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U.S. debt crisis could hit government contractors hard

Government contractors should prepare now for the U.S. to default on its debt, which would result in halted payments among other challenges.

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Government contractors will likely face a tough road ahead as Congress and the Biden administration navigate whether to raise the U.S. debt ceiling to avoid an economic crisis.

If the $31.4 trillion debt ceiling isn't raised by the June 1 deadline, the U.S. Department of the Treasury won't have enough cash to pay all of its bills. It would then likely focus on maintaining its payments on the debt interest to preserve the U.S.'s creditworthiness, said David Wessel, director of the Brookings Institution's Hutchins Center on Fiscal and Monetary Policy. That means payments to Social Security and government contracts, among others, would stop.

"The bottom line is, if they don't raise the debt ceiling, somebody's not going to get paid," Wessel said. "If they have a priority list, government contractors are going to be at the bottom of that list."

Wessel said he believes the market would react negatively enough to a failure to raise the debt ceiling that Congress would be forced to act. However, Wessel said if the stalemate lasts for any length of time, the impact will be significant.

"If it stretches on for more than a couple days, it's going to be terrible for the economy," Wessel said. "Everyone will get paid eventually, but we don't know how long eventually is."

Government contractors need to prepare

If there's a default, there will automatically be cash flow issues that government contractors should be ready for, Wessel said.

A default would be calamitous to U.S. businesses, especially given the number of additional government contracts brought about thanks to Biden's "Build Back Better" agenda, said Robert Hockett, a law professor at Cornell Law School.

All of those contracts would come into question.
Robert HockettLaw professor, Cornell Law School

Hockett said the ramifications of a default would be widespread among the private sector, from construction and manufacturing to retirement funds. As a result, he believes Biden would declare not raising the debt ceiling unconstitutional and continue paying the nation's debts.

"All of those contracts would come into question," he said. "All of the businesses that are reliant on contracts of that sort, especially if they're reliant on them to stay solvent, would now be on shaky ground."

Should a compromise be reached among Democrats and Republicans to raise the debt ceiling, Wessel said that will likely involve a limit on future spending. While it shouldn't affect money the Treasury Department has already committed, it could affect future spending on government contracts.

"People who thought there was going to be a bigger pot of gold at the end of the rainbow, I think they will be disappointed," he said.

Makenzie Holland is a news writer covering big tech and federal regulation. Prior to joining TechTarget, she was a general reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.

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