An Overview of U.S. Government Shutdowns: Causes and Consequences

TradingKey - A government shutdown is a uniquely American political event. After former President Donald Trump orchestrated the longest and most costly government shutdown in history during his first term, the risk of another shutdown has resurfaced at the start of his second term.

On March 11, 2025, the U.S. House of Representatives passed a short-term spending bill, also known as a continuing resolution, by a vote of 217 to 213. The bill now awaits a Senate to vote , which is necessary to ensure that the U.S. government remains operational beyond.

This budget proposal is seen as a potential trigger for another government shutdown crisis , as the Republican-led government must secure Democratic support to pass the bill, which would fund federal agencies through September 30. However, the Democrats appear poised to block the measure.

What is a Government Shutdown?

A government shutdown occurs when the U.S. Congress fails to pass the government budget bill, forcing most federal agencies to cease operations while only essential government functions continue. During a shutdown, government employees stop receiving salaries and are placed on leave to reduce expenses.

The U.S. federal government requires congressional authorization through an appropriations bill to fund its operations before each new fiscal year, which begins on October 1. The Anti-Deficiency Act, passed in 1884 , prohibits federal agencies from using funds without congressional authorization and approval.

The Congress has twelve appropriation committees (Appropriations Committees), each responsible for one of the twelve annual appropriations bills, covering areas such as defense, health and education, and energy and water resources. If some of these bills fail to pass, causing certain federal agencies to lack funding and shut down, it is referred to as a partial shutdown.

According to VOA , a U.S. government shutdown crisis is more accurately described as a temporary halt in government funding rather than a complete cessation of operations.

In essence, the U.S. government shutdowns result from the failure of the two major political parties to reach an agreement on budget allocations, often due to ideological conflicts under the separation of powers system. For example, the disputes over Obamacare in 2013 and the controversy over Trump's border wall in 2018 led to budget impasses that triggered government shutdowns.

What Happens During a Government Shutdown?

During a government shutdown, not all federal functional departments will cease operations, and the impact on state and local governments is not always predictable. The suspension of government employees' salaries is also a major concern.

1. Essential Functional Departments Do Not Close

During a government shutdown, not all federal agencies cease operations. Each federal agency must develop a response plan to determine which functions will be suspended, which will continue operating, and which employees will be placed on unpaid leave or required to work.

According to statistics, generally about 40% of federal government employees are forced to take leave, including most civil servants in departments such as environment, education, commerce, and housing. Meanwhile, the Department of Defense, the Department of Veterans Affairs, and the Department of Homeland Security collectively account for 60% of federal government employees. Among them, more than 50% of the civilian personnel in the Department of Defense will be placed on unpaid leave during a shutdown.

For investors, the shutdown affects key economic data releases. The U.S. Bureau of Labor Statistics will halt operations, potentially delaying or preventing the release of crucial reports such as the CPI and non-farm payrolls.

When the government shuts down, personnel providing essential services such as border protection, law enforcement, and air traffic control continue to work and are not affected. Generally, there are four categories of "exempted" services:

[Source: CRFB, TradingKey]

Although some essential government services remain unaffected, the American public may still experience disruptions due to the "spillover effect" of shutdowns in other departments. These may include air traffic congestion and flight delays, as well as delays in tax refund processing by the Internal Revenue Service.

2. The Spillover Effect on State and Local Governments

The annual budget bill passed by Congress determines the funding for federal government departments, while state and local governments are theoretically unaffected. However, since many states rely on the federal government for part of their funds, these government departments at the state and local levels may also experience disruptions. To maintain essential services, state and local governments often allocate their own funds to ensure continued operations.

3. Salaries of Government Employees

By law, during the government shutdown,non-exempt  government employees are required to stop working and take unpaid leave. Employees who are not designated as essential are prohibited from voluntarily working without pay.

Most government employees must personally bear the financial impact of the unpaid period. However, under the Government Employee Fair Treatment Act of 2019, some employees are eligible to receive back pay for the time they were unable to work.

In general, government employees in non-essential departments are placed on leave rather than being directly laid off. However, employees of private companies with government contracts may face temporary layoffs, leading to an increase in unemployment.

What is a Continuing Resolution?

Historically, the U.S. Congress has often failed to pass the annual budget bill before the new fiscal year begins on October 1. Instead, lawmakers frequently rely on a temporary spending bill, known as a continuing resolution (CR), to keep government operations running.

A continuing resolution is a temporary, emergency legislative measure. When a formal budget bill has not been passed, it typically extends the previous year’s appropriation levels, providing temporary funding for government operations until a specified date. If the continuing resolution expires without a formal budget agreement in place, a government shutdown occurs.

However, it is important to note that this remains an emergency solution rather than a long-term fix. Over-reliance on continuing resolutions could turn them into a "new normal" in U.S. politics, exacerbating public dissatisfaction with political gridlock.

Historical Cases of U.S. Government Shutdowns

According to incomplete statistics, as of early March 2025, there have been 22 (to 24) government shutdowns in U.S. history. Since 1981, the government has shut down 14 times,many of these shutdowns lasting only one to two days. Since 2000, there have been four shutdowns, and three of which occurred in 2018, during Trump's first term in office.

The main cause of budget impasse stem from differences between the two major political parties on issues such as welfare, deficits, military spending, and healthcare reform. Notably, 75% of the government shutdowns have been linked to Republican efforts to cut social welfare programs or the Democratic opposition to right-wing policies.

