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Defense Budget Headed for Dizzying Rollercoaster Ride
By Sandra I. Erwin

A bipartisan group of lawmakers will gather in a House-Senate conference in the coming weeks in hopes of hammering out a deal that will fund government operations for fiscal year 2014 and lay the groundwork for setting future priorities in discretionary spending, entitlements and taxes.

All eyes will be on this committee — chaired by House Budget Chairman Rep. Paul D. Ryan, R-Wis., and Senate Budget Chairwoman Patty Murray, D-Wash. — between now and Dec. 13, when the group is supposed to report a plan on how to move forward. 

On the bargaining table will be the Pentagon's nemesis, the sequester. Analysts and budget experts say the chances that the Pentagon will get permanent relief from the reduced spending caps are slim to none, although a short-term deal to delay the 2014 sequester is possible.

Any reprieve from sequester would be welcome by the Pentagon. Unless the law is changed, the Defense Department will have to slice $20 billion from its 2014 spending on Jan. 15. Under sequester, defense spending in 2014 would plummet from the administration's request of $552 billion to $498 billion. Non-defense agencies also must comply with lower spending caps set by the 2011 Budget Control Act.

For federal agencies, the best-case scenario would be an agreement to replace the sequester — which takes deep cuts to discretionary spending — with savings from entitlement programs or with new revenues. 

Even though the administration, congressional Democrats and some GOP lawmakers oppose the sequester, the lower spending caps are now beginning to settle in. Fiscal conservatives oppose lifting the caps under any circumstances. Within the group that favors raising the caps, Democrats and Republicans are far apart on how they would pay for the cuts if they were reversed.

From the outset, the budget conference faces nearly impossible odds, analysts said. The Senate approved $1.058 trillion for all agencies' discretionary spending for fiscal year 2014, while the GOP-led House passed a blueprint that caps spending at $967 billion. 

“I don't see how you can reconcile the House and Senate budgets. They're oil and water," said 
Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and former chief economist to Vice President Joe Biden.

Because the House and Senate 2014 budgets are irreconcilable, he said, the conferees might try short-term fixes, such as replacing sequestration. “Democrats will push for a replacement that balances cuts and revenues, while back loading any cuts,”
Bernstein said Oct. 17 at a Politico Pro forum.

"A lot of people don't like sequestration, and not just Democrats," said Bernstein.

The pain from the 2014 sequester falls primarily on the Pentagon because Defense got some relief in 2013, the first year of the sequester, and now has to pay it back.

“There are people who want to replace sequestration. The question is, how do you do it? How do you pay for it?” Bernstein asked. “If the answer is with new revenues, that's probably dead.”

Republicans might let Democrats replace sequestration, but would demand entitlement cuts.
“And Democrats won’t accept that,” said Bernstein. “Replacing one set of cuts in programs they care about with another set of cuts in programs they care about even more is unlikely to garner much support.”

Republicans feel as much pain on the sequester as Democrats do, said Tony Fratto, partner at Hamilton Place Strategies. But he believes Republicans are politically in a stronger position in this case because Democrats want to get rid of the sequester and they need GOP help to accomplish that. Republicans can insist on passing continuing resolutions indefinitely, which locks in the sequester, said Fratto. “If the administration wants to fix it, they are going to have to go to Republicans and ask for help,” he said. “I don't know what that is. It's nothing grand. There is nothing grand that is going to happen,” only small, incremental steps.

Bob Litan, director of research at Bloomberg Government, also ruled out the possibility of any “grand bargain” and predicted the budget conference will set its sights low. "We think there will be a mini-deal,” Litan said Oct. 18 during a Bloomberg Government webinar. That could turn out to be a one-year lifting of the budget cap to give the Defense Department some breathing room. Doing so would require finding about $100 billion in savings elsewhere. “That is the most likely outcome,” said Litan. “But who knows? We've seen lots of surprises.”

The Pentagon, under any scenario, does not function well under a continuing resolution and needs a full-year line-by-line appropriations bill, analysts said. The current stopgap funding measure that ended the government shutdown last week keeps the Defense Department at the same funding levels as it did in 2013, and restricts it from starting any new programs or moving money around. If sequester is triggered in January, the Pentagon will face significant pain because it will have to cut $20 billion abruptly, before the fiscal year ends Sept. 30. That could result in more furloughs, layoffs and major disruptions to military operations, training and equipment maintenance, Defense Department officials have said.

Defense Secretary Chuck Hagel said the Pentagon is preparing a two-track budget for the 2015-2019 period, one of which reflects the BCA spending caps. But the Defense Department is nowhere near ready to absorb the near-term shock of the 2014 sequester.

The Pentagon is bracing for a rough six to nine months ahead. After the $20 billion cut, the Defense Department budget would fall to $498.1 billion. By 2015 the cap would inch up to $511.4 and $522.4 billion by 2016.

“If this process continues, what it really means is that the baseline for future defense budgets has permanently changed from the wish lists set out over the past two or three years,” American University professor and former Office of Management and Budget official Gordon Adams wrote in “It is time to accept that baseline, and think accordingly, lining up forces, technology, and capabilities with the reality of resources.”

Photo Credit: Thinkstock


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