Effect of Debt Crisis on IT Staffing (Contractors and Full-time)

In the past few days phrases like “Debt Crisis”, “Debt Ceiling”, “Federal Budget Deficit” are the common occurrences in the news.  So what is this exactly?

What is 2011 US Debt Crisis?

In basic terms, you incur debt when your expenses are greater than your revenues.  To give you a clear picture through numbers:

FY 2010 US Revenues: USD 2.1 Trillion

FY 2010 US Expenditure: USD 3.3 Trillion

What is the difference amount? It is USD 1.2 Trillion and that’s the US government’s annual debt.

US government’s projected expenditure for FY 2011 is USD 3.7 Trillion and an estimated USD 1.6 Trillion debt.

How much does US government spend and what does it spend on?

As mentioned, in FY 2010 US expenditure was USD 3.3 Trillion.  This expenditure can be broken down in to two major categories:

Mandatory Spending (self-explanatory):  USD 2.1 Trillion. (63%)

• Social Security Payments
• Medicare and Medicaid Benefits
• Interest payments on existing debt
• National Highways construction and maintenance
• etc

Discretionary Spending (US government can decide not to spend on this category): USD 1.26 Trillion. (37%)

• Department of Defense
• Department of Veterans Affairs
• Other discretionary spending

FY 2010 Revenue Breakdown:

• $900 Bn - Federal Income Tax revenue.   (This is that amount of money for which you, me, that guy at Mc Donald’s drive-in window, and everyone in USA who earns an income legitimately would pay as income tax to government).
• $860 Bn – Retirement contributions.  (There are several sub-categories here.  Let’s keep this simple and say that this is the amount of tax deferred dollars that people contribute towards retirement).
• $190 Bn – Corporate Income Taxes. (These are the taxes paid by corporations conducting business in USA).
• $140 Bn – Other Revenue Sources. (These sources include Gift Taxes, Custom Duties, and other miscellaneous receipts for government).
• $66 Bn – Excise Taxes. (Excise taxes are taxes that are paid on products that are produced and traded domestically).

So the above items sum up to approximately USD 2.1 Trillion of revenues.

Now the question is where does the deficit USD 1.2 Trillion does come from?

Simple- just like any common man, government seeks “DEBT“!  In return US government offers treasury bonds and IOUs to the Creditors.

[US Treasury bonds are considered as the safest (lowest risk) investment opportunities for both domestic and international investors.  No wonder they are rated AAA. Creditors will be happy too to lend money to USA in return of US treasury bonds which helps their money grow safely and a decent interest rate.  At any time, there are many eager takers for US Treasury bonds.]

You might be wondering if such is the demand for US Treasury bonds, isn’t it easy to find creditors and seek more debt?

Yes, it is easy for US government to raise debt once it decides to raise debt ceiling (debt ceiling is maximum amount proposed by House and authorized by Senate).  The challenge is democratic and republican congressman and senators arriving at consensus on that decision to raise debt ceiling.

For latest updates on this consensus process you can immediately rush to CNN, New York Times, Huffington Post, HotAir.

How does it Impact me as an IT Contractor or Employee

It will impact you directly:

• If you are employed/contracted by a US Federal Government Agency like EPA, VA, etc.
• If you are expecting any of your social security tax refunds or if you are dependent on social security checks.

It will impact you indirectly:

• If your organization/employer cater to US Federal government or its agencies or if majority of revenues come from Federal government.
• If your organization’s services are catered towards beneficiaries of Federal funding like Social Security, Medicaid or Medicare payments.

Feel free to comment and provide feedback.

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