UPDATED with additional data. The federal government’s ongoing budget woes will result in flat-lined technology budgets over the next five years, forcing agencies to move aggressively away from outdated technologies to make the most of limited budgets, a new report by the TechAmerica Foundation predicted.

Compounding the challenge for agencies is Congressional gridlock over the budget and the looming possibility of sequestration which is hitting the government in the middle of an ambitious technology transformation program, said TechAmerica analyst Robert Haas.

The combination of uncertainty and lack of funds is causing agencies to reassess how they manage older systems and acquire new technologies, he said.

All of that is set against a backdrop of broader uncertainty of how Congress will address the so-called fiscal cliff, involving the expiration of tax breaks and forced budget cuts due to trigger in the new year. Unless Congress takes other steps, the Budget Control Act would force automatic cuts of an estimated $1.2 trillion in federal spending spread evenly over a nine year period beginning in 2013.

Many agencies, as a consequence, are pursuing a strategy of shifting existing funds into new systems and away from older systems. This leads to what Haas referred to as “creative destruction” or the withering of older systems in favor of the new.

Spending in the federal IT market will remain relatively flat through 2018, Haas said. The 2013 budget allocates $73.5 billion for IT projects, with a slight rise to $77.2 billion projected for 2018. But inflation will erode the real value of that spending he said, reducing the effective value of the 2018 funding in constant dollars to about $70.2 billion.

Civilian government IT spending for 2013 will be $40.8 billion and raise slightly to $43.5 billion in 2018. Because of the flat budgets, federal agencies are becoming more aggressive in shifting resources away from legacy systems to newer equipment and software, Haas said.

After a series of funding cuts in recent years, the Defense Department IT budget will remain stable for the next five years, Haas said. The 2013 Defense IT budget is $32.7 billion and is predicted to remain steady at $33.7 billion in 2018.

Sequestration, however, would have an overwhelming impact on defense operations, requiring $52.3 billion in DoD reductions in fiscal year 2013, affecting readiness, training, civilian personnel, military families, services and support, all of which would seriously affect DoD technology investments.

Over the next five years, the DOD will focus on integrating its IT infrastructure by merging telecommunications, satellite communications, networks, wireless systems and computers into a single architecture. Part of this activity includes ongoing efforts to consolidate data centers and move to a cloud computing environment, Haas said.

The report outlines five possible scenarios of how Congress might tackle the looming Budget Control Act cuts, summarized in the following slides:

Charts courtesy of TechAmerica Foundation.