Defense Industry Pins Hopes on SASC Chairman Levin

With no budget deal yet on the horizon,defense industry executives are contemplating worst-case scenarios as the clock ticks toward a Jan. 2 sequestration deadline.
Failure to reach an agreement to avert the fiscal cliff — $1.2 trillion in spending cuts and the expiration of the Bush tax cuts — would be bad news for military contractors.
The worst possible outcome for defense industry, however, would not be sequestration. An even more dreaded scenario is a grand bargain that embraces the Simpson-Bowles deficit-reduction proposal that was approved by a partisan panel in Dec. 2010. The spending cuts recommended by Simpson-Bowles would be deeper than the 9.4 percent across-the-board sequestration that the Pentagon fears.
Defense industry’s best hope now is for negotiators to embrace Senate Armed Services Committee Chairman Sen. Carl Levin’s proposal that the Pentagon offer a $100 billion 10-year down payment to help avert sequestration.
“That’s our best case: $10 billion a year,” said a senior executive during a private industry meeting this week. “If we get out of this fiscal mess with a $100 billion cut [over 10 years], that would be one heck of a good deal.”
Within the business community, many top executives have called for a Simpson-Bowles-like framework of spending cuts and tax hikes that could reduce the nation’s debt by up to $4 trillion. But defense firms would not fare well under such a scenario.
“People don’t realize Simpson-Bowles is a huge loser for defense,” the executive said. “It’s significantly below the sequester level. … and would be the worst-case scenario for defense industry.”
The fiscal cliff talks will resume after the Thanksgiving holiday, and the Pentagon’s budget remains very much on the table. The administration and Congress already have agreed to remove $487 billion from future defense spending beginning in 2013. But as part of a political compromise to avert additional defense cuts of $600 billion from the sequestration law, the Pentagon might have to give up more than $487 billion.
Another much-feared possibility is the nation going over the cliff Jan. 2 and realizing that it is not such a bad thing.
“That’s the scariest scenario,” said David J. Berteau, senior vice president of the Center for Strategic and International Studies. “If we go over the cliff, if there’s no blood on the flood, if it doesn’t look too bad, appropriators will think they didn’t cut deep enough.”
If the consequences of going over the cliff turn out to be less severe than forecast, lawmakers will continue to use this tactic, which holds the government hostage and perpetuates the uncertainty about future defense spending, Berteau said Nov. 16.
He predicts that a future deal to cancel sequestration will still cost the Pentagon $30 billion to $40 billion a year in additional cuts. The reductions will not be felt immediately, he said, and would affect the budgets for fiscal years 2016-2021. That would give the Pentagon 15 months to make “tough upfront decisions” about what to fund, said Berteau. “You don’t have 10 years, you only have 15 months.”
Defense executives’ realization that the Levin plan gives them the least-painful escape from sequestration came after the November election. Once it was clear that Mitt Romney’s military buildup would not happen and the Senate would have fewer moderates, defense executives saw the Levin plan as the lesser of two evils.
The new Congress will be more polarized than ever, one executive said at the private industry meeting. About 80 new lawmakers will be sworn in, many of whom “don’t understand defense industrial issues,” he said. “Newcomers have to be educated.”
The Senate, which will have 12 new members, is a major concern for industry, he said. “There has been a loss of moderates … and there are more people with extreme positions. If partisanship grows deeper, what will that portend for fiscal cliff agreements?”
Photo Credit: Navy

Topics: Business Trends, Defense Department, DOD Budget, Government Policy