The collapse of the debt-reduction super committee and the now looming prospect of $1.2 trillion in automatic spending cuts beginning in January 2013 — half of which would come from the Defense Department — has the defense industry hanging in limbo.
As Washington copes with the fallout of the panel’s super failure, the number-one question floating around defense industry boardrooms is whether the Pentagon will begin to factor in these cuts in its 2013 budget request, which must be submitted to Congress this February.
The word inside the building is that Defense Secretary Leon Panetta has instructed the comptroller’s office to draft a budget that does not include any cuts related to the $600 billion “sequestration.”
The Pentagon's 2013 budget would not absorb any cuts beyond the $450 billion that already have been agreed upon for the coming decade, as that would create a self-fulfilling prophesy, sources said. Panetta is expected to send a funding request to the White House Office of Management and Budget that factors in $450 billion in cuts, but not a penny more.
Any budget proposal that hints that the Pentagon considers the sequester a fait accompli would send the “wrong political statement,” one industry insider said.
In anticipation of an ugly fight over the coming months, Panetta issued a tersely-worded statement Nov. 20 that warns Congress that the Pentagon will not accept becoming the sacrificial lamb for the supercommittee’s failure. “Congress cannot simply turn off the sequester mechanism, but instead must pass deficit reduction at least equal to the $1.2 trillion it was charged to pass under the Budget Control Act,” he wrote. “In my four decades involved with public service, I have never been more concerned about the ability of Congress to forge common-sense solutions to the nation’s pressing problems.” The Defense Department is taking steps to cut $450 billion in cuts over 10 years as required by the Budget Control Act,” said Panetta.
The tone of the missive suggests that Panetta has no intention of revising military strategy or cutting one nickel of spending based on the dismal failure of Congress to do its job.
Industry executives already are fretting over the impact of the $450 billion reduction, which technically is not a cut, but a flat-lining of the budget over the next decade.
Some industry officials have said they were disappointed by the vice chiefs of the military services acknowledging in testimony to Congress that removing $450 billion from their budgets would be manageable. The vice chiefs did draw the line at $450 billion. If the $600 billion sequester were enforced, they warned of major disruptions, as it would amount to a $57 billion annual cut from the Pentagon’s top line.
For defense contractors, even a flat budget is bad news because the ax would fall disproportionately on weapons procurement programs. An industry lobbying campaign already has created some momentum in Congress to avert the sequestration by arguing that budget cuts will “cripple” the industrial base. Companies also have complained that they are still absorbing a string of program cancellations that former Defense Secretary Robert Gates ordered in 2009, in addition to cash-flow problems created by Congress’ failure to pass year-long budgets and instead rely on temporary continuing resolutions.
By most estimates, at least 50 percent of the $450 billion reductions will fall on “investment” accounts — procurement, research, development and testing. That is the only way that the Pentagon can continue to fund its soaring personnel, health care and operations costs within a flat budget.
In the post Cold War downturn, investment accounts dropped by 50 to 75 percent, while operations, maintenance and personnel declined by only 10 to 35 percent.
Analysts have pointed out that all this hand-wringing is overblown, as even under sequestration, the Defense Department’s base budget would fall to roughly $472 billion in fiscal year 2013, which would be approximately the same level of funding as 2007, adjusting for inflation. According to a study by Todd Harrison, of the Center for Strategic and Budgetary Assessments, this scenario “seems modest compared to the drawdown at the end of the Cold War when the base budget fell by 34 percent from the peak in fiscal year 1985 to the trough in fiscal year 1998. If war funding is gradually phased out in the coming years as troops leave Iraq and Afghanistan, the total reduction in defense spending would be roughly 31 percent, which is in line with the cutbacks following the Korean War (53 percent) and the Vietnam War (26 percent)."
Harrison also noted that the Budget Control Act exempts war-related funding from sequestration, which creates an incentive for the Pentagon to move items from the base budget to the war budget in order to avoid the budget caps in future years.
Industry executives said in off-the-record conversations that they are still hopeful that Congress might have an epiphany and compromise in 2012, or that the president and Congress take action in 2013 to soften or mitigate the sequester.