Government shutdown would have ‘serious consequences for our economy’ by halting $163 billion in federal contracts to small businesses


The risk of a federal government shutdown on October 1 looms even larger after House Speaker Kevin McCarthy’s latest spending deal was killed by members of his own Republican Party. 

If the government were to shut down, all non-essential government functions would come to a screeching halt at a time of economic uncertainty. Members of the military wouldn’t receive paychecks, federal workers would be furloughed, and small businesses may not receive the loans they depend on to stay afloat.   

“The Republican shutdown is going to have serious consequences for our economy, vis-a-vis small businesses.” said Isabella Casillas Guzman, administrator of the Small Business Administration (SBA). 

The SBA would have to pause all applications for small businesses that rely on the government for loans, federal contracts, and grant money.

“Every day of the shutdown, there are going to be hundreds of loans that would be stuck, unable to move forward,” Guzman said. 

The anxiety among small businesses is palpable. In a Goldman Sachs survey of small businesses conducted between late August and early September, 70% of respondents said the government shutdown would be “negatively impacted” if the government shut down. Small business owners have expressed lukewarm confidence in the economy in recent months. A May survey from CNBC showed that 44% of small business owners rated the state of the economy as poor. Inflation has dropped slightly since then from 4.0% to 3.7% in August, but has been trending back up slowly since June, according to the Bureau of Labor Statistics. The potentially higher costs caused by creeping inflation risk being combined with fewer customers for some businesses as federal employees stay home from work. 

“I was just talking to my local dry cleaner that’s in the federal building across the street from my federal building,” she Guzman said. “She’s so worried about losing effectively her entire client base for as long as the shutdown keeps them out of their jobs.” 

Ninety-three percent of the small business owners who were concerned about a shutdown said it would hurt their top line revenue, which Guzman said points to the ripple effects of the government closing. Losing out on sales can make a bad situation worse for the small businesses that rely on the SBA for capital because they have often been turned away from other sources. “Remember that we’re a lender of last resort, these are businesses that could not get capital in the open marketplace,” Guzman said. 

The SBA also helps small businesses secure work as government contractors and subcontractors. In July, the SBA announced that in fiscal 2022 the federal government had awarded $163 billion in contracts to small businesses, making up over a quarter of all the money spent on government contracts. Guzman said she was “highly concerned” about the government’s small business contractors because a shutdown would represent a second consecutive setback for government contractors. “Many of our small businesses just went through massive disruption in the pandemic,” Guzman said. “They’re not in the strongest position to sustain further disruption.” 

Even though a government shutdown would cause turmoil for many SBA loan recipients, that harm wouldn’t be spread out evenly. When asked who would be hit hardest, Guzman answered, “It’s definitely the underserved communities that face gaps in the marketplace already: veteran businesses, rural businesses, people of color, women.” 

Why is there a government shutdown? 

The White House sought to frame these concerns as more than political side effects. “These consequences are real and avoidable,” the Biden administration said in a statement. The White House has repeatedly laid blame for a possible shutdown at the feet of a fringe group of Republican representatives for reneging on an already agreed upon spending bill, which President Joe Biden signed into law in June.  

“House Republicans are refusing to live up to their end of the bargain,” Director of the Office of Management and Budget Shalanda Young said on Friday. 

The McCarthy-backed deal that was voted down today featured a 30% spending cut for a large portion of government agencies and tougher border security measures meant to appease the small, defiant group of Republican representatives unwilling to pass an appropriations bill. Even before voting began today, Rep. Matt Gaetz (R-Fla.) already said he would not support McCarthy’s newly proposed spending package, even though it was designed to win over members of his caucus.

Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Sign up today.