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Danger: Fiscal Cliff Ahead

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By Mark Del Bianco

Now that the excitement of the national election is over, the TV talking heads will have to find something else to focus on. My bet is on the “fiscal cliff" that Congress created last year and that is approaching on Jan. 1, 2013.  For those who haven’t been paying attention, which is probably most of the country, there are two main parts to the fiscal cliff: automatic spending cuts and expiration of the Bush tax cuts.

The Budget Control Act (“BCA") passed in August 2011 extended the Bush era tax cuts, but only to until the end of this year, and required automatic spending cuts totaling $1.2 trillion between 2013 and 2021. The cuts are to be evenly split between defense spending and discretionary domestic spending (which does not include spending on entitlements like Social Security and Medicaid). The cuts for 2013 will be $109 billion, beginning on January 1.  The only way to avoid these automatic cuts is for Congress to pass (and the President to sign) legislation that achieves deficit reduction equal to at least the $1.2 trillion in the BCA.

If the talking heads do focus on the fiscal cliff, that would be a good thing.  My office is in the D.C. area, so I may be too D.C.-centric sometimes. But I think people outside D.C. — including most people in the channel — are not appreciating the danger of the fiscal cliff.

The expiration of the tax cuts will lead to higher tax rates for most individuals and businesses, and inevitably depress their spending. Some observers believe it could cause the U.S. to fall back into a recession. The uncertainty created by the BCA is already having negative effects on telecom and data center spending. My clients tell me that they are seeing a substantial drop in telecom/IT spending not only by government agencies, but by all kinds of business enterprises — large and small — that rely on government contracts.  Unless a budget deal is reached in the next month, the uncertainty will balloon and the slowdown will expand even to companies that do not rely directly on government spending. 

What does this mean for those in the channel?  I suspect that it means they may need to temper their expectations for 2013. At a minimum, the sales funnel will be stretched out farther than normal. Unless there is a resolution near Jan. 1, the uncertainty will have ripple effects throughout the first half of the year. If there is no resolution — or if the resolution is to mimic the BCA by pushing off the reckoning for another six or 12 months — the effect on the economy in general, and the channel in particular, could be longer term and more severe.

Mark Del Bianco, principal, Law Office of Mark C. Del Bianco, is based in the metropolitan Washington, D.C., area. His practice focuses on domestic and international telecom clients, particularly those implementing new technologies such as WiMax, Gigabit Ethernet and FTTH. Other clients include applications providers, channel sales agents and enterprise customers. Del Bianco is a member of the 2012-13 Channel Partners Advisory Board.

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