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Industry Study 

Defense Department Must Prepare for Deeper Budget Cuts 

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By David Berteau and Clark Murdock 

Many analysts date the beginning of the current defense drawdown to August 2011, when the Budget Control Act (BCA) of 2011 was adopted.

But the decline in defense budgets has been under way for some time. Defense spending peaked in fiscal year 2010 at almost $700 billion, which consisted of $560 billion for the base budget and almost $140 billion for overseas contingency operations, or OCO. From that point, both the base budget and OCO have declined in real terms and, in the 2013-2017 budget request submitted by President Obama in February, declined in nominal terms from $530 billion to $525 billion for the first time since 9/11 as the Defense Department started implementing the BCA budget caps.

The $487 billion over 10 years defense drawdown imposed by the BCA followed a previous round of cuts by former Secretary of Defense Robert Gates of $400 billion in program reductions or terminations begun in early 2010 and $178 billion in claimed “efficiency savings” announced in August 2010. The Gates reductions and savings, though, still left modest budget growth in the Defense Department. The latest cuts are deeper.

The prospect of still another drawdown looms over the department, since the Budget Control Act mandates a sequester mechanism that will impose another $500 billion over 10 years in defense budget cuts unless Congress either reverses the law or approves by Dec. 31 a $1.2 trillion deficit reduction package of spending and tax cuts.   

The Defense Department is coping with this succession of discrete defense drawdowns by action, by gimmickry and by denial.

When the Defense Department released in January its new “strategic guidance,” President Obama said the “size and the structure of our military and defense budgets have to be driven by a strategy, not the other way around.” This assertion has been echoed by virtually all senior defense officials, including Joint Chiefs of Staff Vice Chairman Adm. James Winnefeld who said that “this was all driven by strategy” and that after assessing the geopolitical environment, the nature of warfare and “the fiscal environment we’re in … We’ve crafted a strategy that now can guide our budget decisions.”

From a timing perspective, however, the new strategic guidance and the 2013-2017 budget request had to co-evolve since they were prepared in parallel from September to early January.  Decisions on cuts were reflected in the strategic guidance, and vice versa. The department undoubtedly iterated between the two processes — strategy formulation and budget preparation — to ensure consistency, and they likely made as many big cuts as they had to make in order to meet the BCA-imposed budget caps, but no more.

The Pentagon knows that another round of cuts looms and is holding back big chips, such as the 11th Navy aircraft carrier that doesn’t have an air wing, for bargaining purposes.

Still, much of the 2013-2017 plan does appear to reflect priorities expressed in the strategic guidance, some of which show significant departures from recent strategic documents like the 2010 Quadrennial Defense Review.

The U.S. military will put more effort into the following:
  • Sustaining “an underlying balance of military capability and presence” in the Asia-Pacific to shape and counter China.
  • Cyberspace capabilities.
  • Special operations forces, unmanned systems, intelligence, surveillance and reconnaissance for a robust global counterterrorism strike capability.
The U.S. military will continue — with some modification:
  • Maintaining a high-quality all-volunteer force and “keeping faith” with today’s active-duty force while stabilizing longer-term costs.
  • Sustaining a safe, secure and effective nuclear deterrent force, although elements of the 2010 package such as the plutonium facility at Los Alamos National Laboratory are slipping to the right.
  • Preventing and countering nuclear proliferation and terrorism.
  • Rapidly projecting global power utilizing forward-deployed forces, although two brigades are being permanently withdrawn from Europe, largely driven by domestic base-closure politics.
The U.S. military will stop:
  • Preparing for large-scale, long-duration stabilization operations.
  • Planning for a second nearly simultaneous major combat operation, but instead rely on just halting or punishing a second major aggression.
The new strategy made modest steps in outlining the priorities for Defense going forward, and that made it possible to align some cuts with strategy. This was not simply a “salami-slicing” exercise with cuts being spread across all Pentagon accounts; priorities were expressed in the new strategic guidance and implemented both in budget reductions and plus-ups.

This raises the question of why relatively small changes in budgetary levels necessitated big changes in strategy.



Simply holding the defense budget constant in real dollars required substantial change from the 2010 QDR strategy to the 2012 strategic guidance. Although senior defense officials have many choice epithets for the cuts of the sequester mechanism, ranging from “goofy meat ax” to “doomsday mechanism,” and decry the “devastating” impact they would have, the sequester cuts would only result in a 7 percent to 8 percent reduction in real terms but would require yet another new strategy, according to the Pentagon.  

The nation’s strategy should be robust enough to withstand relatively small variations in the resources committed to its execution. Since previous defense drawdowns after Korea, Vietnam and the Cold War were much larger (25 to 50 percent) than even the combination of BCA and sequestration cuts, does this mean that the nation will have three to five different strategies if the post-9/11 drawdown is of similar magnitude? This question is critical, because other budget games may be making the situation worse.

