Budget sequestration — if allowed to occur — could take the largest toll on the government contracting industry and the local economy.
Understanding sequestration means going back to the contentious battle in Congress last year over raising the debt ceiling. That brought about legislation known as the Budget Control Act of 2011 and created the “supercommittee,” tasked with finding $1.2 trillion in deficit reductions for Congress to approve.
The act stipulated that, should the supercommittee and Congress be unable to find those savings, $1.2 trillion in reductions in government spending would go into effect automatically – a process dubbed sequestration.
The supercommittee has already failed, and, thus far, Congress has not taken action on the looming cuts, which are set to take effect in early January.
The reductions would take a significant toll on contractors. To put it in context, President Obama proposed a discretionary budget of $1.15 trillion for fiscal 2013. With sequestration, the reductions required that year would be about $97 billion—a 10 percent cut. Aside from the Pentagon, no federal department or agency has a discretionary budget as large as $97 billion.
Complicating matters, sequestration is meant to affect fiscal 2013, which begins Oct. 1, three months before the cuts go into effect.
The timing puts government contractors and thousands of their employees in a precarious position. Roughly $550 billion, or 45 percent of discretionary spending, is spent on contracts. If agencies are authorized to continue spending in the first quarter at current levels but then required to make deep cuts to meet the 2013 ceiling, contractors could face consequences.
The government’s options are limited for accomplishing these cuts quickly. Layoffs will not do the trick because agencies would need to make severance payments. Furloughing government employees for an extended period might be a possibility, but this would effectively shut down much of the government.
Another option could be canceling or stopping work on many contracts while ratcheting down grants to state and local governments, hurting the thousands of businesses that depend on the government for their revenue.
Perhaps the most likely course is for Congress to act, but only to delay sequestration and leave it to the next Congress to resolve.
Even then, the spending debate likely won’t end. This round of sequestration was born out of negotiations over raising the debt limit; at current spending levels, Congress will face the same question shortly after the November elections.
Kevin Plexico is vice president of federal information solutions at Herndon-based Deltek, which conducts research on the government contracting market and can be found at www.deltek.com.