Government Shutdowns: The U.S. Experience
Understanding government shutdowns and their impact on bond markets
What is a Government Shutdown?
A government shutdown occurs when a government cannot fund its operations because the legislative body has failed to pass the necessary appropriations legislation. This is primarily a U.S. phenomenon, though understanding it provides important context for how different countries approach fiscal governance and what happens when budget processes break down.
The U.S. Example: Why Shutdowns Happen
In the United States, government shutdowns occur due to a unique feature of the American political system:
The U.S. Appropriations Process
- Annual Authorization Required: Congress must pass appropriations bills each fiscal year (beginning October 1) to fund government operations
- Divided Government Risk: When different parties control the House, Senate, or Presidency, budget negotiations can deadlock
- No Budget = No Spending Authority: Without passed appropriations, federal agencies cannot spend money or pay employees
- Automatic Shutdown: Non-essential government services stop, federal workers are furloughed
Recent U.S. Government Shutdowns
| Period | Duration | Cause | Impact |
|---|---|---|---|
| Dec 2018 - Jan 2019 | 35 days (Longest in U.S. history) |
Border wall funding dispute between President Trump and Democratic Congress | 800,000 federal workers furloughed or working without pay. Economic impact: $3 billion permanent loss to GDP |
| January 2018 | 3 days | Immigration policy (DACA) and spending levels dispute | Brief disruption, minimal market impact due to weekend timing |
| October 2013 | 16 days | Affordable Care Act (Obamacare) funding dispute | $24 billion economic impact, S&P 500 fell 3% during shutdown, recovered after resolution |
| 2023 Near-Miss | Averted | Debt ceiling standoff resolved days before deadline | Market volatility, credit rating concerns, but shutdown avoided through last-minute deal |
| March 2024 | 13 hours | Funding gap for FY2024 appropriations | No federal workers furloughed due to brief duration and overnight timing |
| Oct 2025 - Present | 26+ days (Ongoing as of Oct 27, 2025) |
Congressional failure to pass FY2026 appropriations due to disagreements over spending levels, foreign aid rescissions, and health insurance subsidies | ~900,000 federal workers furloughed, 2 million working without pay. Second-longest shutdown in U.S. history. Treasury Department had largest layoffs (1,446 employees). Estimated GDP impact: 0.15% reduction per quarter during shutdown |
References
U.S. Government Shutdowns
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NPR. “The federal government is still shut down. Here’s what that means in your community.” October 15, 2025. Available at: https://www.npr.org/2025/10/15/nx-s1-5575134/government-shutdown.
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CNN Politics. “October 7, 2025 - Federal government shutdown.” Available at: https://www.cnn.com/politics/live-news/government-shutdown-news-10-07-25.
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Committee for a Responsible Federal Budget. “Government Shutdowns Q&A: Everything You Should Know.” September 16, 2025. Available at: https://www.crfb.org/papers/government-shutdowns-qa-everything-you-should-know.
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USAFacts. “Government shutdown 2025: What to know.” Available at: https://usafacts.org/articles/government-shutdown-2025-what-to-know/.
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Brookings Institution. “Government Shutdowns: Causes and Effects.” Available at: https://www.brookings.edu/articles/what-is-a-government-shutdown-and-why-are-we-likely-to-have-another-one/.
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Brookings Institution. “Is this government shutdown different?” Available at: https://www.brookings.edu/articles/is-this-government-shutdown-different/.