What Sequestration Could Mean For Small Businesses
Headlines this week have been dominated the what has become known as "the sequester," a process of across-the-board budget cuts set to go into effect this Friday, March 1. The process of sequestration would see the federal government reduce spending by $1.2 trillion over the next 10 years, affecting everything from the military to commercial airlines to small businesses.
The sequester comes about as a direct result of the "fiscal cliff" in December 2012. On January 1 Congress passed and President Obama signed the American Taxpayer Relief Act of 2012 (ATRA), which, among other things, pushed off the decision on how to balance the federal budget for two months. Since then, Washington has had a stalemate, with no clear decision on whether to selectively reduce spending on raise taxes to meet costs. Barring a successful resolution on Thursday night, $85 billion in cost cuts will occur by the end of the week, with subsequent reductions happening for the next decade.
No one knows the full extent of what will happen if the sequester occurs, although it is feared that such sudden and drastic cuts could negatively impact a weak U.S. economy. The Budget Control Act of 2011, which included the initial sequestration clause, targets 1,200 different federal programs and agencies, many of which could have an impact on small businesses.
The most obvious cut will hit the Small Business administration, which will see the amount of guaranteed loans it can offer cut by $900 million. Many small businesses depend upon those loans, which are backed up by the federal government, because they are available to businesses without equity and require a less up-front from companies.
Another hurdle for businesses, particularly people in industries with a lot of travel, is a $600 million budget cut for the Federal Aviation Administration (FAA). Transportation secretary Ray LaHood said the FAA would likely need to furlough every member of the 47,000 administration one day every two weeks, the equivalent of a 10 percent reduction in the FAA workforce. That number includes about 14,750 air traffic controllers who would be working fewer days, leading to more backups on the runway.
The New York Times reports that small businesses will be further affected indirectly. The government spends more with American businesses than any other buyer, and a reduction in funds will translate to reduced buying power and a weakened economy.
"Government spending is at 8 percent of gross domestic product, and at a time like this, when the private sector is still climbing off the mat, the last thing you need is for the public sector to pull out," said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, told the Times. "So nonpartisan analysts predict that if the sequester takes hold, it will lower the growth rate of G.D.P. by half a percent. And that translates to an unemployment stuck at 8 percent and hundreds of thousands of fewer jobs."
While the budget cuts are looming, they are still not guaranteed. As with the ATRA, Congress could pass something in the early morning on March 1 that would address, or at least further delay, the budget crisis. The $85 billion cut that would be imposed on Monday would not happen all at once: governmental departments have until the end of the fiscal year, September 30, to implement all of the cuts. It is possible that agencies could wait until April or May before taking serious action, in hopes that that Washington would come up with a solution.
It looks like a solution, if it comes at all, will not happen before the March 1 deadline. President Obama has already made plans to meet with John Boehner, Nancy Pelosi, Harry Reid and Mitch McConnell at the White House on Friday to discuss what happens next.