Last month we were in the middle of a 16 day government shut down and a looming default on debt payments. The Treasury Department had said that the government would run out of cash to pay its bills on October 17, 2013 if the Debt Limit was not increased. The plan to fund the government and raise the debt limit was passed in the waning hours of October 16, 2013.
The government now has spending authorization through January 15, 2014, and a debit limit suspension until February 15, 2013. Congressional leaders and White House staff indicate that the goal is to get a new deal by December 13, so there will not be management by crisis. Nice platitudes, but we’ve seen repeatedly since the Debt Limit/Downgrade crisis in the summer of 2011 to the Sequester of last spring that action only happens in crisis. Don’t expect action until January/February.
The American Tax Payer Relief Act of 2012 was born out of such a crisis. So, what will the effect be on your business and income from this latest crisis? What will happen in the first part of 2014 and how should we plan?
The pundits all believe the next deal will have a trade in current spending for reductions in long term spending. The Republicans want to “chain CPI” on Social Security and Medicare payments in order to reduce the long term spending from entitlements. Democrats want to release the Sequester, and are willing to have tax increases to do so, but the Republicans will not vote for it. So, a spending trade is most likely. The Democrats are not willing to “chain CPI” unless they get relief from the “Sequester” that has limited the growth in current programs. Democrats have credited the rise in unemployment in recent months to Federal work force reductions under the Sequester and the shutdown. They desperately want to increase current spending. The Federal Reserve, which is largely concerned with balancing inflation against employment, was willing to discuss tapering “Quantitative Easing” during the summer, has completely backed off the subject based on the lack of employment growth.
For your business it means continued Quantitative Easing will keep interest rates low, but increased near term government spending will mean that government borrowing will remain high. The Federal Reserve will largely fund the spending through Quantitative Easing, as will banks, which hold an extraordinary sum of US Treasuries. This means less liquidity in the system to lend to business for true growth. You will continue to need very good profits and cash flows, as well as a robust balance sheet to have a good banking relationship. Remember a banker is someone that will lend you an Umbrella when the sun is shining and ask for it back when it is raining. So, operational excellence will continue to take precedence over growth. Therefore, you should also seriously consider taking the next two-three months to renew your credit facilities before the next “solution to the crisis” makes it more difficult.
In my next blog post, we’ll take a last look at the tools under ATRA 2012 and the last minute things you can do to reduce your 2013 taxes.
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