The $14.2 trillion federal debt limit has been reached, forcing the Treasury to defer payments to pension trust funds in order to cover other costs. This permits a delay until August for the political battle on raising the debt limit and cutting federal spending. President Obama has several more accounting tricks available which could add a few more months to the delay. The critical congressional vote on the debt limit and spending cuts will likely be late this year although it may be preceded by a series of small, short extensions coupled with spending cuts of about the same size. Be prepared for further reductions in public construction spending.
Current spending programs can no longer be funded with a ten year budget plan that promises undefined savings in healthcare costs or unspecified efficiency improvements. President Obama now faces a hard cash flow constraint. Spending cuts have to be real and immediate or the higher debt limit will quickly be reached forcing a second round debt limit/spending cut debate with now more skeptical opponents.
What types of public construction projects are at risk for freezes, cutbacks or elimination?
The high risk group includes rail, alternative energy and grants to states and local governments for affordable housing construction and renovation. These are not traditional public works projects. Major spending in each of these areas began quite recently. Each of these programs already has many opponents who want to cancel them entirely. Each of these programs is accused of being wastefully managed, being a political payoff to special interest groups and creating buildings or facilities that operate at a loss and have to be subsidized by taxpayers.
The low risk group includes highway, water/sewer and conservation projects. These state and municipal facilities serve everyone and do not require continuing federal subsidies for operation. Nonetheless, future funding will be less than the President’s current budget plans.
The recent boom in military construction is already winding down. The debt limit constraint will prevent any attempt to continue military funding at the current level. Spending for federal office and lab projects, both new and renovation got a boost from the now ending stimulus plan. The impact from the end of federal stimulus funding will be aggravated by cuts in federal office spaced requirements with a leaner staff.
If Congress makes a large cut in federal spending the indirect impact on construction will be bigger than the direct impacts outlined above. The recovery in private construction will be weakened by slower GDP growth if federal fiscal policy abruptly turns restrictive.