Defense industry fears sequestration delay won't stop Pentagon cuts

The defense industry is worried last week's budget deal on taxes could damage its negotiating position for the next “fiscal cliff” deadline two months from now, when across-the-board spending cuts would take effect.

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The deficit debate is shifting from taxes toward spending cuts and the debt limit, where there will be more of a focus on new cuts to the Pentagon.

While the first fiscal-cliff fight over taxes included the threat of massive across-the-board spending cuts, the sequel is going to be nearly all about where to cut spending. The Pentagon is the largest target outside of entitlements.

“Even when sequester was on the table along with the fiscal cliff, it seemed pretty clear that to get to a spending-side agreement you will have to go deeper in defense,” said Gordon Adams, a defense analyst at the Stimson Center.

“Now the trade-offs are all on the spending side,” he said. “If the Democrats are going to give anything in the Medicare, Social Security arena, they are almost assuredly going to ask for something in the defense arena.”

The spending debate will also exacerbate tensions between GOP defense hawks in Congress and Tea Party Republicans. The two camps mostly agree on taxes, but not on defense spending.

The defense industry is breathing a temporary sigh of relief after sequestration was avoided for two months in the fiscal-cliff deal last week. But most defense analysts and many industry executives say an overwhelming consensus has emerged over the year that more cuts are coming on top of the $487 billion, 10-year reduction to Pentagon budgets included in the Budget Control Act.

“At a certain point the industry has to deal with what’s coming at them,” said Rep. Adam Smith (Wash.), the top Democrat on the House Armed Services Committee.

“They did what they could, but just the broader challenges of addressing our deficit issues are too great for anyone at this point,” Smith told The Hill.

Defense spending, which grew rapidly during the George W. Bush administration amid two wars, is already on a downward trend as the war in Iraq ended and the war in Afghanistan draws down. The debt fight threatens to exacerbate that trend, particularly if the across-the-board cuts are allowed to take effect.

Both Republicans and Democrats want to avoid sequestration. President Obama said flatly during the presidential debates that it would not happen. In addition to the Pentagon cuts of $500 billion over 10 years, sequestration includes an across-the-board domestic discretionary spending cut of the same size.

The issue that remained unsolved since sequestration was set in motion 18 months ago is how to replace the across-the-board reductions.

That was not resolved by the New Year Eve’s fiscal-cliff deal.

Fiscal conservatives say that the Pentagon should not be exempt from budget cuts to rein in the deficit. They want reductions in domestic, military and entitlement spending.

“Here’s the reality: You cannot reduce spending unless you get into the three sacred cows: retirement, healthcare and military spending,” said Rep. Jack Kingston (R-Ga.), who led an effort to end the military’s sponsorship of NASCAR last year.

“If you look at spending $80 million on NASCAR, $37 million on the Blue Angels, $70 billion in Europe … that doesn’t sound like an impoverished budget.”

But for defense hawks like Sens. John McCain (R-Ariz.) and Lindsey Graham (R-S.C.), who pushed for sequestration to be part of any fiscal-cliff deal, resisting further cuts will continue to be a primary goal.

Graham showed a renewed willingness to debate the proper the size of the military budget last week after the fiscal-cliff deal was reached.

“I will fight anybody from any party that wants to destroy the Defense Department,” Graham told reporters Thursday. “If you think defense is not the No. 1 role of the federal government, you’ve lost your way in terms of constitutional priorities.”

Some defense analysts say that the shift in the Republican Party away from national security, with the rise of the Tea Party, was highlighted during the fiscal-cliff negotiations, where taxes trumped defense in importance.

When negotiations stalled before Christmas, for instance, Graham said he was willing to let sequestration happen if the only alternative was a bad deal on tax rates and Medicare.

“Other issues have overtaken national security as being more important,” said Mackenzie Eaglen, a defense analyst at the conservative-leaning American Enterprise Institute.

“I think it does show how the Republican Party is no longer the party of national security, no longer a big-tent party of Reagan Republicans where a strong defense was a central tenet of conservatism.”

Defense firms have already begun preparations for smaller Pentagon budgets in the years to come, regardless of sequestration’s eventual outcome.

But the industry is also looking at its path forward after a yearlong campaign waged against sequestration was largely overshadowed by the debate on tax rates.

“What the defense industry learned from its lobbying campaign is that when there’s no urgent threat, the political system views it as just another interest group,” said Loren Thompson, an analyst at the Lexington Institute who consults with several defense contractors.

Thompson predicted that additional lobbying could have a larger impact in March because the tax issues are largely off the table. He said that the two-month delay in the fiscal-cliff deal is a good sign that lawmakers will find a way to ultimately avoid sequestration.

The biggest problem the Pentagon and defense firms have with sequestration is the “meat-ax approach,” where the cuts are taken across the board. Some defense executives have said they could be willing to live with additional cuts done in a targeted manner, and many point to Senate Armed Services Committee Chairman Carl Levin (D-Mich.) suggesting $100 billion last summer.

“I’d certainly accept Pentagon cuts that are based on national security,” McCain told The Hill Thursday. “But not on the fact we have to just cut spending.”