Private business sectors have played a major role in the economic development in the United States both in terms of big enterprises and small scale businesses. This is particularly after the economic regression that had affected the economic development for a long period of time until 2009 when the recession had ceased. Private sectors have created vast employment opportunities as well as contributing greatly to the government revenue through payment of various business operation taxes.
Small businesses in particular have helped in reducing the economic imbalances whereby the low income citizens are able to start small businesses and at the same time offer job opportunities to other various personnel. The estimated new job opportunities offered by small business in 2012 constituted to over 65 percent as compared to other employers especially the government owned sectors who contributed to less than 20 percent new job opportunities in the past financial year.
The economic importance of small businesses is crucial to the economic recovery of the United States. This means that these businesses need to be supported with all the necessary amenities that will aid in their growth and development in terms of affordable loans and capital, easy access to training for the employees at a minimal or no cost and equal opportunities in negotiation of federal contracts. These opportunities have however been affected by the current budget sequestration which took effect early March that affected the lending of capital to individual entrepreneurs as well as cut out the federal negotiations.
The effect of sequester has also impacted on the total costs incurred by the small businesses in the process of enhancing their employee skills and abilities through training, job creation and remuneration program. This in effect is likely to worsen the economic development for not only for the small businesses but also the whole of the United States. This paper therefore addresses some of the main impacts that sequester will have on the small businesses which have a direct role to play in enhancing the economic development in the United States. The paper also addresses some of the key strategies that the US government could adopt to manage the budget sequestration hence saving the operations of small businesses and the employment of many Americans which mostly is found in this business sector.
The budget sequester is a united states’ fiscal policy that initiates cutting down on budgets in some of the categories spent in the federal sector. The process of sequestration took off in March 2013 and it is enacted under the Budgets Control Act of 2011. This budgets cut has a direct impact both to the non defense and defense sectors whereby the amount to be reduced is distributed evenly to both sectors with exemption of some categories whose benefits cut varies. For instance, the estimated budget cut for Medicare is 2 percent per year as compared to the budget cuts affecting the small business administration spending. The process of sequestration is estimated to reduce the total budget by 85 billion dollars which in the year 2013 and the forecasted annual budget cuts in the subsequent years which will be accumulated to the total debt reduction program are expected to amount to 109 billion dollars annually. The main reason behind sequestration is for the government to reduce the total debts they owe to various international and national lenders and as a result of sequestration set to take place in the next twenty years (2013-2023), the total debts will reduce by 1.2 trillion dollars. SBA is one of the most hit business sectors that have a direct effect from the forced federal budget (Clifford, 1).
According to the forecasted economic effect of sequester by the congressional Budget Office, the Sequester impacts the rate of economic growth and development of the United States with the private business sectors being more adversely affected particularly with the interruption with federal contracting which will result from the Sequester. According to the Congressional Budget Office report, the economic growth is likely to reduce from the current 2 percent to 1.4 percent which is equivalent to 0.6 percent reduction in growth. This as a result will have a direct impact on the employment opportunities whereby over seven hundred and fifty thousand people are expected to lose their jobs annually starting from the year 2013.
The whole sequester program has brought out controversy to both the defense and consumer sectors who feel the pressure of the budget cuts. The small business administration in particular fears for their financial benefits which are the key factors for employment and payment of government payrolls. The sequester will force the small businesses adjust their total budgets as a result of the business deals which may be cut off or reduced hence denying these sectors an opportunity to transact hence reducing their forecasted and actual profit margins.
One of the main impact of sequester is cutting down of the federal contracts with the small businesses. According to the former director of the Small Businesses Administration (SBA), around 35 percent of the total suppliers who supply goods and services to the defense department of the United States are small businesses (Velasquez, 3). The percentage further increased after the department offered 20 percent contracts and 35 percent total subcontracts to the small business firms who deal directly with providing various products and services to the defense sector. This was majorly boosted by the enactment of Small Business Jobs Act of 2010 that encouraged the federal department to offer more contract opportunities to the small businesses as a way of boosting their growth and increase employment opportunities to the American people. As a result of the sequester, the small business firms who benefited from these contracts and subcontracts are going to have a direct impact as the contracts are likely to be cut off in an effort to minimize the budgetary spending by the defense department. The cut off will not only affect those firms who have a direct contract terms with the department but it will also affect other firms that supply materials, products and services to these small firms. As a result, there is uncertainty in business an operation as a result of contract reductions or cut offs in federal contracting.