OCO war-related spending, unlike the base budget, is not scored against the budgetary caps imposed by the Budget Control Act.  Although the nominal one-year decrease in the base budget from $530 billion in fiscal year 2012 to $525 billion was much ballyhooed by senior defense officials, it appears that this was accomplished only through some chicanery.

Since the Army was projected to decline in end-strength by 80,000 and the Marines by 20,000, the department moved much of the funding for them out of the base budget and into the OCO account. In response to inquiries from the Boston Globe, the Pentagon acknowledged that the pay and benefits of 49,000 active-duty troops in the Army and 15,200 in the Marine Corps “are no longer considered permanent and are being maintained in the interim primarily because of current contingency operations” and will be scored as such. This amounted to 80 percent of the $5 billion nominal cut. As Heritage Foundation analyst James Jay Carafano told the Boston Globe, OCO has become “a little bit of a slush fund for the Pentagon. … We’ve gotten addicted to it. It makes being honest with the American people about how much we are really spending on defense very difficult.”

Although politics inside the Beltway are increasingly partisan and Democrats and Republicans seem to agree on nothing of importance, they all agree that the sequester mechanism won’t happen. Defense Secretary Leon Panetta told the House Budget Committee in February: “It’s the law, but doesn’t come until January 2013. I think it’s totally irresponsible for the Congress to allow it.” He added that “There is not a hell of a lot of planning I can do” because sequestration uses a “meat-ax” approach that makes automatic and equally distributed cuts across all accounts.

When asked whether the Pentagon was planning for sequester, Defense Department Comptroller Robert Hale replied: “Well, the answer is no.” The Pentagon’s position is that its fiscal year 2013 budget request is “roughly consistent with the security threats we face.  I won’t be naïve ... We might be thinking about it, but we’re sure not planning for that one and we hope it doesn’t happen.”

It’s often said that hope is not a strategy, but it appears that denial can be a tactic.

The Washington Post’s Walter Pincus has observed that the lame-duck session after the 2012 election will be an economic “perfect storm.” The fiscal year 2013 appropriation bills will need to be wrapped up or covered under a continuing resolution, the debt limit might have to be raised, the George W. Bush tax cuts expire at the end of 2012, and the sequester mechanism kicks in Jan. 3. The traditional tradeoff between “guns and butter” has been transformed into two tradeoffs — “guns and entitlements” and “guns and tax increases” — and “guns” is on the losing end of both of them. An ostrich-like response by the Defense Department and Congress to the prospect of further defense cuts is not likely to work. As it stands, though, the Pentagon may be making it even worse.

The BCA mandated cuts fall disproportionately on the procurement account. In its budget presentation, defense officials claimed that procurement spending would increase in real terms over the 2013-2017 budget plan. This is true, but mainly because the departure point shifted: the 2012 request had been for procurement spending of a total of $497 billion over 2013-2016, starting with $118 billion in fiscal year 2012. Panetta’s new budget calls for a total of $420 billion for procurement over the same period with a start point of $99 billion. These are real increases, to be sure, but smaller than planned in the previous year and from a lower starting point.

The Defense Department experienced an extended “procurement holiday” in the post-Cold War drawdown and could be starting another one now, but without the robust inventory it had last time.

As to what the future holds, the sequester mechanism can be avoided in two ways. The Bush tax cuts could expire and achieve the necessary deficit reductions entirely through tax increases, an outcome that neither political party wants but one that could emerge from the wreckage of Pincus’ “perfect storm.” Or President Obama, either in anticipation of his second term or as the last entry in his legacy as a one-term president, could reach an agreement with a lame-duck Congress on a “grand bargain” deal to reduce the budget deficit by $3 trillion to $4 trillion over 10 years, which might be the magnitude necessary to restore the nation’s fiscal health.

Any “grand bargain” approaching this magnitude will have to involve defense spending, which accounts for 20 percent of the total federal budget and 50 percent of discretionary spending. If the strategy is so weak that it can’t stand another 7 percent reduction, then a better strategy is needed.

The Defense Department should start planning now and making the hard-nosed decisions on how much strategy it can afford at a 20 percent real reduction — which is more than twice what is being cut now — and a 30 percent real reduction, comparable to previous drawdowns in defense spending.  

The post-election bargaining over taxes and government spending will be intense and hard-fought. The Defense Department needs to make it clear to all the players what the real consequences for the nation’s security are of ill-considered, deep cuts to a defense budget that is already on the decline.                             

David Berteau is senior vice president and director of the International Security Program and Clark Murdock is senior adviser at the Center for Strategic and International Studies, Washington, D.C.

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