Sweating through the Sequester

Well, Congress and the Obama administration actually did it. That is, elected officials did not avert the series of automatic federal budget cuts called sequestration. There are some potentially serious ramifications for business and, as a consequence, for managers.

Now is the time to put that MBA experience to work and to create a plan that may become necessary in the medium term. Technically, the sequester is the result of the Budget Control Act of 2011. The legislation was an acknowledgment that Congress and the administration wanted to control the federal deficit. Under this law, mandatory cuts of discretionary federal spending have gone into effect because elected officials could not agree on how to reduce deficits by $1.2 trillion.

Although there is the theoretical possibility that officials will still find a solution, past performance would suggest that to be unlikely. Businesses face a few problems from sequestration. A major budget cut means that the government will spend less on all sorts of things, including goods and services that it otherwise would have purchased from companies. In addition, the reductions could have a serious impact on a still weak economy, which would have a secondary, and possibly larger, effect on many businesses. To prepare for the sequester, you should know how it works. According to the law firm of Brustein & Manasevit, the calculations behind the cuts are more complicated than a simple across-the-board value:

  1. Cuts will bring some savings on the national debt — currently estimated at 18 percent, that helps meet the target reductions. The remaining amount that needs to be cut is actually $984 billion.
  2. The cuts are supposed to take place between 2013 and 2021, which means about $109 billion a year. That is split between defense and non-defense spending, each having to trim $54.5 billion a year.
  3. Certain programs are either exempt, like Social Security, or see limited cuts, like Medicare, in which cuts cannot exceed 2 percent of budget.
  4. The cuts are spread evenly across all the parts of the budget.

Many people with self interest in the budget cuts act as though everything will suddenly grind to a halt. However, that isn’t the case. Two-thirds of the federal budget is mandatory. In 2011 according to the Congressional Budget Office (CBO), discretionary military spending was $699 billion, while non-defense discretionary spending was $647 billion. The CBO estimates that the first year’s cuts will be somewhere between 5.5 percent and 7.8 percent. The sky is not about to suddenly drop, at least to start. But discretionary spending caps will lower each year by the sequester amount, assuming that elected officials still fail to come to terms. Still, it is a significant cut. Here are some steps to take to prepare:

  • Review your company’s direct business with the government and any grant or loan programs that could be affected. What percentage of overall revenue is it? Are there diversification opportunities to become less dependent on federal spending?
  • Review sales to state and local government, as well. Federal reductions will also affect grants to both levels, so there could be additional direct impact.
  • Closely follow any announcements of how sequestration will be implemented for clues as to how it might affect your business.
  • Consider budget cuts at the company to help offset the impact of any revenue loss.

Sequestration is an ugly business, but with some planning and attention to details, it should be something that some smart management will weather.