What if we go off ‘fiscal cliff?’
Businesses, customers not waiting for Jan. 1 to begin cutting back.
While some professional investors say the worst ‘fiscal cliff’ fears are overblown, some small businesses are already experiencing the consequences of lawmakers’ failure to reach a budget compromise.
NEW YORK — More than 1,000 miles from Washington, D.C., Marie DeNicola’s small business is already experiencing the consequences of lawmakers’ inability to compromise on the budget.
If Democrats and Republicans don’t come to a consensus soon, a combination of billions of dollars in tax increases and budget cuts will go into effect Jan. 1. This “fiscal cliff,” as it is being called, is already hurting DeNicola’s company Mainstream Boutique, a Minneapolis-based chain of 23 franchise stores that sell women’s clothes. DeNicola recently got a e-mail from a prospective franchisee who said that she changed her mind about opening a store because of uncertainty about the economic and political climate.
“It was like a punch in the stomach,” said DeNicola, who also operates one of the stores. “It’s a little scary — because of the unknown, small businesses aren’t waiting until January or February to see what happens. People are reacting now.”
Going over the cliff could have a range of negative ramifications. If people have to pay higher taxes, they will likely spend less. Businesses will hold off on hiring or making investments that could help them expand. Federal budget cuts will put billions in government contracts in jeopardy. Economists and lawmakers warn that without an agreement, the U.S. could slip back into a recession. And they say that small businesses have the most to lose.
Like her potential franchisee, DeNicola is also holding off on big moves because of the cliff.
“We’re waiting to see what happens before we decide on hiring. I can’t continue to invest in the business until I know what’s going to happen,” she said.
One of the biggest con- cerns for small merchants is the pending expiration of the 2 percentage point cut in payroll taxes that gave consumers more money to spend in 2010 and 2011. If the tax cut isn’t extended, the government stands to get $95 billion — money that consumers won’t be spending at Mainstream Boutique and other small businesses. Long-term jobless benefits will also expire, giving people who have been out of work for a long time $26 billion less to spend.
Small business owners who rely on federal contracts are also worried about how much business they’ll get from the government if big spending cuts go into effect. Vince Fudzie, CEO of Triune, a general contracting company based in Dallas, says business with the government has been shrinking since 2006, and the cliff presents yet another challenge. He’s already been waiting to find out if he’ll get approval to finish a dormitory project for the Department of Labor that’s 95 percent complete.
If no agreement is struck, Fudzie says he’ll have to reevaluate his business and see if it can find new niches to fill.
“Even in a bad economy, there are pockets that are doing better. We have to figure out, what are we good at?” he said.
In the meantime, he said, he’s frustrated by lawmakers’ inability to reach a deal.
“We elect these seemingly reasonable people to go to Congress and they seem unwilling to get along,” he said.
Vince Fudzie of Dallas is waiting to hear if his company will get approval to finish a federal project.