Source of Fiscal Exposure: Economic Downturns

In the event of downturns in the broader economy, the federal government has often sought to stimulate the economy beyond the automatic stabilizers already in place, such as unemployment insurance. The most recent example was the federal government’s economic stimulus in response to the recession that began in 2008. This included temporary funding targeted to specific sectors—notably finance and housing—to facilitate recovery and support long-term growth. While some aspects of this most recent downturn are winding down, the government’s actions in this and previous downturns may have created the expectation that it will provide similar support to especially hard hit industries in the event of a future downturn. These expectations present a fiscal exposure in the federal budget.

State and local governments. The most recent recession is generally believed to be the worst economic downturn the country has experienced since the Great Depression. In response, the American Recovery and Reinvestment Act of 2009 (Recovery Act) provided state and local governments with federal fiscal assistance. As of October 31, 2013, the federal government provided approximately $812 billion related to Recovery Act activities. The figure below provides an overview of Recovery Act spending by category and program. The vast majority of Recovery Act funds that went to state and local governments in the form of grants have been spent. Federal responses to prior recessions have included providing various forms of federal fiscal assistance directly to state and local governments, as well as decisions not to provide fiscal assistance in response to national recessions.

Overview of Recovery Act Spending by Program and Category, as of October 31, 2013

Excerpted from GAO-14-219.

Fiscal exposures stemming from the government's response to the financial crisis included support to the following sectors:

Housing. To preserve liquidity in the housing market the Department of the Treasury (Treasury) entered into purchase agreements with Fannie Mae and Freddie Mac. These agreements, under which Treasury bought senior preferred stock and made funds available on a quarterly basis, show how an exposure can change over time. Prior to 2008, securities issued by Fannie Mae and Freddie Mac were explicitly not guaranteed by the federal government, and the government had no legal responsibility to provide support to these government-sponsored enterprises. However, in response to the financial crisis, the government placed them into conservatorship and agreed to provide temporary assistance, creating a new explicit exposure. As of March 31, 2014, Treasury had outlays of $187.5 billion to the enterprises through purchases of senior preferred stock. Through the stock purchase agreements, Treasury collects dividend payments from the enterprises, which have reported paying $202.9 billion in dividend payments from 2008 through March 31, 2014.

Financial services. "Too big to fail" is a market notion that the federal government would intervene to prevent the failure of a large, complex financial institution and to avoid the destabilization of the financial sector and the economy. Expectations of government rescues can distort investor incentives to properly price the risks of firms they view as too big to fail, potentially giving rise to funding and other advantages for these firms. As GAO reported in July 2014, while views varied among market participants with whom GAO spoke, many believed that recent regulatory reforms have reduced but not eliminated the likelihood that the federal government would intervene to prevent the failure of one of the largest bank holding companies.

Automotive. In 2008 and 2009, through the Automotive Industry Financing Program under the Troubled Asset Relief Program (TARP), Treasury provided significant support to the automotive industry—including automotive finance companies—after deteriorating economic conditions resulted in a dramatic decline in automobile sales and significant financial losses in the industry. For example, Treasury provided unprecedented support of $62 billion to General Motors (GM) and Chrysler—two of the nation's largest auto manufacturers—during the companies’ restructurings as they attempted to return to profitability. As of September 30, 2014, Treasury collected $68.9 billion through sales, repayments, dividends, interest, and other income, compared to the $79.7 billion in funds that were disbursed under the Automotive Industry Financing Program. The following figure shows the amounts of federal financial assistance disbursed as of March 31, 2010.

Government Assistance Provided to Selected Companies, as of March 31, 2010

Government Assistance Provided to Selected Companies, as of March 31, 2010

Note: When the government provided debt assistance, the companies received the assistance in the form of loans. The government provided equity assistance initially in the form of preferred shares. Warrants that the government received as part of these transactions are not included in the equity totals.

Excerpted from GAO-10-719.

In addition, the government faces a host of serious infrastructure challenges that present potential exposures which, if not addressed, could adversely affect the economy.

Infrastructure.The federal government does not own most U.S. infrastructure (such as roads, bridges, and airports), but states and localities depend on federal funds for assistance to pay for infrastructure needs. Demand has outpaced the capacity of the nation's surface transportation and aviation systems, resulting in decreased performance and reliability. In addition, water utilities are facing pressure to upgrade aging and deteriorating water infrastructure to improve security, serve growing demands, and meet new regulatory requirements.

The government's response to this recent economic downturn was to some extent funded through large amounts of borrowing. While the deficit has fallen considerably since 2009, debt held by the public as a percentage of gross domestic product (GDP) continues to grow. At the end of fiscal year 2014, debt held by the public reached 74 percent of GDP—the largest as a share of GDP since 1950. This debt could limit the federal government’s flexibility to address emerging issues and future shocks, such as another economic downturn or large-scale natural disaster.


GAO Reports

Other GAO Resources

State and local governments

  • Recovery Act: Grant Implementation Experiences Offer Lessons Learned for Accountability and Transparency (GAO-14-219)
  • Recovery Act: Use of Transportation Funds, Outcomes, and Lessons Learned (GAO-11-610T)
  • State and Local Governments: Knowledge of Past Recessions Can Inform Future Federal Fiscal Assistance (GAO-11-401)

Following the Money: GAO’s Oversight of the Recovery Act


  • Housing Finance System: A Framework for Assessing Potential Changes (GAO-15-131)
  • Mortgage Financing: Opportunities to Enhance Management and Oversight of FHA's Financial Condition (GAO-10-827R)
  • Fannie Mae and Freddie Mac: Analysis of Options for Revising the Housing Enterprises’ Long-term Structures (GAO-09-782)

Federal Government’s Role in Housing Finance

Federal Response to the Foreclosure Crisis

Financial services

Financial System Stability and Reform


  • Troubled Asset Relief Program: Government’s Exposure to Ally Financial Lessens as Treasury’s Ownership Share Declines(GAO-14-698)
  • TARP: Treasury’s Exit from GM and Chrysler Highlights Competing Goals, and Results of Support to Auto Communities Are Unclear (GAO-11-471)


  • Water Infrastructure: Approaches and Issues for Financing Drinking Water and Wastewater Infrastructure (GAO-13-451T)
  • Air Traffic Control Modernization: Management Challenges Associated with Program Costs and Schedules Could Hinder NextGen Implementation (GAO-12-223)
  • Physical Infrastructure: Challenges and Investment Options for the Nation's Infrastructure (GAO-08-763T)

Funding the Nation's Surface Transportation System

Other related areas

Economic Development and Small Business

Employment in a Changing Economy

Wireless Broadband Spectrum Management