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How the fiscal cliff affects IT

The so-called fiscal cliff has the potential to send the U.S. economy into a tailspin. Here are the specific changes that could hit the IT industry.

By , Network World
December 06, 2012 10:48 AM ET

Network World - Since the election, the political news cycle has revolved around the impending "fiscal cliff," a perfect storm of tax increases and government spending cuts set to take effect on Jan. 2, 2013. Although the IT industry may not have paid much attention, it's just as susceptible to the policy changes as the rest of the economy.

The policy changes range from the removal of tax provisions for small businesses to massive cuts in spending on federal programs. The Congressional Budget Office predicts that, if these policy changes are not altered by the turn of the year, the U.S. economy could plunge back into recession in 2013, with real gross domestic product dropping by 0.5% and unemployment shooting back up to 9.1%.

IT industry could be blindsided by fiscal cliff

Network World spoke with Lamar Whitman, director of public advocacy for CompTIA, and Richard Davis, managing director covering enterprise software for investment bank Canaccord Genuity, about the specific tax and government spending changes that could have the most significant impact on IT companies, as well as how they could protect themselves.

Sequestration will slash federal IT spending

Whitman pointed to sequestration - a combined $66 billion in spending cuts among federal programs - as the biggest threat to the overall IT industry. If enacted, the cuts would be distributed evenly across defense and non-defense programs, and the money that pays IT contractors serving federal agencies of all kinds could suddenly dry up.

"When we get to Jan. 2 and the sequestration does occur, clearly government will have to be reassessing some of its technology needs and contracts at that time," Whitman says. "We're just going to be put in a holding pattern to wait and see."

If possible, Davis advises businesses with standing contracts to extend their services engagements. This doesn't bring in additional revenue, but Davis says a move to extend a services agreement could ensure income for a longer period of time. For example, a six-month services engagement could be extended to a nine-month agreement, and although the monthly amounts would need to be reduced, the contractor is afforded a few extra months of revenue while it seeks new business.

If we talk about a fiscal cliff, it might end up being a fiscal valley for a lot of the vendors.

Sequestration could, however, have a ripple effect in the private market. If the public sector market thins out, those serving it aren't going to simply fold, Whitman says.

"If you have a company that's solely involved in government contracting and therefore their business is cut off, they're going to try to branch out into other forms of business, at least in the near term, which will squeeze out other companies," he says. "So even if companies aren't directly involved in government contracting, there's going to be some squeezing out within the industry because of that void of funds."

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