After a spirited election season and as we wind down toward the end of the year, the elected officials in Washington D.C. are in the midst of a strong debate regarding the tax increases and budget cuts that will begin in 2013. Although the impact is largely debatable, discussions about the “fiscal cliff” are rampant and relevant. What is the “fiscal cliff” and what does it mean to you – the construction industry?
The fiscal cliff arises from tax increases due to the expiration of President Bush’s tax cuts and spending cuts under the Budget Control Act of 2011. Lawmakers must choose whether to leave some or all of these cuts in place, replace them, postpone them or cancel them entirely. The decision will certainly impact the economy, the country’s credit rating and the U.S. debt burden. If left in place, the fiscal cliff could lead to the biggest single-year drop in the annual deficit as a percent of the economy since 1969. However, because it would be so abrupt, it also could throw the United States back into a recession next year, when more than $500 billion will be taken out of the economy – or, off the “fiscal cliff.”
According to a recent study by the AIA, the annual rate of federal construction totaled $25.2 billion. However, this will be greatly impacted by 48 separate budget accounts that will be reduced which directly fund the design, construction and rehabilitation of buildings and other vertical infrastructure. These cuts are expected to result in a 9.4 percent reduction in non-exempt defense discretionary funding and an 8.2 percent reduction in non-exempt nondefense discretionary funding – more than $2 billion dollars.
Although this is only an estimate, less spending inevitably means less jobs relating to government projects. A July 2012 study by the George Mason University Center for Regional Analysis estimated that the total employment impact in architecture and engineering occupations would be over 61,000. This number does not include the employment loss from government contractors, or from construction workers, which could make the number significantly higher.
In order to minimize the impact on the construction industry, the AIA recently wrote to President Obama and Congressional leaders in order to express the importance of avoiding the “fiscal cliff.” The AIA stressed the fact that a large portion of agency facility budgets are devoted to repairs, maintenance and retrofits. If those funds are cut, the need for such repairs still exists and may result in costing taxpayers additional money in the long run. The AIA urged the President to address the fiscal cliff in ways that do not disproportionately impact the already struggling design and construction industry.
Although the AIA did not offer any particular suggestions on how to properly address the fiscal cliff’s impact on the construction industry, it properly alerted congressional leaders of the crippling impact it may have on a vital industry to the US economy. We will continue to keep a watch on Congress’s reaction to the spending cuts for federal construction projects. However, as a precautionary measure, contractors, engineers and architects should keep abreast of these impending cuts and plan accordingly for the upcoming year. It appears that federal construction funds will be inevitably reduced, so contractors must expand their project portfolio to counteract these cuts.