Fed IT Spending To Rise After 3-Year Decline

Spending will increase only some and significant IT challenges remain ahead for government agencies, says TechAmerica Foundation.
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Following a significant reduction over the past few years, federal IT spending will grow 2.3% annually, from $70 billion projected in fiscal year 2014 to $78.5 billion in fiscal 2019, according to a forecast released Wednesday by the TechAmerica Foundation.

However, federal agencies and IT suppliers will continue to face big challenges as sequestration, defense cutbacks and budget uncertainties delay IT purchasing and force federal agencies toward commodity IT products, the industry trade group maintains.

The current outlook follows a significant fall-off in federal IT spending, from a peak of $78.9 billion in 2010, when agencies started grappling with government-wide budget cuts. For example, defense agency IT spending is projected to total $31.7 billion in fiscal 2014, down significantly from a peak of $41.3 billion in fiscal 2009 (adjusted for inflation).

Defense IT spending levels are expected to increase only slightly through 2019, to an inflation-adjusted $33.2 billion. Civilian agencies will spend an inflation-adjusted $38.3 billion on IT in fiscal 2014, TechAmerica forecasts, down from $44.7 billion in fiscal 2009. Civilian IT spending is expected to remain flat through fiscal 2019, rising to an inflation-adjusted $39.0 billion.

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Federal IT contractors have been feeling the financial squeeze for the past few years, as agencies award increasing numbers of contracts on lowest price technically acceptable (LPTA) terms, which is driving down their prices and profit margins.

In addition to making IT cuts because of sequestration, agencies are delaying or postponing longer-term enterprise system, security and other investments because of budget uncertainties, according to contractors. The government shutdown over the past two weeks, requiring the furlough of hundreds of thousands of federal employees, is exacerbating the situation for contractors, further delaying existing contracts.

Among the factors TechAmerica took into account in its forecasts is the pressure on agencies to shift their IT spending toward commodity IT products, reflected in the rise of LPTA contracts. Defense IT spending is also shifting toward open systems, reducing software spending.

The TechAmerica forecast reflects broader economic risks as well, including expectations that sequestration will extend into fiscal year 2015 and that the gridlock on Capitol Hill might lead to a downgrade of the U.S. credit rating, raising borrowing costs and slowing U.S. GDP growth.