The modest federal budget deal tentatively reached by Republican and Democratic negotiators in Washington this week would provide temporary relief to defense contractors, medical researchers, and other Massachusetts businesses hit hard earlier this year by automatic spending cuts aimed at reducing the US deficit.
But state industry officials, economists, and government observers warn that the measure — which could go to the House of Representatives Thursday — is temporary, and that spending reductions in defense and domestic programs will likely resume in two years.
“In the long term, we’re still facing major budget challenges,” said Chris Anderson, president of the Massachusetts High Technology Council.
Until Tuesday’s night’s rare show of bipartisanship, businesses that rely heavily on government contracts, grants, and reimbursements were facing the effects of a round of more than $20 billion in across-the-board sequestration cuts in early 2014, on top of this year’s $80 billion in reductions. The Massachusetts economy is considered particularly vulnerable to federal budget cuts because of its many defense firms and health care institutions.
The compromise brokered by Representative Paul Ryan, a Wisconsin Republican, and Senator Patty Murray, a Washington state Democrat, would effectively eliminate the threat through 2015, largely by raising federal spending caps and imposing more long-term budget cuts and fee increases.
Congressional leaders appear guardedly optimistic the budget accord will go to President Obama, who has said he would sign it.
“It would provide some relief and more certainty about what’s going to happen,” said Carl Pasciuto, president of Custom Group Inc., a Woburn specialty manufacturer that makes parts for defense contractors.
“Right now, everyone [who deals with the government] is kind of hunkering down and hiding under their desks, waiting to see what happens.”
Custom Group didn’t have to lay off any of its 86 employees because of the federal cuts this year, Pasciuto said, but business growth noticeably stalled as many defense vendors pulled back on orders.
At Lexington’s Oasis Systems LLC, business was down by 15 to 20 percent because of sequestration, forcing the IT-services firm to reduce its workforce by a number that Oasis chief executive Tom Colatosti declined to specify.
Without a budget deal, the effects of additional spending cuts would been “even more dramatic” for his already battered company, said Colatosti, whose firm depends heavily on defense contracts.
After defense department contracts, health care spending makes up the second largest portion of the federal budget subject to sequestration.
The National Institutes of Health, for instance, slashed about $1.5 billion from its budget — leading to a reduction of about $128 million in research grants to Massachusetts research hospitals and other institutions, said Dr. Francis Collins, NIH director.
“This is a huge deal for Massachusetts,” Collins said. “You have Harvard, UMass, Tufts, Boston University, all these great academic research [institutions], and we’re having to cut their research funding.”
Dr. Elizabeth Nabel, president of Brigham & Women’s Hospital, said the NIH cuts were, overall, balanced out at her hospital by raising research funds from other private sources and charitable donations.
Still, she said, some medical research projects and personnel at Brigham & Women’s “got nixed” because the hospital had to juggle finances to deal with government cutbacks.
The total amount of sequestration cuts in Massachusetts is hard to gauge, because spending reductions were often spread out geographically among a variety of contractors and subcontractors that did work for local companies but were not necessarily located here, budget specialists say.
But Alan Clayton-Matthews, an economist at Northeastern University, said he has no doubt that federal spending reductions hurt the Massachusetts economy, and he warned that the 2011 Budget Control Act agreed upon by the President and Congress still looms as a threat two years from now.
That 2011 deal called for a total of $1.2 trillion in deficit reduction over 10 years — a figure that has not changed under the Ryan-Murray budget accord.
“As long as sequester cuts are around [beyond 2015], we can expect a negative impact on the economy in the long term,” said Clayton-Matthews.
Indeed, health care institutions are furious that the Ryan-Murray deal doesn’t give temporary relief to Medicare providers, who last year had their reimbursements cut by the federal government by 2 percent.
Not only will those cuts remain in place under the Ryan-Murray plan, it would extend the reductions through 2023, two years beyond the original deadline.
“Reports of extended cuts to Medicare providers are obviously a concern,” the Massachusetts Hospital Association said in a prepared statement.
“All too often Washington’s answer to broad budget problems is reduced payments to Medicaid and Medicare, and that is the wrong answer.”
Senator Edward Markey, a Massachusetts Democrat, said he would prefer a long-term budget deal that would prioritize government spending and tax policies.
“This short-term budget agreement represents a good first step by limiting devastating sequestration cuts and putting in place a more reasonable level of funding,” Markey said.
“But we need a longer-term solution that completely eliminates sequestration, raises revenue, and addresses the damage already done to the Massachusetts economy by these across-the-board automatic budget cuts.”