The small picture: how does the federal deficit affect your business?

Entrepreneur, June, 2003 by Joshua Kurlantzick

ALTHOUGH THE NATIONAL deficit often seems Like a topic solely of interest to academics and policymakers, in reality, it has a significant impact on small businesses. After decades of deficits, the federal government had balanced its budget by 2000, leading many businesspeople to assume the deficit was banished.

But as the foreign capital flowing into the United States has fallen, and the administration's economic stimulus plans slash taxes, the deficit has mushroomed. According to Robert E. Scott, an economist at the Economic Policy Institute, a Washington, DC, think tank, as the deficit rises, it forces the value of the dollar down and could lead to a spike in U.S. interest rates. As the Center on Budget and Policy Priorities, a nonpartisan research organization in Washington, DC, has shown, "higher interest rates would raise the cost of borrowing for small businesses, making it harder for them to [buy] capital equipment and pay off loans."

What's more, programs designed to help entrepreneurs may be cut as the deficit forces governments to be more selective. "It's a struggle to keep valuable programs," says Garth Hickle, a member of Minnesota's Office of Environmental Assistance (OEA), who deals with small recycling companies. In the tighter fiscal climate, the OEA has reduced efforts to encourage recycling start-up firms and other waste-management entrepreneurs.

Meanwhile, as interest rates rise and the dollar weakens, consumers will be hit hard. "If the dollar collapses, you'll see a downturn that makes our current problems look minor, and consumers 'incomes will drop," says Scott. With consumers' incomes plummeting, entrepreneurs might be unable to rebound from two years of national economic malaise.