September 29, 2023
What a Federal Shutdown Would Mean for Virginia
Update: On Saturday, September 30, Congress passed a continuing resolution to continue funding through mid-November.
Due to the U.S. Congress not passing funding legislation, there will very likely be a government shutdown beginning Sunday, October 1. The last federal shutdown was for 35 days in late 2018 and early 2019. That shutdown, which was only partial, cost the U.S. economy $3 billion.
This shutdown would be more total, and important services such as food assistance would be cut off, while the economy as a whole is also damaged. Some civilian federal workers and military members would be expected to continue working without pay, while others would be furloughed without pay. Contractors would also go without pay and, unlike direct federal employees, would be unlikely to receive back pay when a funding bill eventually passes.
What would this mean in Virginia?
Because Virginia’s economy is deeply intertwined with federal civilian and military spending, Virginia families and communities would be particularly hard hit.
- Virginia was the number one state for Department of Defense spending in fiscal year 2022. Defense spending injected $62.7 billion into Virginia’s economy last year and accounted for 9.7% of total Virginia GDP.
- One in 17 people working in Virginia is directly employed by the federal government, more than double the national share, according to 2022 data from the Bureau of Economic Analysis. That includes 2.1% of Virginia workers who are members of the U.S. military, and another 3.7% who are federal civilian employees.
- Many of these jobs pay well: Direct federal employment accounts for 10.9% of Virginians’ earnings, compared to just 3.6% in the U.S. as a whole, according to data from July 2022 through June 2023 from the Bureau of Economic Analysis. Put another way, 8.1% of all federal wages and salaries are paid to people living in Virginia, compared to just 2.5% of private-sector earnings.
- Direct federal employment is only part of the picture for Virginia: Many additional Virginians are employed with federal contractors. Virginia was #2 in the country in Department of Defense contracts in fiscal year 2022, amounting to $42 billion in federal defense contracting in Virginia. Including non-defense contracts, the federal government spent $89.6 billion on contracts in Virginia in FY2022, far higher than the next-highest amount of $67.4 billion in Texas, according to USAspending.gov. The jobs generated by those contracts are not counted in the direct federal employment data from the Bureau of Economic Analysis.
- Unlike direct federal employees, federal contractors will not receive back pay after the shutdown ends unless their employer provides it despite not getting reimbursed by the federal government. In 2019, the Northern Virginia Chamber of Commerce estimated that the region is home to 375,000 federal contractors. While some federal contractors are well paid and may have robust emergency savings, many others, such as custodial staff, may experience significant hardship and need assistance from public and private sources.
- The partial shutdown in 2019 cost the Washington, DC region $1.6 billion in the short term, although some of that economic activity likely rebounded when direct federal employees received back pay.
- Additional data by county and metropolitan data is available upon request.
Risk of repeating the past: Federal cuts during recovery from the Great Recession harmed Virginia
During the Great Recession from 2007 to 2010, Virginia’s economy wasn’t as hard-hit as the national economy until the federal government cuts started. An extended federal shutdown could see a repeat of this pattern: Even as the national economy strengthens due to major federal investment packages such as the Inflation Reduction Act, a shutdown in regular federal government spending would particularly harm Virginia.
- As of early 2010, which was near the worst point of the Great Recession, the U.S. had lost 6% of all pre-recession jobs, but Virginia had lost just 4%. And for a time, Virginia was recovering from the recession at a similar pace to the U.S. as a whole.
- This changed in early 2013, when the federal government moved into a period of austerity, causing Virginia’s job creation to slow while the U.S. as a whole continued adding jobs. Automatic spending cuts (budget sequestration) and continued federal budget uncertainty continued to impact Virginia’s growth in 2014 and 2015.
- As a result, Virginia experienced sharp declines in wages, salaries and personal income in the second half of 2014, which in turn reduced expected state revenue.
What won’t happen?
Despite the many challenges that a shutdown would pose to Virginia families and communities, some federal services would continue. Social security checks would continue to be sent, and mail would continue to be delivered. Air traffic controllers and TSA employees would be asked to work without pay, so these services would continue, although a long shutdown might lead to some staff needing to leave for paying employment, leading to shortages and disruptions to air travel.
Budget & Revenue