The process of sequestration means reduced funds for the defense department which as a result affect the funding system that assist the small businesses in terms of loans. Small businesses, through the assistance of small Business Job Protection Act of 2010, have the ability to borrow loans from the government and private lenders and pay back at a minimum interest rate. This way, these businesses have been able to expand their businesses, provide reputable incentives and remunerations to their employees as well as equip them thoroughly through training and seminars using these funds. As a result of the Sequester however, the small businesses have little or no access to the funding and loans and those who succeed in getting the loans, they have to pay high interest rates which have a negative impact on the businesses growth.
According to the small businesses association report (Velasquez, 5), the small businesses will lose about 1.5 billion dollars by the end of the financial year 2013 only and these funding are the main businesses’ source of investment capital which is used in funding the businesses operations. In the financial year 20909 alone, small over 176000 businesses had a access of funding through the SBA which was approximately 87 billion dollars which had enabled entrepreneurs start new businesses while the existing small businesses were able to expand their operations while others retain and increase the number of employees in their businesses. As a result of sequestration, the small businesses have no chance of expanding which as a result negatively affect the economic development of the United States.
Reduced funding and the small businesses lacking a chance to contract with federal bodies which is the main market segment for most small businesses, there will be a huge difficulty in starting new small scale businesses. It is estimated that most of the veterans depend on starting small business operations after they retire from their defense operations in Afghanistan. The veterans depend on the loans and subcontracts with assistance from the Small business Association (SBA’s) office of the veterans business development to start entrepreneurial businesses as a way of enhancing their financial lives after serving the country in defense missions.
According to a report by one of the fellow committee in the Center on Budget and Policy Priorities, the estimated total funding aims at assisting around 112,000 retired veterans to establish their business but the total number of veterans to benefit from this funding program as a result of the sequester is likely to reduce to approximately six thousand veterans.
Unemployment is also another consequence resulting from the sequester plan. The reduction in total market share that small businesses get from the department of defense due to the subsequent reduction in contracts; subcontracts as the total business financial funding have a direct impact on these small businesses that have to reduce their total spending that raises the total expenses (Weigelt, 4). Employee wages and incentives are some of the expenses that businesses incur and hence as a way of saving their businesses who have limited capital and market access, small business owners have to reduce the total number of employees or retain the number of employees they currently have.
In addition, small business employers depended on the federal funding in payment of 50 percent of the employees’ health care coverage. This amount will be cut off as a result of the budget sequestration leaving the whole burden to the employers who have little capital to finance the employee health welfare taxes which have an estimated increase by 8 percent per annum and as a result, they could opt to fire some of their employees to reduce the total employees health cover expenses (Phillips, 2). This as a result will shut down employment opportunities which are provided by the small business sectors at an estimated rate of unemployment as a result of The Sequester will rank at 5.6 percent.
The essence of implementation of the sequester program will lead to a reduction in the small businesses’ total estimated net profits will be reduced drastically. The small businesses depend on the contracts and subcontracts with the main contractors working with the department of defense as a source for their business operations which as a result contribute to the total net profits. Through these contracts, small businesses have been able to expand their operations and achieve their forecasted profits as well as retain the Small Business Association (SBA) membership which deals with all the negotiations and closing business deals with various federal agencies. However, the reduced contracts and high taxation among other increase in total expenses leads to a reduced net profit or even the effect may result to incurring losses which could force some small businesses to close down.
The offset of the budget sequestration has a direct impact on the growth and development of small businesses as their market scope is reduced whole the financial assistance is frozen due to the increase in interest rates and reduction in the cutting monetary funding provided by the department of defense. Most small businesses have a direct or indirect business contract with the defense department which will be affected negatively by down of the budget in this department. Therefore, the small businesses have to prepare for the negative outcomes. This can be achieved through sourcing for the alternative contracts and subcontracts with private and international investors as a way of coping with the negative financial impacts brought about by The Sequester. This mostly since the program will be in practice for a long period of time.
Works cited
Clifford, Catherine. SBA Budget Whacked $92 Million By Sequestration. The entrepreneur, March, 5, 2013. Retrieved from www.entrepreneur.com
Hoffman, Constantine. Sequester cuts already hurting small businesses. Money watch, February, 2013. Retrieved from www.cbsnews.com
Mandelbaum, Robb. Many Expect Budget Cuts to Hit Small Businesses Hard (But Not the N.F.I.B.). The New York Times, February, 2013.
Phillips, Kelly. Some Small Businesses Take A Hit From Sequestration. Forbes, march, 2013. Retrieved from www.forbes.com
Rosenbaum, David Inside the Sequester: “Everything’s Ground to a Halt”. CFO Economic review, March, 2013. Retrieved from www.cfo.com
Velasquez, Nydia. Impact of the Federal Sequester on the SBA and Small Businesses, March, 2013.
Weigelt, Mathew. Sequester could hit small DOD providers hard. The Business of Federal Technology, February, 21st, 2013.
