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Do budget cuts equal recession?

January 6, 2013 12:10 am



--Uncertainty stemming from Congress' last-minute fiscal cliff deal and overall inability to solve its budget problems has already affected the economy, says economist Christine Chmura.

In an economic forecast presentation to the Virginia Bankers Association and the Virginia Chamber of Commerce, Chmura, president of Chmura Economics and Analytics, said those economic effects will get much worse if Congress fails again to avert deep spending cuts under its sequestration package.

"Sequestration would send Virginia into a recession, and Northern Virginia and Hampton Roads would be hit the hardest," Chmura said.

While Congress did pass legislation to avoid many tax increases this week, it merely postponed action for two months on the "sequestration" budget cuts, a package of across-the-board spending cuts that would lower federal spending by billions of dollars.

About half of the cuts would come from defense, which would hit Virginia particularly hard. It's likely that those cuts will not come to pass, as federal lawmakers in both parties want to avoid them, but a compromise on exactly how to avert them--while still finding ways to cut spending--has thus far proved difficult in Washington.

Chmura said that, overall, Virginia's economy is growing slightly more slowly than the national economy, although its unemployment rate is better, in part because of a highly educated workforce.

But the sequestration cuts, if they went into effect, would slow the national economy and possibly put Virginia back into a recession. She predicted that the cuts could cut in half an expected 1.8 percent growth in the GDP over the next year.

Virginia would be hit hard because of its reliance on the federal government and federal contracting. Chmura said in fiscal 2011, Virginia had more federal contract awards than any other state, totaling about $59 billion. That's 10 percent of the state's gross product, she said.

Most of those contracts were awarded to Northern Virginia companies, Chmura said, but many large contractors then subcontract, meaning that companies all over the state are affected by contracting and a potential drop in federal contracts.

She said the state could lose about 156,000 jobs through September if the sequestration cuts went through, and urged the bankers and businessmen in the audience to call their congressmen and push for action to stop those cuts.

Gov. Bob McDonnell, who spoke after Chmura, also upbraided federal leaders for continually fighting until the last minute over major fiscal policies, saying Washington is in "a crisis in being able to govern effectively."

"This unprecedented uncertainty creates enormous hardships for you and for the private sector," he told the banking group.

It also creates uncertainties in state budgeting. When he proposed amendments to the state's two-year budget last month, McDonnell said he had tried to make the budget as flexible as possible, and put aside some cash reserves, because state leaders don't know what federal budget cuts might become reality.

Now that Congress has put off dealing with the sequestration cuts, state lawmakers might finish out their 45-day legislative session--which starts Wednesday--without a clear idea of how the state's budget could be affected by federal budget cuts.

McDonnell told reporters after his speech that he and his staff are still reading the fiscal cliff bill to see how it might affect the state, and that state leaders will have to wait and see what happens with the sequestration cuts.

"I thought we'd have clearer resolution" by now, he said.

McDonnell said he doesn't think the General Assembly will have to postpone its budget work to await the federal government, though. He pointed out that while the session is due to adjourn before March 1--the sequestration deadline--he will have until April to propose additional budget amendments if necessary.

"The best thing to do is just be conservative, be cautious" in budgeting, McDonnell said, adding that federal budget cuts are expected to happen, even if the sequestration cuts themselves are averted. "There is no outcome that is not going to be painful for Virginia."

Chelyen Davis: 540/368-5028

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