It turns out this is not an easy question to answer. First, let’s examine what we know (see article by CNN’s Jeanne Sahadi for additional detail). The legislation caps domestic and defense spending, which results in $917 billion in reductions over a ten-year timeframe. Of these, $350 billion is taken from the defense budget.
The framework then calls for more deficit reduction (between $1.2 trillion and $1.5 trillion worth) to be determined by the end of this year and enacted over 10 years. This second round of deficit reductions would be set forth by a special bipartisan joint committee of Congress. The committee has until Thanksgiving to come up with its proposals.
If Congress approves between $1.2 trillion and $1.5 trillion in cuts, the debt ceiling will be increased dollar for dollar.
If the committee deadlocks or comes up with less than $1.2 trillion in cuts (or if Congress votes down the committee’s proposals) the debt ceiling will be raised by $1.2 trillion.
What does not appear to be open for additional cuts are the following:
- The wars in Iraq or Afghanistan or “similar activities”
- “Entitlement” programs, (Medicare, Medicaid, and Social Security)
- Debt payments
So back to the question of what impact the deficit reduction legislation will have. Here are a few thoughts:
Contractors will feel the pinch of budget reductions in areas of discretionary spending and Defense. There will simply not be as much money to go around and certain programs will see significant reductions or be eliminated altogether. As defense resources are withdrawn from the Middle East, expenditures will be reduced.
Long-term contractor planning will become even more difficult. Tying of budget reductions to increases in the debt ceiling will add even more uncertainty and complexity to the process, making long-term contractor planning a challenge. Every year will be even more of a battle as the stakes are now even higher.
States will feel the cuts particularly in areas of public safety and homeland security. These areas already took a hit in the 2011 budget and will likely receive continued scrutiny/attention.
Smaller service-oriented businesses may find new opportunities. While smaller businesses on the manufacturing side may find it difficult to achieve cost advantages due to lower economies of scale, smaller businesses on the services side may actually leverage a cost advantage due to lower overhead and lower labor costs.
IT spending is expected to actually increase across the federal government. This is one bright spot and will be particularly true where clear cost savings or efficiencies can be illustrated through the adoption of technology.
While there is little doubt contractors will feel the effects of this latest budget wrangling, there will still be massive opportunity to provide valuable goods and services to the nation’s largest single customer. Sure it’s going to be more difficult, but when was the last time a government buyer DIDN’T talk about funds being a problem? When was the buying process NOT complex? Things will settle in, and contractors who can illustrate real value will thrive. Staying focused on building relationships and relieving pain WILL get results even in times of change.
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