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The Fate of Defense Businesses after Sequestration

Sign of sequestration debt ceiling
In less than a month, large scale budget cuts will begin for the defense department. Over the course of a decade, about $1.2 trillion in scheduled budget cuts will be removed, or sequestered, from the government’s spending budget, which will be taken largely from defense programs and domestic programs.

How Sequestration Started

The problem became evident in 2011 when Republicans and Democrats could not agree on ways to reduce the national budget deficit.

The political fight became an increasingly pressing concern later in the year as the current spending and tax cuts crept towards the nation’s debt ceiling. Party leaders ensured that a bipartisan “Super Congress,” comprised of 12 members of both the U.S. House of Representatives and the U.S. Senate, would find a solution. In the meantime, the debt ceiling was raised.

But the plan failed.

Sequestration to defense and non-defense programs will begin on March 1, 2013. Sequestration was initially supposed to begin on Jan. 1, 2013, but was extended to the current deadline. It will begin in less than a month if Congress doesn’t agree how to reduce the budget in other manners.

On the defense side, the large scale cuts are creating anxiety among government contractors and workers. The major cuts from domestic programs such as Medicare are worrying the health providers and insurers.

In its current form, sequestration will remove $54.7 billion from both the defense and non-defense programs.

Although a plan is set in motion, it has not kept political parties from fighting.

The Current Debate

President Obama spoke to the press on Tuesday afternoon after the Congressional Budget Office released revised budget projections. The projections state the federal deficit will drop to $845 billion. If those projects are met, 2013 would mark the first year during President Obama’s terms that the deficit was below $1 trillion. 

“They should at least pass a small package of spending cuts and tax reforms that would delay the economically damaging effects of the sequester,” President Obama said.

He continued stating the importance to protect jobs in America.

“There’s no reason that the jobs of thousands of Americans who work in national security or education or clean energy, not to mention the growth of the entire economy, should be put in jeopardy just because folks in Washington couldn’t come together to eliminate a few special interest tax loopholes or government programs that we agree need some reform,” President Obama said.

But President Obama’s plans for cuts do not come without serious criticism, especially from frequent critic House Speaker John Boehner (R-OH).

In a released statement, Boehner said Republicans have voted twice to replace the “arbitrary cuts with common-sense cuts and reforms that protect our national defense.”

“We believe there is a better way to reduce the deficit, but Americans do not support sacrificing real spending cuts for more tax hikes,” Boehner said.

He said sequestration should be replaced with spending cuts and reforms that will help to balance the budget in 10 years.

Part of the reason for a quick call to action is the recently passed bill H.R. 325, the “No Budget, No Pay Act of 2013.” This bill enacted a plan that if either Congressional body failed to pass a budget resolution by April 14, 2013, congressional members would have their paychecks put in an escrow account starting on April 16. Their paychecks would remain in the account until a budget plan was adopted.

Threat to Defense Businesses

The United States currently spends more money on defense that any other program, including Social Security or Medicare. For Fiscal Year 2013, the government budgeted $851 billion for defense programs.

With budget cuts looming, defense businesses are growing concerned. Sequestration will threaten a large sector of the U.S. economy that thrives off the defense industry.

Lynore Abbott, Founder of New Mexico-based Logical Marketing, told loans.org that the first thing small businesses will do is to contain costs. Businesses can contain costs by firing employees, selling unused materials, and limiting or stopping any future expansion efforts. These efforts could impact business lending from banks as well as government-backed business loan programs from the Small Business Administration (SBA).

Once this has been handled, Abbot said the defense businesses will devise new revenue sources.

But defense cuts have been occurring for the past few years, and a new set of cuts could impact the industry in a powerful way.

The Army alone will be forced to reduce their budget by $18 billion. If passed, part of this reduction will be used to reduce orders through 3,000 vendors. The Army said that 1,100 of the vendors are listed at moderate to high risk for bankruptcy.

Removing a high powered purchaser such as the Army would likely cause struggling dependent businesses to close.

“The tough part is that many of these steps were undertaken already in 2009,” Abbot said. “Resources in some cases were never added in 2010. In 2011, things got shaky again so if the companies didn’t add in 2010, they certainly didn’t add in 2011.”

Abbot said that many organizations have been planning since 2009 for this situation.

“They just have to decide when to pull the trigger,” Abbott told loans.org. “I think that many organizations survived, just barely, in 2009 and are prepared to make really tough decisions now.”

If the military budget cuts are passed, the Pentagon will absorb $46 billion in spending reductions for the upcoming fiscal year. Several military branches have warned of hiring freezes and layoffs. In addition, the Navy said it will stop deployments to South America, the Caribbean and limit deployments in Europe. 

The Army and Marine Corps are predicted to be reduced the most now that their increased size from the Afghanistan and Iraq wars is no longer needed.

Abbott said the next round of organizational cuts will “be very painful.”

Beyond the direct military, federal employees will suffer considerably.

The start date for budget cuts nears closer. Solutions continue to float around for both Democrats and Republicans, but without a clear focus, change will prove difficult.

Steve Bell, Senior Director of the Economic Policy Project at the Bipartisan Policy Center said he hopes President Obama’s recent speech will “spark serious discussions about a major, long-term debt stabilization package” for this year.

“Not only have policymakers failed to confront the debt trajectory, but fiscal policy has been a drag on economic growth,” Bell said in a statement.

President Obama requested that both political parties work together and agree for any real change to occur.

“Our economy right now is headed in the right direction, and it will stay that way as long as there aren’t any more self-inflicted wounds coming out of Washington,” he said. “Let’s keep on chipping away at this problem together, as Democrats and Republicans, to give our workers and our businesses the support that they need to thrive in the weeks and months ahead.”

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