Is government headed towards a contracting slump?

For the past few years federal budgeting has been all over the place. The roving numbers make it almost impossible to accurately forecast what the market will look like in the next year, let alone five years down the road.

But the folks over at Tech America are experts in forecasting and for the past nearly 50 years they have come out forecast every October.

This year Tech America predicts federal information technology spending will hover around $70 billion annually through fiscal 2019 when measured in today’s dollars. You can see all the forecasts in their annual near-term forecast.

Trey Hodgkins and Robert Haas lead the forecasting team for Tech America. They sat down with Chris Dorobek on the DorobekINSIDER program for a two part interview.

The forecast, based on federal budget data and interviews with federal IT executives, assumes an overall discretionary topline lower than the Office of Management and Budget’s projections but slightly greater in out-years than Budget Control Act caps.

First let’s take a look from the 30,000 view?

“There is a lot of new activities and a lot of outside pressures both globally and in the United States themselves. But the tagline is pretty much the same, “We have persisting federal fiscal uncertainty and that is causing a lot of disruption and inability for government and business to adequately plan because we don’t know what the funding is going to be like,” said Hodgkins.

Haas adds, “There is a couple of ways to look at this. One is there is a tremendous amount of uncertainty and we have seen it over the last year or so, but beyond that uncertainty you can extract a signal from all of that noise and that is there are many things that have stayed the same. We have seen, sequestration the debt ceiling and overall budget spending pressures have stayed fairly consistent over the last year. So we have used the consistent components to put a range on where we see this forecast going.”

How will the shutdown affect the forecasts?

“It is worth noting that the scenarios that the teams created did not anticipate a shutdown, so they reflect 2014 without a shutdown. In the grand scheme of things the shutdown causes a disruption around when the money goes out but not really that much different from how much goes out,” said Hodgkins.

Forecast scenarios

“In the forecast we created there were some drivers that were consistent and persist. One is that the long term deficit is roughly the same and continues to grow to some degree and is increasingly a larger and larger portion of our economy. But short term deficits have been going down. In fact, the estimates by the forecast teams is that the era of one trillion dollar deficits is gone at least in the near term and that it will continue to decline.

• The other trends that are impacting the forecast are the mixed worldwide economy. What is going to happen as we continue to emerge even amicably out of our depressed economy. What is the Federal Reserve going to do with the financial markets that will affect the economy.
• We talked a little about the political system and the dysfunction today. That dysfunction is significant impact of how we look at a macroeconomic level.

There is a government transformation going on?

“The budget challenges don’t exist in isolation. The government is really trying to reinvent itself. If you think about the work that is done daily by the civil servants as well as the uniformed military across the government, it is really impressive the types of work they are trying to accomplish on a daily basis to try to serve and protect the citizens and then also reinvent the work so that they can become more efficient. They are seeing some of their efforts cut back significantly by sequestration or some of the agenda items taking precedence over some IT related items. They are also doing all of this work in the middle of a technology shift that is of a scale that we haven’t seen in about 15-20 years with the implementation of things like mobility and cloud computing on a scale that are really changing the way the economics are in the IT budget,” said Haas.

Disruptive technologies

• They are feeling the challenge of these new technologies. They can’t replace their existing legacy systems fast enough with the new technology to lower their overall costs.
• The people themselves are also changing. More people are retiring. There are challenges with respect to pay freezes, training, even just retaining the talent or hiring new talent as people move on in their career. A lot of that is driven by budgets.

Defense Department takes on major cuts

“The Defense Department has had significant financial challenges over the last several years they took hundreds of billions of dollars of cuts on their own and then last year they came up against sequestration which was another fiscal hurdle for them to get over. The forecast estimates that going forward those challenges are going to be baked into the budget because sequestration is here to stay. We have heard from a number of sources and the forecast includes that starting in 2015 and the following out years the budgets will be coming from the President you will see sequestration integrated into that. That is a significant element that has been missing in 2013 and 2014. When it comes to sequestration agencies were not able to manage as well as they could have how the cuts were going to occur,” said Hodgkins.

• So the end result is that the team forecast shows the DOD will dip below $500 billion in annual funding. There will be a trough there through 2017 or 2018. They also have the Overseas Contingency dollars will be declining and then rolled into the overall DOD budget into the baseline in the latter part of this decade. So that is also going to be another baseline dip in funding that the department will have.
• They have a series of challenges over this decade and into the next decade that they are going to have to struggle to overcome. The projection that we have is that they will climb out of a low of 475 as a budget number and come back out of that incrementally at roughly an inflationary increased rate somewhere around 1.5 to 2.5 range.

Tomorrow Haas and Hodgkins will take a deep dive into IT spending.