won’t retire to the beach as millionaires.

He also frequently discusses the big-picture trends that are putting the squeeze on the bottom 90%, offering workarounds and expense cutting tips to help readers carve out more money to save in their budgets – a.k.a., breaking the "savings barrier" and transitioning from debtor to saver.

Kevin has a B.S. in Accounting and Finance from Montclair State University.

Opinions expressed here are the author's alone, not those of any bank or financial institution. This content has not been reviewed, approved or otherwise endorsed by any of these entities.

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