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Deal’s cutbacks could hobble state’s recovery

By Megan Woolhouse
Globe Staff / August 2, 2011

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Massachusetts would lose an estimated $400 million in federal dollars next year and $800 million the following year in the federal budget deal moving through Congress, cutbacks that could slow the state’s tenuous economic recovery, regional economists said.

Those budget cuts will also escalate each year across the next decade, forcing many key Massachusetts industries that rely on federal funding - including defense contractors, hospitals, and universities - to reckon with a new fiscal reality. The Bay State may feel the impact more than others because it enjoys an outsized allotment of funding, racking up $31.4 billion in federal contracts and grants in the last fiscal year, the ninth-highest in the country, according to US government data.

Alan Clayton-Matthews, an economics professor at Northeastern University, said the cutbacks could hamper the state’s economic recovery as well as the country’s. Clayton-Matthews calculated that Massachusetts could lose an estimated $18 billion in federal dollars by the end of the next decade, when the spending cuts wind down.

Though the federal cuts will probably not force the state or the country back into a recession, Clayton-Matthews said, he disagrees with economists who believe lowering the deficit will hasten a recovery by encouraging businesses to borrow and grow.

“That’s not a sure bet,’’ Clayton-Matthews said. “In the US economy, there’s a high level of uncertainty. Businesses might not be willing to take a risk and borrow and spend.’’

State budget chief Jay Gonzalez said the state has not estimated how much Massachusetts stands to lose, because the details of the federal plan have not been finalized. But this much he knows: “With the size of the cuts they’re talking about, there almost certainly will be a significant impact in Massachusetts.’’

Gonzalez said state government and local governments, already struggling with shortfalls, stand to lose additional federal grants. The state gets more than $200 million a week in federal reimbursement to help pay for programs ranging from Medicaid to food assistance.

The Massachusetts economy benefits from a disproportionately large amount of federal spending to state defense contractors, like Raytheon Co. and its subsidiaries, as well as from National Institutes of Health research spending, a boon to the state’s hospitals, universities, and biotech industry.

Andre Mayer, senior vice president of research at Associated Industries of Massachusetts, the state’s largest business trade group, said questions remain about how Medicare cuts, for example, will affect the state. Massachusetts has, on average, an older population than most other states, putting some hospitals at a disadvantage.

Massachusetts also has a higher student population than many other states, Mayer said. The proposed budget plan includes efforts to eliminate subsidized loan programs for graduate students and loan-repayment incentives.

“It’s not just individuals and households that have a federal safety net; it’s also true of hospitals and universities, and obviously, they won’t be able to rely on that to the same extent,“ Mayer said. “It may or may not unravel things, but it certainly reduces our margin of safety if the federal government is not going to play the same role in funding.’’

Robert A. Baker, president of the nonprofit Smaller Business Association of New England, said Raytheon and its Massachusetts subsidiaries, as well as companies like General Dynamics and General Electric Co., help anchor the state’s economy. For example, about 1,500 small New England businesses supply Raytheon alone, he said, and those companies are all closely watching the budget debate.

“You have to worry about it,’’ Baker said of the budget cutbacks. “Since Raytheon is such a prolific employer in the state, I’m sure everybody is going to look at the proposal and think, ‘How is it going to affect me?’ ’’

Thermo-Craft Engineering in Lynn, a 45-employee company that supplies specialized parts to two federal defense contractors and to the Patriot missile program, has already seen business slow down as a result of the budget battles.

One of its top customers, MIT Lincoln Laboratory in Lexington, suspended work with the company until the debt deal is done, said Ralph Faia Jr., Thermo-Craft vice president. That has cut the company’s workload 30 percent, stoking fears about looming defense cuts and how they might hurt the company.

“There’s a lot of concern throughout the whole company, everybody here,’’ Faia said. “Certainly it will hurt us.’’

Todd Wallack of the Globe staff contributed to this report. Megan Woolhouse can be reached at mwoolhouse@globe.com.