Collateral damage: How the US government shutdowns undermine the territorial economies

While deadlines focus on gridlock in Washington DC, the economic shockwaves of the United States government shutdown reach far beyond the mainland. For the 3.5 million Americans living in US territories, the effects of the shutdown are severe. 

What is a government shutdown?

A shutdown happens when Congress fails to pass funding legislation, otherwise known as appropriations bills, or the president doesn’t sign them into law by the beginning of the new fiscal period. When this occurs, the federal government runs out of legal authority to spend money, leaving many federal agencies to suspend non-essential operations until funding is restored. Essential services such as national security, air traffic control, and certain healthcare programs keep running. However, hundreds of thousands of federal workers are furloughed, sent home without pay, or required to temporarily work without pay. Shutdowns ripple through the economy by depriving federal employees of paychecks and freezing contracts, which can slow overall economic growth, especially in areas dependent on federal funding like the US territories. 

Why the US territories are vulnerable

The economies of America’s five inhabited territories are heavily dependent on federal funding streams. According to the Government Accountability Office (GAO), total public debt was worth up to $324 billion as of the end of 2023. This comprises a large percentage of GDP (gross domestic product). The territories lack the fiscal flexibility of states, making them especially exposed when Washington’s spending halts.  

What this means

A federal government shutdown doesn’t just pause legislative work; it freezes the funding pipeline that sustains the territorial economies. 

The shutdown can cripple the tourism sector, a primary source of revenue for most territories. Airports slow down because of reduced staffing for the Transportation Security Administration (TSA), causing halts on paychecks and negatively impacting employees of the travel economy. The US Travel Association estimates that shutdowns cost the national travel industry about $1 billion in losses per week. For territories such as Guam or the US Virgin Islands, which depend on tourism for economic stability, even a modest drop in visitors can strain small businesses and local tax revenue. 

The shutdown also erodes economic confidence. The Bureau of Economic Analysis (BEA) noted that growth across multiple territories in 2022 depended on increased government spending funded by federal grants. Any disruption, such as those from shutdowns, discourages new business investments and migration into already shrinking territorial economies. 

Puerto Rico takes a blow

Puerto Rico, home to the largest territorial economy, embodies the risks of federal instability. The islands’ recovery from hurricanes, earthquakes, and debt crises has relied on consistent federal funding and assistance. During previous shutdowns, the suspension of the Federal Emergency Management Agency (FEMA) and the US Department of Housing and Urban Development (HUD) grant processing delayed critical infrastructure and housing projects that would assist in rebuilding the lives of territorial Americans. 

The GAO warns that while Puerto Rico’s real GDP grew 3% in the fiscal year of 2024, this progress is fragile and heavily tied to consistent federal support. Each missed reimbursement or halted program hinders not only short-term growth but also long-term confidence in the island’s ability to recover and attract foreign investment, which stimulates the economy. 

How territorial citizens carry the burden

For the common mainland resident who is not a federal employee, a shutdown may not seem to create a catastrophic impact. However, for territorial residents, a shutdown is a disruption to daily life. Many essential services, from food assistance to medical care, can be either slowed or suspended. Programs like the Supplemental Nutrition Assistance Program (SNAP) and the Temporary Assistance for Needy Families (TANF) rely on federal funding renewals to support Puerto Rico, Guam, and the US Virgin Islands. When those are halted, families in the territories face delayed benefits, sometimes necessitating them to turn to community food banks or informal local aid networks. 

Federal workers in these territories, for example, those employed by the US Department of Defense, National Park Service, or the US Postal Service, often go weeks without pay. Unlike the mainland states, these territories lack the fiscal flexibility to offer state-level relief, making workers more financially exposed. 

Healthcare systems face immediate strain as well. Hospitals in Puerto Rico and the US Virgin Islands already operate with limited resources and rely on Medicaid reimbursements from the federal government. When shutdowns delay payments, clinics postpone non-emergency procedures and reduce staffing, directly affecting patients. The GAO has repeatedly warned that territorial health programs depend on temporary federal funding that, if interrupted, would jeopardize access to care for thousands.

The last shutdown ended on November 12, 2025, marking the longest ever in American history, lasting 43 days. Although the shutdown is over, it doesn’t necessarily mean that issues have been resolved. Many citizens and businesses in the territories were without federal funding for over a month, stirring more instability and creating a greater distance between the people and their representation in the federal government. Without consistent, reliable federal policy, territories might continue to struggle.

This latest shutdown emphasizes the impacts of political gridlock on things on the mainland. For the territories, costs cut deeper.