Historically, the U.S. government shutdowns of 2013 and 2018 have received the most attention:

• In October 2013, the federal government shut down for 17 days, primarily due to a dispute over "Obamacare." At the time, the Democrat-controlled Senate failed to pass the 2014 annual resolution, leading to the closure of non-essential departments and the suspension of 800,000 federal employees without pay. The U.S. Office of Management and Budget estimated that the direct financial loss, excluding broader economic impacts, reached $2 billion. Meanwhile, S&P estimated the economic loss at $6 billion.
• In December 2018, the federal government shut down for 35 days, marking the longest, most recent and most impactful shutdown in U.S. history. The shutdown was triggered by Trump’s demand for funding to build a border wall between the United States and Mexico. Trump rejected an appropriations bill that did not include $5.7 billion for the wall. Among the 2.2 million federal government employees, 800,000 to 850,000 were placed on unpaid leave. S&P estimated the economic loss from the shutdown to be as high as $24 billion.

[Source: Wikipedia, CITIC Group, TradingKey]

The Impact of a Government Shutdown on the Economy

A government shutdown may seem like a serious issue, but industry insiders generally downplay its long-term effects based on historical events. The actual impact depends on factors such as the shutdown date, duration, and chain reactions.

A short-term shutdown lasting only a few days may have minimal economic impact, whereas a prolonged shutdown can cause significant disruptions. If the shutdown occurs on a weekend, the impact is relatively small.

According to Goldman Sachs, a one-week government shutdown could reduce U.S. GDP growth by 0.2 percentage points. However, once the shutdown ends, GDP is expected to recover by the same margin.

Analysis suggests that government-related expenditures are delayed rather than cancelled. Since only non-essential government departments are affected, essential services continue to operate, making the short-term impact less significant.

The effects of a government shutdown on the economy are primarily reflected in the financial and market aspects:

• Fiscal Revenue: The suspension of tax collection reduces potential tax revenue. The closure of tourist attractions, such as national parks and staff shortages at airports, which disrupt air travel, lead to a decline in tourism revenue. Additionally,  business operations, and investment activities of individuals and enterprises may be affected, potentially slowing economic growth and indirectly reducing tax revenue.
• Market Sentiment: Expectations and sentiment weaken. Before a government shutdown, U.S. stocks, crude oil, and gold typically decline, along with the U.S. dollar index and U.S. bond yields. However, after the shutdown ends, markets generally rebound.

The U.S. Congressional Budget Office reported that during the five-week government shutdown from late 2018 to early 2019, the shutdown caused a 0.1% decline in GDP growth in the fourth quarter of 2018 and a 0.2% decline in the first quarter of 2019. Primarily due to the losses incurred by federal employees on unpaid leave and delays in federal spending on goods and services. While most of the GDP losses were later recovered, it is estimated that the shutdown resulted in an irreparable loss of $3 billion.

The Wall Street Journal noted that a single factor may not have a severe economic impact, the cumulative effect of multiple issues— such as high inflation and high interest rates during the Biden administration—could be more damaging.

The Impact of a Government Shutdown on the Public

CNN summarized the top 10 impacts of the U.S. government shutdown on the public's lives, with the degree of impact from severe to mild:

[Source: CNN, TradingKey]

Other Impacts of a Government Shutdown

1. The Credibility of the U.S. Government

The government shutdown is a consequence of the political standoff between the two major political parties in the United States. A 2018 survey found that more than 60% of Americans believed that partisan politics posed a serious threat to the country.

The suspension of government functions has further intensified public doubts about government effectiveness, while repeated shutdown crises have eroded vote confidence in American democracy.

2. The Credit Rating of the United States

The rating agency Moody's warns that a U.S. government shutdown may impact the United States’ credit rating, as it would underscore weaknesses in U.S. institutions and governance capabilities.

The IMF has pointed out that the arrears issue caused by a government shutdown could spur reforms to the Special Drawing Rights (SDR), potentially weakening the U.S. dollar’s hegemonic position.

3. Tourists Visiting the United States

In terms of transportation, air travel and air freight services continue to operate during a government shutdown, but airports may experience staff shortages, potentially affecting traffic flow and operations.

Although federal employees in the transportation sector continue to work, they may face delayed payment. As a result, the longer the shutdown lasts, the harder it becomes to retain the necessary workforce on duty.

Regarding visa and passport services, although these services are not funded by the Congress, the processing speed of U.S. consulates overseas may slow down, leading to issues such as longer wait times for visa interviews.

4. Impact on Other Countries

Due to factors such as the separation of powers, checks and partisan polarization, the government shutdowns are a uniquely American phenomenon. In contrast, when other countries face budgetary deadlocks, they often adopt alternative mechanisms, such as institutional innovation (e.g., the automatic enactment of budgets), forced promotion (United Kingdom), cabinet restructuring (Netherlands), or cultural compromise (Japan).

Given the United States’ pivotal role in the global economy and industrial supply chains, a U.S. government shutdown can have far-reaching international repercussions across multiple sectors.

• Disruption of the Global Supply Chain: The shutdown of departments such as the U.S. Department of Commerce and the Department of Agriculture may slow down the approval of import and export licenses and the quarantine inspections. Additionally, delays in the implementation of trade agreements and tariff policies could have a significant impact on global trade.
• The Rise in the Risk of U.S. Debt Default Hits Sentiment: The decline in U.S. stocks negatively impacts global stock markets, while the exchange rate of the U.S. dollar against other currencies experiences short term.
• Talent Flow: Visa delays, an increase in the visa refusal rate, and a slowdown in the inflow of international students.
• Global Public Services: Funding issues of international organizations such as the United Nations, the World Bank, and IMF.