While Congress lurches towards some sort of CR that will begin the 2025 Fiscal Year, contractors and their federal customers may want to look at the larger picture.  While no one may like what they see, it is important to understand the reality and its possible implications for long-term spending and stability.  The term “fiscal cliff” is one that is heard more and more and is something that cannot be ignored.  The Congressional Budget Office (CBO) reported last week that they expect the federal deficit to reach $2 trillion this year.  While revenue is growing, outlays are growing more quickly.  Whether it’s mandatory spending, such as Social Security and Medicare, or infrastructure improvements, continued deficit spending patterns will soon require hard decisions by elected leaders who, to be honest, don’t exactly fit the mold of those chronicled in “Profiles in Courage”.  This matters to contractors because it could point to significant changes in both spending and corporate taxation trends.  Your taxes could go up, even as your market goes down.  A quick quiz on the numbers is instructive.

Place the following categories of spending in order from highest to lowest: (A) Defense spending, (B) Interest on the federal debt, (C)Medicaid, (D) Medicare, (E) Social Security.  While the answers are provided below, the fact is that all these choices, except Defense spending, are considered “mandatory”.  Without meaningfully addressing these issues, taxes will inevitably increase and discretionary spending, which includes national defense projects, will decrease.  We’ve said before that contractors should engage their elected officials in discussions on how spending decisions impact their business.  That impact will increasingly have little, if anything, to do with actual federal contract spending.

Answers to Quiz:  Social Security – $1.3T, Interest on the Debt – $870B, Medicare – $847B, DOD spending – $753B, Medicaid spending – $561B.  All figures are from the Congressional Budget Office.