On October 1st, 2025, the federal government entered its first federal government shutdown since 2018 after lawmakers failed to reach an agreement on a recent spending bill. The government shutdown comes after disagreements about Medicaid cuts and tax breaks could not be resolved by Congressional leaders. Many Democratic lawmakers aimed to reverse Medicaid cuts from President Trump and extend tax credits for healthcare plans purchased through the marketplaces established by the Affordable Care Act, while many Republican lawmakers opposed the reversals, indicating they would cost taxpayers more than 1 trillion dollars. The government shutdown will suspend many federal services and furlough thousands of federal employees.
As of October 1st, neither side shows any signs of budging. Warnings of a government shutdown have been on the radar for weeks as the White House informed agencies to prepare for large-scale firings of federal workers. All federal agencies maintain contingency plans in case a government shutdown occurs. In advance of the current shutdown, the Office of Management and Budget instructed agencies to modify those contingency plans and increase provisions for reducing agency workforces if a shutdown were to happen, particularly those that are “not consistent with the President’s priorities.” Compared to previous shutdowns, this language is much more aggressive and could include permanent layoffs instead of just temporary furloughment. This additional guidance may result in more severe impacts for workers and communities than in the past, depending on how long the shutdown lasts and if permanent reductions in agency workforces occur.
The most recent government shutdown in 2018 lasted 34 days and was the longest shutdown in history. While most economic losses from government shutdowns can be recouped, the Congressional Budget Office estimates that the nearly 5 week shutdown in 2018 resulted in about $3 billion of forgone economic activity that could not be recovered, which was equivalent to approximately 0.02 percent of annual GDP in 2019. If the current shutdown persists similar to the shutdown in 2018, we could see similar or worse economic consequences due to potentially higher layoffs and pre-existing poor economic conditions in state and local communities.
While federal government shutdowns primarily affect federal services and employment, these impacts ripple through state and local communities. The shutdown is expected to place 750,000 workers on unpaid leave, and for areas with high concentrations of federal employees, local economies will suffer. The unpaid leave for federal workers will result in a major loss of income, which will likely lead to lower consumer spending in local economies.
If the shutdown is prolonged, many services that are provided by the federal government but administered by state and local governments will be strained. All non-essential discretionary services will be suspended, while essential services will continue to function. However, some essential services, such as WIC, SNAP, Medicaid, Medicare, and disaster relief programs may experience staffing shortages or run out of federal funding. Staffing shortages and lack of funding would lead to interruptions in services that millions of Americans rely on, many of which will turn to state and local governments to bear the cost of distressed social services.
On October 1st, federal funding authorization expired for some mandatory programs such as Medicare and TANF. Once federal funding runs out, state and local governments usually dip into their own contingency funds to bolster social safety net programs. Once the federal government returns to regular operation, they typically reimburse state governments for the expenses they incurred. However, as political tensions grow higher, many legal experts have less certainty about when and if federal reimbursements will come in. If states continue to fund the discretionary programs that may see budget cuts in the very spending bill that caused the shutdown, the federal government may be hesitant to provide reimbursements. Congress would decide on a case-by-case basis whether or not to reimburse state governments.
The government shutdown puts state and local policymakers in a tight spot as political tensions grow and threats to federal spending continue. The natural inclination of most state and local policymakers would be to continue funding the programs that millions of Americans rely on as the status of the federal government remains in limbo, but what happens if Congress refuses to reimburse state and local governments after the shutdown ends? State and local governments may see themselves enter worse financial situations, especially as funding for these programs remains at risk.