Bailout could cost agencies

Government executives watched anxiously last week as Congress considered a proposed $700 billion Wall Street bailout to avert a massive credit crisis.

Experts say the bailout package could result in a significant increase in the federal deficit — which could be temporary — and some contraction in the general economy, though much less of a contraction than if a package is not approved. The deal would also create inflationary pressures because of an expansion in the money supply.

Although the implications for federal agencies aren’t clear yet, the effects could be significant.

Most immediately, agencies might be more conservative in their contracting, said John Slye, a principal analyst at Input. “There will be budget constraints and pressure to do more with less,” he said. Any increase in mandatory spending reduces what is available for discretionary programs, and that includes most contracting, he added.

Ray Bjorklund, senior vice president and chief knowledge officer at FedSources, said agencies are already expecting minimal growth in their budgets for fiscal 2009 and will not see much additional impact from the bailout package.

Similarly, with fiscal 2010 budget requests due to be submitted in February shortly after the presidential inauguration, Congress has little time or inclination to attempt major changes to the fiscal 2009 and 2010 budgets, Bjorklund said.

As a result, federal agencies probably will see little effect for the next two budget cycles, he said. “We don’t see radical changes happening,” he added.

However, it is also possible that having approved a historic bailout, Congress might follow up with some form of federal budget cuts or employee furloughs, said William Alpert, an associate professor of economics at the University of Connecticut-Stamford.

“At the very least, there could be a hiring freeze. They did it in the late 1970s,” Alpert said. “The circumstances are historically dramatic.”

State and local agencies are most likely to feel the squeeze because they depend on smaller pools of tax revenues. Last week, New York City Mayor Michael Bloomberg ordered city agencies to cut spending by $500 million this year and $1 billion next year.

“There will be a tightening in state budgets,” Bjorklund said.

“State employees are much more vulnerable than are federal employees,” Alpert said.