The Impact of the Debt Ceiling Crisis on Business Budgets

Rob Enderle

As we approach the deadline with the two political parties in the U.S. farther and farther apart, it seems likely that the debt ceiling won't be raised and, strategically, that could actually be a good thing for the nation. However, tactically, it will have, at least for the short term, negative implications for business.

 

Let's explore both parts of that.

 

S&P

 

The S&P has already warned that even if one of the two plans circulating through Congress passes, it may still reduce the debt rating for the U.S. The impact appears to be primarily focused on national corporations that don't have substantial international holdings. That impact will be an increase in the risk associated with lending to these firms, which should increase the cost of capital acquisition from borrowing. In short, they'll pay more money for interest and have less money to pay salaries and to buy goods and services.

 

Increase in Equity Financing


 

This on the surface should make equity financing more attractive and might increase the number of additional stock offerings as firms shift to this relatively more attractive method of gaining cash for growth. However, equity financing takes longer to accomplish because of regulations, is more expensive and may dilute existing equity that is potentially contributing, at least initially, to a drop in valuations. As valuations drop, people tend to become more conservative in terms of their spending and less spending leads to less revenue, which contributes to an overall reduction in economic growth.

 

In short, regardless of how we get there, the recovery, which has been anemic at best, will likely stall.

 

Belt Tightening

 

It would seem that, regardless of whether the debt ceiling is raised or not, it is likely that substantial belt tightening, if it's not already happening, will start shortly. This suggests that open headcount slots will be the first to be lost, unspent budgets are likely to be cut (and may now be in the use-it-or-lose-it category) and whatever was expected to be available for much of the rest of this year and in 2012 is now at increasing risk.

 

This suggests that priorities should be shifted in the near term to focus on filling those open slots while you still can and purchases that you are sure to need before year's end should be locked in. Future projects should also be re-thought against the likelihood that you may have to choose between them to better ensure the successful result of some, since you may not be able to take on all of them.

 

Like headcount, budgets for staff functions are going to be increasingly at risk with many dropping into the use-it-or-lose-it category. Justifications that are tied to cost containment or reduction will likely carry the most weight and many things IT does can actually be placed in that category. For instance, CRM improvements can be positioned as both reducing the costs associated with customer replacement and retention, not to mention improving top-line performance with regard to increased sales.

 

However, budgets associated with replacing older equipment, unless that equipment is failing, will likely be harder to defend unless you can showcase savings. Productivity benefits, which are always somewhat difficult to sell, may become impossible as this situation matures. Finally, recognize that you'll increasingly be in competition for these funds against other managers, and finding ways to align interests and to form alliances and have solid relationships with decision makers could make a huge difference with regard to who gets what funds are left and who doesn't.

 

Wrapping Up: Why the Debt Ceiling Shouldn't Be Raised

 

Working through what we need to do to anticipate the impact of the foolishness that is going on in Washington got me thinking. At the core of the problem isn't the debt ceiling, it is government's inability to live within its means. Raising taxes would be no different than us going to our customers and demanding more money because we couldn't cover what we wanted to spend. Increasing the debt limit is borrowing because we can't live within our means and that isn't a formula for success, either.

 

If you had a child, an employee or a company that couldn't live within its means, the fix would not be to give them more money because that would simply prolong the problem and not fix it. The fix would be to advise them to find a way to live with the money they had. This would result in the same hard choices that the rest of us will now have to make because they weren't able to live within their means and that, to me, seems reasonable.

 

It may be that this budget gap can be corrected by more efficient spending. For instance, we have both the most expensive and nearly the worst health care (ranked 37th) of any developed nation. Health care is one of our largest expenses. It may mean getting more aggressive with regard to self-dealing and eliminating more aggressively politicians who milk the system. It may mean rethinking a military policy that seems to approach the world's problems as if the U.S. were the world's law enforcement, which it does so both expensively and badly.

 

But whatever the approach, it would mean that the U.S. government, and it is hardly alone, would have to face the same reality it is forcing on the rest of us, which is that there isn't a golden goose and, at some point, we all have to find a way to live within our means.



Add Comment      Leave a comment on this blog post
Jul 29, 2011 1:05 AM a. asdf a. asdf  says:

Of course not raising the debt ceiling would benefit everyone. The government is currently running $46,000 of debt for every person in the US. (Greece is running at $44,000) But some congressman are not satisfied with this number and want to take out more debt in our name from countries like China, Japan, etc. And a certain portion of the population actually agree with this brilliant idea.

And government not raising the debt ceiling would actually benefit businesses. Since government would no longer borrow from the credit market, those loans would be available to businesses. Interest rates would actually go down for businesses, not up.

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