Economic paper

CBO: Shutdown Will Cost Government $3 Billion of Projected 2019 GDP

The deficit is expected to total $897 billion in 2019

By 

Kate Davidson

Updated Jan. 28, 2019 10:38 a.m. ET

WASHINGTON—The partial government shutdown that ended Friday will cost the government about $3 billion and will subtract about 0.4 percentage point from annualized gross domestic product growth in the first quarter, the nonpartisan Congressional Budget Office said Monday.

In new estimates of the shutdown’s impact, the CBO said the shutdown dampened economic activity mainly because of the roughly 380,000 furloughed workers who weren’t contributing to GDP, as well as the delay in federal spending on goods and services and the reduction in aggregate demand.

The estimates, which the CBO cautioned are highly uncertain, don’t incorporate other indirect negative effects of the shutdown, such as businesses that couldn’t obtain federal permits or access loans while the government was partially closed.

“Such factors were probably beginning to lead firms to postpone investment and hiring decisions,” the CBO said, adding that risks to the economy were becoming increasingly significant as the shutdown continued.

“Although their precise effects on economic output are uncertain, the negative effects of such factors would have become increasingly important if the partial shutdown had extended beyond five weeks,” the report said.

The CBO estimated the 35-day shutdown, which was the longest in U.S. history, reduced fourth-quarter GDP by $3 billion, or 0.1%. The level of real GDP in the first quarter, which ends March 30, is expected to be $8 billion lower than it would have been, or 0.2% lower.

Economic growth is expected to be higher in subsequent quarters this year, as the economy makes up some of the lost ground. But the CBO estimates about $3 billion—or 0.02% of projected annual GDP in 2019—will never be recovered.

In estimates prepared before the shutdown, the agency projected the economy would grow 2.3% in 2019.

President Trump on Friday reached a deal with congressional leaders to reopen the government for three weeks while Republicans and Democrats negotiate over border security provisions in a new spending bill.

Although a shutdown temporarily halts government operations, previous shutdowns have imposed significant direct and indirect costs, including billions of dollars in back pay, lost output by federal workers and weaker economic growth.

Two separate shutdowns in fiscal year 1996 cost the government about $1.4 billion over 26 days, the Office of Management and Budget said at the time. The 16-day shutdown in 2013 cost roughly $2 billion in retroactive pay to furloughed employees, plus billions more in lost economic output, according to OMB.

Kevin Hassett, the chairman of the White House Council of Economic Advisers, said Wednesday the U.S. economy may not grow at all in the first quarter if the shutdown continued through March. But he added that the economy should recover any lost ground once the government reopens.

The CBO also estimated the budget deficit would total $897 billion in 2019, and pushed back its estimate for when budget deficits will exceed $1 trillion to 2022. Last year, the agency saw deficits topping $1 trillion next year, as government outlays continue to outstrip revenue growth.

The shift mainly reflected lower projected spending this year on emergencies, such as hurricanes and wildfires, as well as lower projected interest rates, which translates to lower expected interest costs on government debt.

The CBO also projected federal deficits would average $1.2 trillion a year over the next decade, or 4.4% as a share of gross domestic product, much higher than the 2.9% average over the past 50 years. Government debt is projected to swell from 78% of GDP in 2018 to 93% at the end of 2029.