Federal Money Problems Piling Up And Will Affect Contracting

(MoneyWatch)  In the same week President Obama suggested to Congress that they try to use PAYGO rules while the Treasury announced a record deficit for the past month. PAYGO means that Congress must either reduce other spending or increase revenue to cover the cost of any new spending. In theory it keeps the budget balanced as any new program is offset one way or another.

Unfortunately Obama said that this did not necessarily apply to any new spending on the reform of the U.S. health care system. Borrowing to pay for that is OK as it is so critical. The total deficit for 2009 is approaching one trillion dollars with four months to go. Tax revenues and economic growth are stagnant with unemployment now higher then what was predicted in March if the "Stimulus" bill was not passed. If there is not serious growth in the economy tax revenue will not recover. If more people lose their jobs or remain unemployed tax revenue from the income tax, FICA and Social Security will also remain low. The long term spending and borrowing picture for the Federal government is not good.

The government has tried to keep things going by borrowing significant amounts of funds. Unfortunately the response to the last few attempts to sell bonds has not been what was expected. This leads to higher rates will then drive up the rates on all loans. This makes it harder for people to buy house, businesses to expand and so on.

What does this all mean for government contracting? Most likely the amount of money in the discretionary side of the budget will begin to shrink and this also means defense spending. There will be less available for contracts whether they be to buy airplanes, IT support or pens. More companies will be bidding on less work which means prices will be driven down affecting the salaries and benefits of the workers. The Obama Administration also is on paper committed to hiring more civil servants at the expense of contractors making even less money available for the type of services contractors provide.

If the worst happens and the Federal government starts running out of money either through not being able to raise revenue or borrow money the contracting business will start to dry up as well. To be honest this is about as bad as situation as can be imagined and will represent a major depression. Once the economy begins to grow again there may be some stabilization in the Federal budget which might see a growth in the contracting arena. The defense budget also will ultimately grow or contract based on how the economy does.

Right now the outlook is fairly bleak. Health care reform will cost the government at all levels a great deal of money. It has to come from somewhere and it will affect the rest of the budget. Proposed reforms in acquisition and spending may also reduce the use of contractors. The end of the fighting in Afghanistan and Iraq with the subsequent draw down will also reduce the market. If there is a silver lining in the next few years it is hard to see.