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Government Spending Cuts: Industries at Risk
February 2013
Government Spending Cuts:
Industries at Risk
By Robert Kempken and Nikoleta Panteva
Many US industries will feel the sting of funding cuts as federal debt
levels rise and government spending debates rage on.
Spending cuts are
inevitable, but
when they will
take place and
how severe they
will be remain
unknown
Has spending hit a ceiling?
The United States has faced significant
challenges in managing its budget deficit
and debt load for more than a decade.
Faced with two wars and two recessions
in the past 12 years, federal government
outlays have grown at an average annual
rate of 3.9%, according to the Office of
Management and Budget at the White
House. Spending as a percentage of GDP
grew slowly during the 2000s from
18.2% to 20.8%, but spiked to 25.2% in
2009 as the country faced a financial
crisis and Congress passed the Troubled
Asset Relief Program (TARP) and
American Recovery and Reinvestment
Act (ARRA or “the stimulus”) to prevent
a meltdown. These spending programs
may have helped the economy avert
disaster, but they tripled the budget
deficit in a single year.
Current spending is unsustainable
While the new spending programs of
2009 were meant to be temporary,
federal spending has generally leveled off
at those elevated amounts and tax
receipts have increased only slightly.
While the deficit as a percentage of GDP
has declined from 10.1% in 2009 to an
estimated 8.5% in 2012, the ratio is well
above its average of 2.5% in the 30 years
prior to the 2009 recession. This factor
has caused federal debt to balloon from
69.7% of GDP in 2008 to an estimated
104.8% of GDP in 2012.
Most people agree that this level of
debt is not sustainable, but experts are
split on how and when to take steps to
reduce the debt. Some want to take
action now, even if it means upsetting
the fragile economy, while others want
to continue current levels of spending
to stimulate growth and address the
debt once the economy can stand on
its own. However, President Obama
and Congress will likely be forced to
trim spending sooner rather than
later. Unless other spending
reductions are agreed upon by the end
of February, across-the-board
spending cuts will automatically come
about in March, as agreed to during
the debt ceiling negotiations in 2011.
The country approached another debt
ceiling in January, but Congress
agreed to extend the nation’s
borrowing privileges until May, setting
up another debate about whether to
raise the debt ceiling or cut spending.
One way or another, government
spending cuts are almost inevitable.
What is unknown is exactly when they
will take place and how severe they will
be. While the cuts may be good for the
economy as a whole over the long term,
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Government Spending Cuts: Industries at Risk
in the short term, they will negatively
impact many US industries that rely on
the federal government as a major
customer or as a financial supporter.
IBISWorld examines the effects that a
reduction in spending programs will
have on the industries most reliant on
the federal government.
Impact of spending cuts on industries
IBISWorld identified 94 industries that
would be directly impacted if federal
government spending is cut back.
Together, these industries generate an
excess of $5.9 trillion in revenue and
employ more than 36 million people.
IBISWorld profiles five of these
industries based on their size and the
importance of government spending on
their operations.
Public Schools (IBISWorld report
61111a) are expected to generate $685.3
billion in revenue in 2013 and employ
6.5 million individuals. In 2009,
Congress passed the American Recovery
and Reinvestment Act (ARRA) in
response to the recession. The ARRA
allocated $100.0 billion to education,
which went toward teacher salaries,
school repairs, Pell Grants and lowincome
public school children, among
other areas. Any spending cuts in
education would severely reduce this
industry’s revenue. Cutbacks could
result in layoffs, loss of school
transportation and even school closures.
The Public Schools industry is highly
reliant on federal government funds
and is at high risk for cuts when
spending comes into question.
The $156.3 billion Aircraft, Engine
and Parts Manufacturing industry
(33641a) generates about 20.0% of its
revenue through government military
contracts. While defense spending
jumped during the past five years due to
the wars in the Middle East, it has
already fallen in 2013. In fact, the
Pentagon cut defense spending 22.2%
from October to December 2012, causing
a 0.1% contraction in US GDP. The
industry employs nearly 362,000 people
and many of those jobs will be at risk if
defense spending cuts are implemented.
Bolstered by the ARRA, the Road and
Highway Construction industry (23411a)
weathered the recession relatively well.
The federal government dedicated
$105.3 billion to infrastructure projects,
aiding in the resuscitation of stalled
highway projects. The $49.7 billion
industry is also set to benefit from
federal funding under the Surface
Transportation Extension Act of 2012
and the Moving Ahead for Progress in
the 21st Century Act. Both of these laws
will allot money to highway construction
during the next five years. Public funds
account for 78.5% of industry revenue,
so any decline in government spending
will hurt the industry and its
185,000 employees.
Companies within the Remediation
and Environmental Cleanup Services
industry (56291) provide remediation
services to mining sites, soil,
groundwater and contaminated
buildings. The federal government
contributes a third of the industry’s
$20.8 billion revenue. Under the ARRA,
the industry received significant funding
from the federal government to continue
its operations. Moreover, funds from the
Federal Emergency Management Agency
(FEMA) and the Environmental
Protection Agency (EPA) are vital to the
industry’s existence. A reduction in
government spending – either via
FEMA, the EPA or the ARRA – could
stifle industry performance and put
many of the 90,300 industry jobs at risk
of being eliminated.
The Mental Health and Substance
Abuse Clinics industry (62142) also relies
heavily on government contributions,
primarily in the form of Medicare and
Medicaid reimbursements. Medicare and
Medicaid patients account for about a

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Government Spending Cuts: Industries at Risk
About IBISWorld Inc.
Recognized as the nation’s
most trusted independent
source of industry and
market research, IBISWorld
offers a comprehensive
database of unique
information and analysis on
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1-800-330-3772.
third of the industry’s $15.1 billion
revenue. Because of the sheer size of
these social insurance programs, they are
targeted for cuts, but patients are
increasingly depending on them for
access to the 203,000 doctors and staff
members within this industry. A
reduction in Medicare and Medicaid
funding could constrict industry
performance.
The spending debates will continue
Most Republicans and Democrats agree
that federal debt levels are not
sustainable, yet government spending is
a hotly debated issue. Federal
expenditures on defense, mandatory
benefits and discretionary programs have
all grown over the past decade, even as
US GDP has stagnated. The proposed
solutions involve a combination of tax
increases, spending cuts and strategies to
grow the economy; however, politicians
have not agreed upon the exact mix – or
timing – of the changes. One certainty
exists, though: Spending cuts in some
form will kick in during 2013.
While spending cuts will help bring
down federal debt levels, many
industries will feel the blow. Companies
in these industries will have to adapt by
reducing employment, curtailing
investment and possibly ceasing
operations altogether. IBISWorld’s
collection of industry reports can help
clients spot these industries at risk and
acquire the knowledge needed to make
important business decisions.
Contact:
Savannah Haspel
VP, Public Relations
IBISWorld
Phone: 1-310-866-5044
savannahh@ibisworld.com
www.ibisworld.com

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