The Government Shutdown Will Probably Increase The Deficit


Budget Battle


The economic cost of Congress’ failure to avert a shutdown is quickly mounting, to the tune of $300 million a day. Now, financial analysts say the shutdown could also worsen the nation’s deficit.

This year, the deficit was expected to shrink to its smallest shortfall since before the recession. However, as a new Bank of America Merrill Lynch Global Research Report explains, the loss of tax revenue from the masses of furloughed workers, coupled with the cost for agencies to implement the shutdown, will likely “put upside risk” on the budget deficit. The analysts warn:

Inside the Beltway this may look like a ‘zero-sum game’ where one party’s win is the other party’s loss. However, outside the Beltway, we believe this is very much a negative-sum game: the odds of a major shock to the economy and a full-blown correction to the stock market have risen.

Ironically, we think this also puts upside risk to the budget deficit – due to shutdown costs and reduced revenues – and it does not slow implementation of the Affordable Care Act – it is funded outside of the appropriations process.

On top of this likely damage, the shutdown could reduce GDP growth by 1.4 percent in the fourth quarter and cost the economy $55 billion if it lasts three to four weeks.

To re-open the government, self-professed Republican budget hawks are pushing for the repeal of Obamacare’s medical device tax, which would add about $35 billion to the national debt. The last Congressional crisis, over sequestration, resulted in an estimated $4.5 billion in lost revenue, not to mention stagnating consumer spending due to mass furloughs.