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What the Failed Deficit Deal Could Mean for Small Businesses

What the Failed Deficit Deal Could Mean for Small BusinessesA special Congressional debt-reduction committee failed to reach an agreement on how to cut the U.S.'s billowing deficit yesterday evening -- a turn that could bode poorly for everyone from defense contractors and entrepreneurial grad students to U.S. businesses operating abroad and small-business loan candidates.

After vowing this summer to trim at least $1.2 billion from the deficit between 2012 and 2021, the bipartisan Congressional "supercommittee" that was heading up the effort announced yesterday evening that it would fail to reach a consensus by its deadline, Nov. 23. As a result, automatic spending cuts to defense and nondefense programs in that amount are scheduled to go into effect in 2013.

Among others, federal agencies like the U.S. Department of Defense and the U.S. Small Business Administration, as well as subsidies to lower income Americans could get a haircut. Those cuts, which don't apply to entitlement programs like Social Security or Medicaid, would derive from both limiting agencies' discretionary spending and cancelling mandatory budget resources for nonexempt programs -- a process known as sequestration.

Some members of Congress are attempting to offer legislation that would undo the automatic spending cuts. However, President Barack Obama and other members of Congress have indicated that they would not support a measure that would overturn the Budget Control Act of 2011 -- that is, the law that authorized the automatic cuts. Still others are looking to next year's election to provide an antidote to the spending cuts -- suggesting that the party of the victor could have the upper hand in future debt debates.

Even as lawmakers have a year to offer legislation that would prevent these onerous cuts, if the stalemates of late are any indication, a Congressional compromise will be a tough sell. As such, here are five ways the current spending cuts could hit small businesses:

  1. Fewer funds for small-business programs. The Congressional Budget Office estimates that about 71 percent of the total savings from the automatic cuts would come from lowering the caps on discretionary programs such as those that subsidize small-business loans, transportation projects, the environment and housing assistance. In other words, the SBA in 2013 to 2021 would have less money to back small-business loans. The SBA wouldn't comment about what programs would be trimmed by the spending cuts. A spokeswoman only offered the official White House response.  
     
  2. Government contracts dry up. And since there would be equal cuts, in dollar terms, in defense and nondefense spending starting in 2013, contractors who rely on doing business with the government could face fewer opportunities to work. From 2013 to 2021, cuts to new discretionary appropriations for defense programs are expected to save the government $454 billion, while non-defense savings will amount to $294 billion, according to the CBO.
     
  3. Consumers have less money to spend. Lack of a deal also allows the payroll tax holiday and insurance benefits for the long-term unemployed to expire at the end of the year. Though Congress is expected to take up the measures after the Thanksgiving holiday, if lawmakers fail to act to extend the current payroll tax cut, the average family earning $50,000 a year would see its taxes rise by $1,000 at the beginning of next year. 

    That could lead to compounding the nation's already sluggish economic conditions. The Washington, D.C.-based nonpartisan Economic Policy Institute has stated that the spending cuts and the failure to continue the payroll tax holiday and emergency unemployment benefits could lead to 1.8 million fewer U.S. jobs in 2012. 
     
  4. Grad students lose loan subsidies. Also, per the automatic spending cuts, students -- possibly those studying entrepreneurship in graduate school or programmers in training -- hoping to access financial aid could suffer. Next year, graduate and professional students wouldn't be eligible for interest subsidized loans. Unsubsidized loans will be available but students will need to start paying interest during school.
     
  5. Another debt downgrade. Over the summer, ratings agency Standard and Poor's downgraded the U.S.'s credit rating from triple A to double A+ when Congress failed to meet a separate deadline to raise the nation's debt limit. Although the failure of the supercommittee isn't likely to trigger another downgrade, unraveling the automatic spending cuts might. If that happens, interest rates could tick up -- which could raise the cost of borrowing and force the dollar lower. A lower dollar could make it more expensive for those who have operations abroad to meet their payment obligations.
Diana Ransom is deputy editor of Entrepreneur.com.
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