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The FPBA Group (Federal Procurement and Budget Analysis) is a new independent research firm that helps institutional investors track and understand federal government spending and the contractors who rely on it. Our research is carried out by senior analysts in the Washington DC area. They come... More
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  • Beware the Washington Rhetoric

    Beware the Washington Rhetoric

    Republican intentions toward major government spending cuts will amount to more bark than bite

    As newly-elected Republicans descend on Washington, last year’s election rhetoric will give way to the realities of politics and procedure.  In particular, proposed Republican spending cuts and budget austerity will be hard to accomplish, at least for the next 2 years.  Investors in the government contracting sector, therefore, should not run for the hills as talk of dramatic spending reductions makes headlines.

     The drama will not subside.  In fact, we think the next two years will be filled with strong rhetoric and sound bites.  After all, talk is easy when action will be thwarted by a Congress currently set for gridlock.  Smart investors will separate reality from political posturing, and buy on weakness fueled by the hype.

     Incoming House Speaker John Boehner has pledged a reduction in domestic spending of $100 billion this year, excluding spending for defense, security at home and veterans.  This would translate into a cut of about 20% in the remaining federal programs.  By contrast, the Administration is likely to propose a freeze of 2010 spending levels on domestic programs.

     There are several reasons why Boehner’s goal cannot and will not be met: 

    1. The Senate is still under control of the Democrats.  Even if such cuts are to be passed in the House, the Senate remains in control of the Democrats albeit at a smaller margin (53-47 with Independents) than in the last Congress and President Obama would more than likely veto any cuts in federal funding he finds excessive especially after the concerns last year from liberal Democrats on the tax cuts he accepted. 
    2. Reality will collide with principal for many new and progressive Republican Congressmen.  Achieving 20% cuts in domestic spending would mean painful and unpopular spending reductions. When push comes to shove, even the most righteous may be challenged to make cuts in areas such as student loans, small business and farm subsidies, and R&D.  Furthermore, many of the newly elected House Republicans come from districts that President Obama carried in 2008.  They will risk re-election in two years should their actions significantly alienate and/or rally their more moderate and liberal constituents.
    3. Truly meaningful spending cuts require dealing with entitlement programs such as Social Security and Medicare – unlikely before the 2012 elections.  Serious efforts to close a budget deficit will ultimately hinge on changes to Social Security, long known as the third rail in American politics; but these are not likely given a Presidential election in 2012 not to mention another Congressional election.  With the highly partisan atmosphere in Washington that now exists, a reasoned debate on entitlement spending is not likely.

    Spending this fiscal year should end up equal to last year’s levels. The Continuing Resolution that passed in December 2010 funds the government until March 4, and gives Congressional Democrats and the Administration time to craft a strategy to deal with the rest of this fiscal year.  We expect the remainder of the year to be funded by a CR with anomalies built in to deal with critical programs both on national security and domestic programs.  These anomalies will be the factors for investors to watch, as they could impact major defense programs.   

     We will also be watching two other events over the next few months:

    1. The President’s budget request for FY2012, coming in early February
    2. The upcoming Congressional vote to raise the federal debt ceiling this Spring.  This is an issue that will gauge the strength of the Tea Party and House GOP conservatives.  While we expect a debt limit increase to pass, it will likely come with concessions from the Administration and Congressional Democrats. 
    -The FPBA Group: Julie Chariell, Chuck Viator and Eric Scheinkopf
    Jan 07 3:02 PM | Link | Comment!
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