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July 28, 2015

Risking the Recovery

It’s become another ritual of summer: speculation about federal budget cuts, sequestration, and government shutdowns, and it presents a serious threat to Virginia’s economy because when the federal budget gets cut, bad things happen here at home.

That’s because Virginia is home to a large number of federal employees and, just as importantly, to a host of companies that do contract work for the federal government. In fact, more federal dollars are spent on contracts and procurement in Virginia than in any other state. This helps boost the state’s economy, but it also leaves  us particularly vulnerable to cuts in federal spending on both military and non-military projects. There are about 170,000 federal civilian employees in Virginia—almost five percent of all non-farm civilian workers in the state–and we are also home to over 100,000 active-duty military personnel. But federal contracts support even more jobs.  

And these are good jobs that have helped Virginia become one of the best educated, highest-income states in the country. But between 2010 and 2014, federal spending in Virginia on procurement and other contracts dropped 26 percent ($15.5 billion), and Northern Virginia alone lost about 20,000 federal and private defense-related jobs between September 2013 and September 2014. These cuts sharply slowed Virginia’s economic recovery. While the U.S. economy as a whole grew 2.2 percent in 2014, Virginia’s economy showed no year-over-year growth after adjusting for inflation. Virginia’s state income tax revenue slowed as well, and tax withholding payments from companies identified as federal contractors fell 6.4 percent in the fiscal year that ended in June 2014.

While there have been some recent positive signs for Virginia’s economy, slow retail sales may indicate the continued uncertainty families feel as they read the newspaper headlines about yet another possible federal budget standoff. And state leaders across the political spectrum are worrying that if Congress doesn’t avert strict budget limits, the state will once again be facing tough times.

Beyond those impacts on our economy overall, Virginia has seen direct cuts to programs that families need, and could see more cuts in the coming year. For example, Virginia’s K-12 schools have seen losses from prior rounds of sequestration and budget cuts. Among the school divisions that saw particularly large cuts were those that serve children who live on military bases. Looking forward, federal support for services such as mental health programs, water quality monitoring, and child care for at-risk children could also be in jeopardy if congressional budget writers choose to make cuts in critical programs in order to make ends meet in other programs, rather than raising the caps.  The budget limits that would be imposed in 2016 from another round of sequestration would not require new deep across-the-board cuts, but they would come on top of the prior years of cuts–including the failure to adjust funding to keep up with inflation–resulting in damaging cumulative reductions.

There are a variety of proposals floating around for what could happen with the federal budget, and a lot of possibilities for avoiding sequestration’s limits to defense and nondefense programs. But many of the proposals would cut critical programs even more deeply than is currently scheduled under the Budget Control Act caps and sequestration, and some proposals seem to seek out programs that serve low- and moderate-income Americans to bear the brunt of the cuts.

The federal budget can – and does – play a stabilizing role in the nation’s economy, ramping up spending during tough times to help Americans get back to work and jump start the economy. The federal budget cuts of the last few years are an example of ramping down spending as the economy recovers. But removing the stabilizers too fast risks throwing the country’s recovery off-balance. And focusing only on how much money we spend, rather than also looking at how much we collect in taxes, risks putting too much of the burden on low- and moderate-income families, and not enough on our shared responsibility for keeping the country’s deficit and debt levels in line.

Federal policymakers should take a responsible, moderate path toward the federal budget this summer and fall, rather than risking another shutdown or pushing deep cuts. Virginians serve the nation in jobs that range from accountant to welder. Deep federal budget cuts, or even the slow erosion that comes from the cumulative effect of years of smaller cuts, would not only harm these hard-working families and businesses within our commonwealth, it would risk harming country’s recovery just as it’s starting to build steam. Let’s take the responsible path.

–Laura Goren, Senior Policy Analyst

The Commonwealth Institute

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