Budget Challenges

Shadow of sequestration hovers over IT market forecast

sequestration flowchart courtesy of Bipartisan Policy Center

A breakdown of the cuts mandated by the Budget Control Act, as illustrated by the Bipartisan Policy Center. TechAmerica's forecast suggests there are several possible scenarios for how sequestration could unfold.

Federal IT is bogged down by ominous macroeconomic trends, weak economic recovery and volatile policy-making, making the forecast over the next few years less than encouraging, according to industry experts.

The Defense Department is particularly hard-hit by flat spending, mired in competing contingencies, a military drawdown and massive budget cuts. A new forecast from the TechAmerica foundation predicts DOD topline spending will stay in real decline through fiscal 2017, down 30 percent from 2007 peak wartime spending of roughly $730 billion.

With additional pressures from budget uncertainty under Congress’ continuing resolutions, the possibility of sequestration’s across-the-board cuts and changes in military strategies, there is a pervasive sense of ambiguity looking forward. It’s unclear if DOD will face cuts in the tens of billions or in the hundreds of billions, TechAmerica representatives noted.

“The Middle East, cybersecurity threats, defense investments and procurements and what kind of weapons systems will be bought in the future, sequestration, the drawdown, the Asia-Pacific pivot and its necessary buildup of the Navy in that part of the world – all of these are factors in what these numbers look like, and a variation in any one of them could change the outcome,” said Trey Hodgkins, TechAmerica senior vice president of global public sector.

One of the biggest budgetary question marks hovers over sequestration. If enacted as currently planned, it would slash more than $1 trillion in government spending over the next 10 years, with DOD taking a large share – including $56 billion in fiscal 2013.

According to TechAmerica, there are several scenarios seen as possibilities of how sequestration could unfold. According to the group’s findings, the mostly likely would not be a sequestration at all, but a bipartisan solution that would implement a mix of tax and spending changes that would allow discretionary cuts to be deferred to out years, Hodgkins said.

“We anticipate a sequestration-like cut, but it’s going to involve Congress and the next President coming together and resolving it in a political fashion,” he said. “I think it tracks the conversation we’ve been seeing about trying to avoid the effects of sequestration in the short term with a short-term political solution followed by a long-term political solution, and that’s what the numbers also tell.”

The broader federal IT market over is predicted to stay flat as well, though the civilian IT market may see slight increases – growth around 1.2 percent – through 2018, according to TechAmerica spokesman Robert Haas.

Continuing resolutions, sequestration and fiscal cliff worries and political gridlock all are putting IT growth on ice, Haas said, but he added that budget cuts are not the only factor constraining federal IT and its economic outlook.

The government currently faces a period of IT transformation – something he said happens about every 15 years – that is requiring a shift in technology, business processes and the federal workforce. But with anemic funding, the transformation is undergoing serious challenges.

“One of our interviews suggested that we wouldn’t see an increase in the IT budget until we saw the GDP tick above 3 percent…that’s taking into account all of these economic factors,” Haas said. “The government is really at a crossroads with a number of different factors…there’s a major IT transformation of mobile, cloud and virtualization. It’s a major tech shift, but the government hasn’t had ability to invest to make those changes.”

Money is not the only problem, Haas added. Internal governance and policies – both in the leadership and in IT systems – are presenting agencies with even more hurdles.

“CIOs that are executing these IT budgets really don’t have budget authority; it still rests with CFO. That split authority really constrains their ability to execute. In some cases that might be good, forcing them to work together…in other cases it’s not working well,” he said. In terms of IT systems, “simply automating what you’ve got, without changing the way you do work or change the outcomes, isn’t going to be that valuable. There’s a business processing reengineering component that’s needed to really make the investments pay off.”

Still, there are some bright spots. Consolidation and transformation as well as cybersecurity, while challenging, are receiving some funding and present opportunities, Haas and Hodgkins said. Data center consolidation, virtualization, cloud transitioning, business process reengineering and enterprise infrastructure all are hot areas in both the civilian and military IT markets.

At DOD, the transformation is central as the military shifts out of Afghanistan and into modernization.

“What we’re seeing with the infrastructure side of things that you’ve got to have that investment before you can support the mobile warfighter in the field. That’s really the driver…since DOD is shifting to more of a mobile warfighter,” Haas said. “They have people deployed in the field who need to be able to reach back into their base camp or station to access data, and it needs to be available on the network [at all times]. None of that’s possible unless you have the infrastructure.”

Reader comments

Mon, Oct 22, 2012

If we go to a flat 15% flat tax both on individuals and businesses and eliminate all deductions, we could save billions each year. It is such a simple idea but it seems like there is no common sense in the political arena. There would be no loopholes and we wouldn't need as many IRS employees because the taxes would be automatically collected. Additionally, there would be no need for filing if the taxes are automatically collected and there are no deductions.

Thu, Oct 18, 2012 Budget Analyst

Please look at the DoD budget build-up the past 15 years. They have manipulated to have their budget grow from 300B to where it is today using fear and patriotism. At the very root you will find DoD is really an engine funding large private industries and spread across all states. The real questions should be focusing on the dollar growth, the total aquisition $ increase, where it went (what company and if the company was in the US or some other country). Also, in your chart, show the percent of budget cut to DoD vs. the other areas. Since DoD is really about jobs, manufacturing, and research at its core, why can't companies supporting DoD undergo a conversion into industries supporting the US? Engineers designing high-tech equipment could help industries be more energy efficient, improve transportation, and many infrustructures. Conversion was done in WWII, why not now? Keep jobs in the US, but have them make the nation stronger. Combine the 5 military branches and eliminate massive redundancies.

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