As Congress attempts to negotiate an agreement on taxes, spending and the debt ceiling, businesses in Connecticut and across the country are growing uneasy about what the impending “fiscal cliff” could mean for their operations.
If a compromise is not reached before the end of the year, the Budget Control Act of 2011 — which was passed last year as a temporary solution to increasingly raising the debt ceiling — stipulates that a combination of tax increases and heavy cuts to government programs will take effect at the start of 2013. “Sequestration,” as the automatic budget trigger is called, would mean the end of measures such as payroll tax cuts and components of the Bush-era tax cuts. As many as 1,000 government programs will also feel the impact, with Medicare weathering a 2 percent cut in spending and other mandatory non-defense social programs bearing a 7.5 percent reduction. Facing a 10 percent budget cut, mandatory defense spending will be the most severely influenced; and with an active defense industry, Connecticut could feel an outsize portion of the impact.
“A lot of companies have lost confidence in Congress’ ability to do something,” said Benjamin Zimmer LAW ’12, director of the non-partisan Connecticut Policy Institute. “Last time, the presumption was that at end of the day, they’d figure it out. They didn’t.”
Zimmer said a number of studies have predicted varying job losses, including one from the National Association of Manufacturers that estimates 9,000 to 10,000 lost jobs. Other studies have placed as many as 50,000 jobs at risk, but Zimmer thinks such estimates are generally above realistic projections.
Zimmer said the state will inevitably lose jobs if sequestration goes forward. Sikorsky Aircraft Corporation, located in Stratford, Conn., is a large supplier of military aircraft for the U.S. Air Force. Military contractor General Dynamics also maintains a facility in Groton, Conn., which has long served as a primary supplier of submarines for the U.S. Navy.
Another issue, Zimmer said, is that many of these spending reductions are affecting budgets for departments that do not need to be cut. Defense as a share of spending has not been increasing, he said, adding that long-term debt reduction is going to involve a “serious” look at entitlements, which have grown as a percentage of total federal outlays.
“Cutting funding for PBS – or raising taxes on the wealthy, whether or not it’s the right thing to do – isn’t going to solve the debt problem,” Zimmer said.
Connecticut Independent Senator Joseph Lieberman ’64 LAW ’67, who will take part in negotiating a budget deal before his retirement in January, is opposed to considering any cuts to defense spending as part of the agreement, said his communications director Whitney Phillips.
“Our armed forces are already under unprecedented strain given previous cuts and aging assets,” Phillips said.
John Piecuch, a spokesperson at international rating agency Standard & Poor’s, said sequestration would not automatically mean a devastating economic impact. Increased tax revenues and cuts in spending visible by the end of 2013 can be “credit-positive,” Piecuch said, “provided that the recession didn’t result in large numbers of people removed from the workforce to the extent that their skill sets permanently deteriorate.”
With regards to the U.S. credit rating, which was downgraded following the 2011 debt ceiling crisis, Piecuch said that another drop given sequestration is a possibility but not a certainty. The last downgrade was fueled by a negative appraisal of the debt trajectory and the current political situation, two of the five “pillars” used by S&P when evaluating credit ratings, he explained. Neither is likely to improve this year, but it is unlikely that these scores will come down even further, he said.
But the Defense Technology Initiative, a research group based in Massachusetts, released a study in November warning that the defense industry in Connecticut “has driven economic growth for the region over the last decade,” and that cuts would mean a more sluggish recovery. Companies like General Dynamics are not yet laying workers off, but Congress might force their hand in the coming months.
The fiscal cliff’s year-over-year changes for 2012–’13 include a 19.63 percent increase in tax revenue and 0.25 percent reduction in spending.