Billions and counting: why shutting down the government is actually worse for taxpayers
- Even though it involves closing agencies, shutting down the government is actually more costly for taxpayers than keeping it open.
- Some of major cost factors include back pay for employees, uncollected taxes and fees, and interest on late government payments.
- The current shutdown is two weeks away from costing the US economy more than the $5.7 billion Trump wants for a border wall, according to an estimate by S&P Global Ratings.
With the arrival of this past weekend, the partial shutdown of the federal government has become the longest in US history at three weeks and counting. For anyone concerned about excessive government spending, that’s bad news. It may seem counterintuitive on its face, but shutting down the government will actually prove to be more costly for taxpayers than keeping it open. Yes, agencies are closed and therefore aren’t spending tax dollars, but whatever the government saves in the short term, it will have to spend even more to compensate for in the long term.
Michael A. Peterson, chairman of the Peter G. Peterson Foundation, which advocates for fiscal prudence and federal debt reduction, put it bluntly to the New York Times last week: “There’s nothing good about this shutdown, from a fiscal or a budgetary standpoint. We’re absolutely not celebrating not spending money.”
The Times article goes on to explain four reasons why shutting down the government and furloughing hundreds of thousands of employees is ultimately more costly than continuing to keep every agency open:
Federal employees will eventually get their salaries — for work they weren’t allowed to perform. The fact is that furloughed government workers will receive back pay once the government reopens. Historically this is what the federal government has done after past shutdowns, and President Donald Trump as promised as much after the present one. So assuming they’re going to be paid anyways, then as a rule of thumb it’s better for the government when it gets services in return for what it spends on employee salaries. After the 16-day shutdown in 2013, for instance, a report commissioned by the Obama administration estimated that the compensation costs of pay and benefits for affected federal workers was $2.5 billion.
Some taxes and fees won’t be collected. Employees of the Internal Revenue Service charged with collecting back taxes have been furloughed. That absence, combined with closures or reduced services at national parks, deprives the government of two relatively small but significant revenue streams. As a point of reference, during the 2013 shutdown the parks service said it lost about $7 million in revenue, and the Smithsonian lost about $4 million.
The government will owe other payments, with interest. Under two laws, the Prompt Payment Act and the Cash Management Improvement Act, the federal government must pay interest on contracts, grants, and other obligations that it couldn’t fund while it was shutdown. For the first half of this year, the Treasury Department says the interest rate required by the Prompt Payment Act is 3.625 percent.
The economy will take a hit (and so will tax revenues). This final factor is more difficult to quantify, but most economists take it as a given that when 800,000 furloughed federal workers don’t get paid, the economy suffers — along with tax revenues. As consumers, these workers lose spending power. They’re less likely to eat out at restaurants, for instance, or to buy a car. And it’s even worse for federal contractors, who range from cafeteria workers to technology specialists, as they likely will not even have back pay to fall back on like workers employed directly by the government.
“The longer the shutdown lasts, the faster the economy could fall,” the Times concludes. “Slower growth would likely lead to lower tax revenues, adding to a federal budget deficit that is on pace to top $1 trillion for this fiscal year.”
In fact, as several news outlets last week pointed out with unabashed irony, the current shutdown is only two weeks away from costing the US economy more than the $5.7 billion Trump wants to build a wall along the US-Mexico border, according to an estimate by S&P Global Ratings.
For Americans frustrated with the inability of Congress and the White House to keep the government open, that metric may well sum up the cost of the shutdown as well as any.
Image Credit: “U.S. Capitol Building” by Erik Drost is licensed under CC BY 2.0