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Economic Impact: Federal budget reform could have impact on Virginia's fortunes

The federal government spends billions of dollars buying goods and services from private sector firms each year.

Just as the fortunes of businesses dependent on federal spending ebb and flow with federal budgets, so do the budgets of the states where those employers are concentrated.

And while non-defense contract spending has supported economic growth in many states over the past decade, it will contract when budget reform becomes a priority.

When that happens, states like Virginia whose budgets are more dependent on that spending may experience shortfalls.

In the fiscal year that ended Sept. 30, federal contracts decreased by $5 billion, or 1.2 percent. And 64 percent of the purchases in the most recent fiscal year were driven by the Defense Department.

In Virginia, federal government contracts decreased more sharply, falling 4.4 percent — or by $2.4 billion — based on data from USASpending.com that Chmura Economics & Analytics adjusted for place and time of performance.

Virginia is more dependent on DoD spending than the nation.

Sixty-five percent of the purchases in Virginia during the most recent fiscal year are from Defense Department spending — and those purchases made up 7.1 percent of the state’s gross domestic product, compared with 1.5 percent in the nation.

While the majority of these awards support the Defense Department, numerous other federal agencies enter contracts to purchase goods and services. For example, the Department of Health and Human Services contracts with pharmaceutical companies to produce vacc-ines, and the Department of Energy awards contracts for, among other things, research and development.

The state also is more dependent on non-Defense Department federal spending, which makes up 3.8 percent of its GDP compared with 0.8 percent in the nation.

Since non-Defense Department contract spending has been less volatile than the department’s spending over the past 10 years, it has contributed to more stable growth in some states — like Virginia — that are dependent on defense spending.

In Virginia for the fiscal year that ended Sept. 30 compared with the prior 12 month-period, a $1.4 billion increase in non-Defense Department contract spending partially offset a $3.8 billion decrease in the department’s contract spending. In other words, Virginia would have been impacted more severely without the expansion in non-Defense Department contract spending.

Non-Defense Department contract spending advanced at a modest 32 percent from fiscal year 2005 to fiscal year 2010 compared with a 49 percent gain in Defense Department spending over the same period. The non-defense spending was particularly strong, jumping by $30 billion from fiscal year 2008 through fiscal year 2010 as fiscal policy expanded in response to the recession.

After peaking at $152.9 billion in fiscal year 2010, annual non-defense contract spending has declined by only 1 percent. That compares with a 19.4 percent drop in defense contract spending after it peaked at $336.7 billion in fiscal year 2009.

Non-defense contract gains by state

Here are the non-defense contract gains by state from fiscal year 2005 (12-month ended Sept. 30, 2005) to fiscal year 2015. (The per capital gains are in parentheses.):

  • Virginia: $8,542,008,667 ($1,019)
  • District of Columbia: $5,839,744,820 ($8,687)
  • Maryland: $5,593,916,049 ($931)
  • Pennsylvania: $3,285,748,606 ($257)
  • Massachusetts: $2,857,615,828 ($421)
  • California: $2,039,365,210 ($52)
  • North Carolina: $1,173,863,398 ($117)
  • Florida: $1,173,274,726 ($58)
  • Colorado: $939,922,764 ($172)
  • Mississippi: $929,920,035 ($311)

Source: Chmura Economics & Analytics

 

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