The five-week partial government shutdown cost the U.S. economy about $3 billion in forgone economic activity that won’t be recovered, the Congressional Budget Office said in a new report Monday.
Because the IRS was among the agencies unfunded during the shutdown, it had to slow down some compliance work. For that reason, CBO estimates tax revenue will be about $2 billion lower in fiscal 2019 and that “much of the lost revenue … will not be recouped.”
In addition, these CBO estimates did not include indirect effects. As the shutdown dragged on — breaking the record for the longest funding lapse in U.S. history — the “risks to the economy were becoming increasingly significant,” including the blow to businesses that could not get federal permits, government-backed loans or grants, the budget scorekeeper said.
Since that impact was more difficult to quantify, CBO explained, those effects were not factored into the cost estimate “but were probably becoming more significant” as the shutdown continued.
The agency projected that an overall $11 billion in losses due to the shutdown over President Donald Trump’s border wall will be offset by a projected $8 billion boost for the GDP through the remainder of the year.
“Underlying those effects on the overall economy are much more significant effects on individual businesses and workers,” the agency says. “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.”
The shutdown, which ended on Friday, reduced GDP in the fourth quarter of 2018 by $3 billion, in addition to $8 billion in the first quarter of 2019.
Although funding is now flowing to the departments that were shuttered for more than a month, they are guaranteed funding for only three weeks under the stopgap spending bill, Trump signed Friday. If the president and congressional leaders don’t reach a compromise on border security spending in that time, the same nine departments and dozens of agencies are likely to be shut down again come midnight Feb. 15.
The shutdown also delayed about $18 billion in federal discretionary spending by sidelining salaries and suspending federal services. CBO estimates that federal spending on goods and services was about $9 billion lower during the shutdown than it would have been otherwise.
The good news for government contractors and vendors is that the budget office predicts federal agencies will spend about $3 billion extra in each of the first, second and third quarters of this year, completely making up for that spending gap by next winter. But CBO predicts agencies will probably purchase a different mix of goods and services than they had initially planned.
Workers at nine of 15 federal departments were not paid during the shutdown. So the lapse will complicate tax withholding over the next few months, resulting in a temporary revenue bump for the IRS and short-term losses for the workers, who are receiving back pay in a lump sum, with more withheld.
The agency cautioned that the shutdown’s estimated effect on the economy is “subject to considerable uncertainty.”
For example, CBO said it wasn’t sure how federal employees and contractors adjusted their spending while not getting paid, or how agencies will adjust their spending and goods and services now that the shutdown is over.
CBO’s shutdown report was released alongside the agency’s annual reportdetailing the nation’s economic outlook for the next decade. That annual economic outlook report doesn’t include the effects of the shutdown.
The agency estimated that the U.S. federal budget deficit will hit about $900 billion this year and exceed $1 trillion every year beginning in 2022 — two years later than what CBO estimated last year.
CBO’s projection of the federal deficit for 2019 is about $75 billion less than what it was last spring, namely due to a decrease in emergency spending.
Two years into Trump’s tenure, the national debt is expected to soar, to almost $29 trillion in 10 years. That debt held by the public would be the largest percentage since 1947 and more than twice the average of the past 50 years.
Real GDP is expected to grow 2.3 percent in 2019, down from 3.1 percent in 2018, as the initial effect of the GOP tax bill, wanes, in terms of growth in business spending.
Import tariffs the Trump administration has proposed, and their subsequent effect on trading partners, will reduce real GDP by about 0.1 percent by 2022.
“Those changes in trade policy increase policy uncertainty among investors, which may further reduce U.S. output,” CBO says. “If investors lose confidence in stable international trade and economic relationships, then that increased uncertainty may delay investments or discourage them entirely, leading to less economic activity both in the United States and abroad.”