2020 Election preview: Government contracting
INSIGHT ARTICLE |
With the election approaching, RSM is looking at the economic stakes and key issues for various industries and sectors. This is one in our series of election previews.
The top policy issue for government contractors
Do fiscal stimulus and heightened government spending continue, or does a record-setting deficit result in pullback? If so, what agencies will see changes to their budgets? What expertise and capabilities will be required to serve the agencies poised to receive increased favor going forward?
If Trump wins
If current trends continue under a Trump administration, the federal budget will likely focus on continued discretionary spending cuts in an effort to reduce bureaucracy and transfer responsibility to state and local governments. Remaining federal discretionary spending will continue to prioritize national defense. The fiscal year 2021 National Defense Authorization Act (NDAA) is currently in conference after House and Senate versions of the bill passed this summer. The Republican-controlled Senate’s version of the bill provides a total of $740.5 billion for national defense programs, which reflects a decrease relative to the $750 billion proposed the prior fiscal year.
If Biden wins
A change in administration and democratic flip in Congress would usher in greater government spending. According to an analysis by the University of Pennsylvania’s Wharton School of Business Budget Model, the Biden campaign’s policy proposals suggest $5.37 trillion of increased spending over the next 10 years (paired with increased tax revenue). Key areas of increased spending include education (e.g., Title I funding, universal pre-K, college tuition assistance), infrastructure (high-speed rail, water infrastructure, public transit) and research and development (e.g., 5G, clean energy, AI).
Other government contracting issues:
The government contracting sector may see continued M&A activity in the fourth quarter of 2020 in anticipation of tax changes under either administration. The Biden administration’s proposed tax plan explicitly includes rollback of portions of the 2017 Tax Cuts and Jobs Act and increased capital gains rates. The Trump administration has not publicized specific expectations around future tax policy, but the topic will remain the elephant in the room after historic levels of fiscal stimulus flooded the economy in response to COVID-19.
Cash-flush contractors may look to gain access to contract vehicles associated with favorable agencies of the winning administration. This could result in increased M&A activity for contractors serving agencies related to energy, education and public health if there is a change in administration.
The Trump administration’s effect on government contracting:
The Trump administration kicked off with a commitment to cost-cutting initiatives at both the agency and program levels. Some large contractors were forced to sharpen their pencils and dig deep to identify cost-saving opportunities.
On the other hand, the Trump administration provided some relief to contractors by rolling back regulations, particularly executive orders put in place under the Obama administration. President Trump instituted a hiring freeze (excluding military, public safety and public health) during his first week in office. This hiring freeze was the first step in a long-term effort to reduce the size of the federal government. However, the executive branch memorandum specifically noted, “Contracting outside the government to circumvent the intent of the memorandum shall not be permitted.” A continuation of this trend of reducing the size of government could result in a shift in work from the federal government to contractors, but not without a continued focus on cutting costs.
By the numbers: 98%
The Congressional Budget Office projects federal debt to equal 98% of U.S. GDP by the end of calendar year 2020. This is second only to a 106% debt-to-GDP ratio post-World War II, in 1946. The heightened amount of government spending in response to COVID-19 suggests there will be a reckoning in the future in the form of increased revenue (i.e., tax rates), decreased spending or both.
While the federal government is able to operate at a deficit, many state and local governments are required to balance their budgets on an annual basis. Absent fiscal stimulus for state and local governments, there will be downward pressure on spending by state and local municipalities in light of 2020 tax revenue shortfalls. Government contractors serving state and local governments will be the first to feel the consequences of the revenue and spending imbalance.
In preparation for the outcome, government contractors should consider:
Early in fiscal 2021, which began Oct. 1, government contractors should take time to assess their strategic alignment in terms of agency end customers, customer diversification, contract vehicle diversification and related capabilities. If current customers and contract vehicles do not align with future spending trends, contractors should consider investing in their workforce (i.e., adding professionals with relevant experience and skill sets), reassessing service offerings or acquiring a business with the goal of novating contract vehicles tied to desired agency relationships.
You may also be interested in
How might the 2020 presidential election impact your business? RSM provides tax, policy and regulatory insights for the middle market.
From law firms to government contractors, what’s impacting business and professional services businesses amid a time of uncertainty?