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Congress, President Must Act to Avoid 'Fiscal Cliff'

Posted by Rick Lord on Aug 8, 2012 11:10:00 AM

If you’re wondering what the looming “fiscal cliff” will mean to Massachusetts, think the ending of the 1991 Ridley Scott movie Thelma and Louise - with Congress taking Massachusetts along for the ride it as it drives into the economic abyss.

Fiscal CliffFailure by Congress and President Barack Obama to reach agreement on reducing the federal deficit will cost Massachusetts thousands of high-skill jobs in key industries such as health, education, research and defense. Associated Industries of Massachusetts and its thousands of member employers wish to tell federal policymakers in the strongest possible terms that such a scenario cannot be allowed to happen.

Under the Budget Control Act of 2011, Congress must act by January 2, 2013 to reduce the federal deficit, or automatic budget cuts (“sequestration”) will impose immediate, drastic reductions on both defense and non-defense spending, amounting to $1.2 trillion over 10 years.  The first-year cuts are $54.7 billion on each side of the ledger - a 10 percent reduction on defense spending and an average 8 percent reduction on most other discretionary accounts, including Medicare and Medicaid reimbursements.  

Sequestration, put in place in a failed attempt to force resolution of budget issues last year, is just part of the “fiscal cliff” before us in 2013 – we also face the expiration of extensive tax reductions initially enacted under President Bush, and of the employee payroll tax cuts included in President Obama’s stimulus package.  All of these will take effect automatically if Congress does not act.

The budget cuts and tax increases will go a long way towards eliminating the budget deficit.  But they will also bring an end to the already weak economic expansion we have been experiencing. Economic forecasts suggest that sequestration alone would push the nation into recession and raise unemployment by two percentage points. 

Massachusetts sits about in the middle among the states in terms of the projected impact of sequestration – but important sectors of our economy would suffer extreme disruption from the federal budget cuts, on both the defense and the non-defense sides.

Our state ranks fifth in Defense/Homeland Security contracts, with almost $14 billion in contracts, 2,500 contractors, and 130,000 jobs.  Our largest employment sector is health and education - we rank third in National Science Foundation funding and second in National Institutes of Health grants. The hardest-hit employment sector nationally would be research and development, which is the core of our economy on both sides of the defense/non-defense line.

AIM’s perspective on the federal fiscal crisis is a product of its non-partisan position and of the breadth of its membership, which includes employers in every sector of the economy. The key components of our view may be summarized as follows:

  • The ongoing political deadlock over federal finances is itself having a serious impact on business confidence, evident in AIM’s own Business Confidence Index and in national studies. Inaction in Washington, and the impending crisis created in a failed attempt to force action, is a principal source of the uncertainty that is depressing job creation and investment in the private-sector economy.
  • Whatever resolution is eventually achieved will have enormous implications for the business climate across all industries nationally, and perhaps especially for economic activity in Massachusetts.
  • To frame the choices before us as basically between defense spending on the one hand and expenditures on domestic programs on the other is to continue to evade decisions that are difficult, complex, and ultimately unavoidable.
  • Attaining long-term federal fiscal balance will require discipline with regard to spending and revenues, and economic growth that will make manageable for our children and grandchildren the massive public debt accumulated over the past generation.
  • A primary component of any long-term program to achieve fiscal balance must be control of health care costs, which push up the pricetag of all federal programs and pose the principal threat to the viability of entitlement programs (notably Medicare). The fact that all businesses, as well as state and local governments, bear similar burdens makes this the number-one issue for AIM and its members.
  • Our state should be treated fairly in this process, bearing in mind that we depend heavily on both defense and non-defense expenditures – and that (unlike many states) we nevertheless pay significantly more into the federal treasury than we receive back in federal spending.

Accordingly, we call upon national political leaders of both parties, including members of the Massachusetts Congressional delegation, to get to work towards timely action on this most pressing matter. We do so in full understanding that the issues are complex, the decisions hard, and any solution to some degree necessarily painful.

But Massachusetts does not want to be in the passenger seat as the car accelerates over the cliff.
 

Topics: Budget, Issues, U.S. Congress

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