WASHINGTON — Maryland’s economy would be particularly hard-hit if Congress is unable to reach a budget agreement to avoid the broad, automatic cuts to the federal budget set to take effect in January, according to economic experts.
Going over the “fiscal cliff” could lead to a loss in the state’s recent employment gains, agencies having to rollback services and even emigration.
“The loss of direct federal assistance would be moderately bad, and the effect on the regional economy would be very, very bad,” said Neil Bergsman, director of the Maryland Budget & Tax Policy Institute.
Because the area’s economy is so linked with federal employment and contracts, tightening the federal purse strings would have far-reaching effects on local consumption and the ability to attract and keep all types of businesses in Maryland, he said.
“You think about what we have here that gets the federal contracts, and defense is very big and so is biotech … we have federal contractors and suppliers in a lot of sectors and I think it would be a pretty broad strike,” Bergsman said.
Maryland is particularly vulnerable because it has a high rate of federal employees compared to the national average. Nationally, 2.2 percent of workers are employed in federal jobs, but in Maryland, that number is 5.6 percent, according to a memo from the Maryland Department of Budget and Management on the likely effects of sequestration.
The 2011 American Community Survey shows that 23.1 percent of Maryland’s workforce was employed by federal, state or local government, and that rate has increased since the recession. In 2007, 22 percent of the workforce held government jobs.
The Maryland Department of Budget and Management estimated that sequestration would cost the state more than 12,600 jobs and $2.5 billion in wages through cuts in federal grants worth about $150 million. Non-exempt programs will face broad, departmental or program-wide cuts of up to 10 percent.
Anirban Basu, chairman and CEO of the Sage Policy Group, a Baltimore-based economic consulting firm, said that he did not think the outlook was “as dire as some people suggest,” but, he noted that the mere threat of losing federal dollars has been challenging for Maryland’s economy.
“We’re seeing effects already. Defense contractors have slowed hiring,” he said.
Lockheed Martin Corp. is one example. The Bethesda-based company is one of the world’s largest defense contractors. It is also heavily reliant on government contracts. Government payments account for 82 percent of the company’s revenue, according to a Hoover’s report.
The company released a statement in July estimating that it would have to cut around 10,000 jobs worldwide. That represents an 8.3 percent loss of its 120,000 person workforce.
Basu said the loss of jobs could also lead to a population loss. “States in which there is higher unemployment tend to see a greater outmigration as people tend to loosen their tie to community and look to other communities,” he said.
The public sector would also face tough budget choices, even though certain programs are exempt from automatic budget cuts, including Medicaid, and low-income assistance programs TANF and SNAP.
Growing concern over ‘fiscal cliff’
Since budget cuts will be spread evenly across all non-exempt programs, everything from schools to the Department of Housing and Community Development will be tightening belts.
For Maryland schools, the loss of federal funds may have serious consequences on their ability to provide services.
“[Budget cuts] would be tough for our systems. They have been watching their dollars very closely for years now. The funding we receive from the federal government is very important,” said Maryland State Department of Education spokesperson Bill Reinhard.
While different school systems would be affected differently, he said that some may face a loss of technology or books. Not hiring new teachers would also be a possibility.
The state housing department receives 24 percent of its funding from the federal government, according to Director of Communications and Marketing Erlene Wilson, and if those funds were slashed, the 25,000 Marylanders receiving housing assistance would likely be affected.
“There would probably be a reduction in the amount of people who could actually get that assistance,” she said.
With so much at stake for Maryland and time running out to reach a budget agreement, the fiscal cliff has become an ever-increasing concern for Maryland politicians.
“Sequestration would be very harmful to Maryland and to our country. It would be across-the-board cuts without any regard to policy,” said Sen. Ben Cardin, D-Md.
However, Cardin said he did not think sequestration would occur.
“I believe, and my colleagues on both sides of the aisle believe, that we can avoid automatic budget cuts,” he said. Congress could find savings, Cardin said, by reforming the health care delivery system, reducing return visits to hospitals and improving information technology systems. He added that the defense budget could be trimmed as the U.S. decreases its military presence overseas.
U.S. Rep. Donna Edwards, D-Md., said at a recent governor’s housing conference that sequestration could send Maryland into another recession, because it would worry investors and create cautious markets.
“I think we need to put this election to bed … and then wake up on November 7th and use the time from then through the end of the year, at least, to send a signal to our markets that we’re going to deal with the issue,” she said.