When it comes to the business of government, budgets remain as squeezed as those in private industry. But agencies aren’t abandoning the concept of pursuing advances in IT. In fact, state, local and federal customers are seeking the latest IT products and services that can help them save or make millions by reducing energy use, enhancing Web services and more effectively “drilling” for data in ways that translate directly into a bottom-line benefit.

Nevertheless, the amount of money the government sector will spend on IT in 2009 and beyond will depend greatly on the troubled economy.

“The economy affects all agencies,” says Shawn McCarthy, director of research for government vendor programs at Government Insights, a research company owned by Framingham, Mass.-based IDC. “There’s less money coming from taxpayers and less tax revenue from declining property values. This will hit the state and local agencies harder than the federal ones. But the lights won’t be turned out when it comes to IT spending.”

Projections from Government Insights and other companies that track government spending offer a mixed forecast.

After experiencing healthy growth from 2004 through 2007, IT spending at the state and local level will hit a bump, declining from $24.4 billion in 2008 to $23.8 billion in 2009, according to Government Insights. Still, there is much interest in enterprise software, system consolidation and software-as-a-service (SaaS) solutions in the state and local market, McCarthy says.

The National Association of State Chief Information Officers, an industry association based in Lexington, Ky., indicates that IT consolidation, security, resource sharing, Web 2.0, e-records management, and data and document management will be among the top priorities for its membership in 2009.

Spending increases in the federal IT market are expected to slow down in the next several years—to just under 4 percent annually—after experiencing an average of 7 percent growth a year for the last two decades, according to INPUT, a market research firm in Reston, Va. INPUT projects that federal government IT spending will increase to $83.4 billion in 2009, up from $80.8 billion in 2008.

Baseline recently interviewed government agency managers to learn more about three key IT areas of interest: green IT, Web services and data management. Here’s what these managers reported.