A budget impasse between the Democrats and Republicans in Washington has shut down the federal government since October 1, and has brought the nation to the brink of exceeding the statutory debt ceiling if the limit is not raised by October 17.
Everglades National Park usually hosts around 2,700 visitors per day in October, but is currently closed. [Photo: SFWMD]
Far from being simply a Washington problem, there are tangible impacts of the shutdown on Florida’s economy. Given Florida’s dependence on the sales and use tax (more than 70 percent of Florida’s general revenue), anything that decreases consumption affects Florida’s budget. The shutdown will likely cost Florida millions of dollars in tax receipts, as thousands of federal employees in Florida have been furloughed for almost two weeks. (See list below)
Several key Florida industries have already been hurt, including tourism, retail, and those sectors of the economy that require significant capital investment.
Particularly impacted when the federal government is shut down, Florida tourism has been strongly affected by the closing of national parks and museums, such as the Everglades National Park. In addition, small businesses that depend on visitors to the state’s parks have seen drops in income during this period, and some may go out of business because of it.
The shutdown also creates uncertainty for businesses and individuals, both of whom spend and invest less during periods of higher uncertainty. Adding to this uncertainty is the fact that there was no jobs report released on October 4th because of the shutdown, the release of which usually triggers market movement.
In addition to businesses delaying investments in productive capital and hiring workers, the shutdown of the IRS will likely delay some home purchases by individuals. This will hurt not only the buyers and sellers, but also mortgage lenders and banks, and will reduce the collection of Florida’s documentary stamp tax.
The Debt Ceiling
While the shutdown has a substantial negative impact on Florida and other states’ economies, another significant decision is still on the immediate horizon: raising the national debt ceiling by October 17.
At its most basic level, failure to raise the debt ceiling will not allow the U.S. to meet its current financial obligations. These obligations include Social Security, disability payments, and services provided to the population such as food stamps and Medicare, and will prevent the federal government from making payments due on existing debt to domestic investors and foreign countries.
Tangible effects of the debt ceiling crisis, according to a recent report by the U.S. Treasury, include slow job growth, decreased consumer and business confidence, very volatile financial markets, and bond rating downgrades. We could expect higher interest rates on future borrowing, costing U.S. taxpayers substantial amounts of money through higher interest payments. These impacts will translate into less investment in productive capital, something necessary for higher levels of economic growth.
Whatever the political outcome of the debt ceiling crisis, financial markets are already reacting. One way to gauge the recations of the financial markets is to look at the Chicago Board Options Exchange (CBOE)’s Volatility Index, the VIX. The VIX shows the market’s expectation of volatility in the S&P 500 over the next 30 days. It’s often referred to as the “Investor Fear Gauge,” and has increased by nearly 48 percent since September 20th (see chart below).
Another measurement is the yields on one-month Treasury bills. A spike in yields on this short-term bill would be an indicator that investors are avoiding the market and only willing to purchase these bonds at significant discounts. These bonds that were, as of September 20, on the secondary market at .01 “bank discount” were trading at .15 on October 7 – a substantial discount compared to recent values.
Importance of Capital Investment to Economy
Investment fuels economic growth. However, current uncertainty is holding back investment. The state of Florida, like most other states, has experienced sluggish growth since the end of the Great Recession. The uncertainty of the current situation is likely to further hinder this growth, and could potentially return the U.S. to a recession if necessary political action is not taken in a timely manner.
The general downside of the shutdown and debt ceiling crisis is that it may cause a drop in revenue collections, a risky situation for Florida’s upcoming budget projections.
The most recent Revenue Estimating Conference has projected an $845.7 million surplus for FY2014-15 (some from recurring and some from non-recurring sources), even when $1 billion in reserves are included.
The most recent Revenue Estimating Conference has projected an $845.7 million surplus for FY2014-15 (some from recurring and some from non-recurring sources), even when $1 billion in reserves are included. The loss of revenue from an extended shutdown could reduce these estimates.
Although much of the public focus has been on the infighting and political theater in Washington, the federal shutdown and debt ceiling crisis have negatively affected Florida’s economy, and the longer the shutdown is in effect, the more damage will be done here at home. The global impact of the United States defaulting on its debt would be immense, and would certainly hurt the Sunshine State. No matter what the solution politically, these issues are not limited to Washington, and the impact to Florida and the other states must be a consideration moving forward.
Snorkeling in Biscayne National Park, also closed due to the shutdown
TAXWATCH CENTER FOR COMPETITIVE FLORIDA ADVISORY BOARD
SENATOR GEORGE LEMIEUX
Chairman of the Board, Gunster
MR. JOHN B. ZUMWALT III
Florida TaxWatch Chairman & Immediate Past Chair, CCF Advisory Board
MR. MARSHALL CRISER, III
President, AT&T Florida
Immediate Past Chairman, Florida TaxWatch
MR. DOUG DAVIDSON
Market Executive, Bank of America Merrill Lynch
MR. J. CHARLES GRAY
Chairman, GrayRobinson Law Firm
MR. CLAYTON HOLLIS
VP for Public Affairs, Publix Super Markets, Inc.
MR. JON FERRANDO
Executive VP & General Counsel, AutoNation, Inc.
GOVERNOR BOB MARTINEZ
Sr. Policy Advisor, Holland & Knight
MR. DAVE MCINTOSH
Trustee, BlueField Ranch Mitigation Bank Trust
Vice President, The Walt Disney Company
MR. JAMES M. REPP
Senior VP, AvMed Health Plans
MS. MICHELLE A ROBINSON
President, SouthEast Region, Verizon
MR. DAVID A. SMITH
Former Chairman, Florida TaxWatch
MR. MICHAEL SOLE
VP for State Governmental Affairs, Florida Power & Light
Economic Commentary written by
Jerry D. Parrish, Ph.D., Chief Economist, and Executive Director of the Center for Competitive Florida, with assistance from Jennifer Linares, MS, Research Analyst.
Robert Weissert, Chief Research Officer
Chris Barry, Director of Publications
John Zumwalt, III, Chair, Florida TaxWatch
Sen. George LeMieux Chair, Center for Competitive Florida
Dominic M. Calabro, President, Publisher, and Editor
Florida TaxWatch Research Institute, Inc.
Copyright © Florida TaxWatch, October 2013