'Cliff' deal gives defense a reprieve

The “fiscal cliff” deal gives the Pentagon and defense industry only a temporary reprieve Tuesday from across-the-board spending cuts.

The eleventh-hour agreement did little to address the defense industry's biggest complaint about the fiscal cliff: Possible cuts have created an uncertainty that's terrible for business.

“[I] hope they come to an arrangement sooner rather than later because the continued uncertainty is really bad for the industry on the whole,” said Michael Herson, president of American Defense International, one of the largest defense lobbying firms.

Todd Harrison, a defense analyst at the Center for Strategic and Budgetary Assessments, said the two-month delay failed to address the primary reasons that sequestration is bad policy.

“The two big problems with sequestration are the abruptness of the cuts and the across-the-board nature of the cuts, and both of those things still exist even with this delay,” Harrison said. “This merely extends the uncertainty and perhaps increases it.”

The postponement of $55 billion in defense cuts scheduled to go into effect on Wednesday did provoke some optimism.

Defense Secretary Leon Panetta said Congress had prevented the “worst possible outcome,” though he noted the “cloud of sequestration remains.”

The Pentagon still faces the prospect of at least a $42 billion cut in 2013 if sequestration takes effect on March 1, and another $5 billion under the Budget Control Act’s budget caps, according to an analysis from Harrison. Domestic discretionary spending would also receive a similar across-the-board cut.

Panetta said the cuts would lead to furlough notices for 800,000 civilian defense workers, in addition to weapons program cuts that would hit the industry.

“The responsibility now is to eliminate it as a threat by enacting balanced deficit reduction,” Panetta said. “Congress cannot continue to just kick the can down the road.”

Both Democrats and Republicans for months said they were opposed to letting the cuts take effect, but the two sides found little agreement over an alternative and the defense cuts eventually became the side issue to a battle over tax rates.

House Armed Services Committee Chairman Buck McKeon (R-Calif.), who voted for the deal, warned Tuesday that “this deal leaves the force vulnerable to sequestration's devastating and arbitrary cuts, and it leaves Congress and the president with much work to do to end the crisis.”

The panel’s top Democrat, Rep. Adam SmithDavid (Adam) Adam SmithOvernight Defense & National Security — Presented by AM General — The Quad confab The Hill's Morning Report - Presented by Alibaba - Democrats argue price before policy amid scramble House passes sweeping defense policy bill MORE (D-Wash.), voted against the deal mostly over taxes, but he said that it could also make things worse for the Pentagon.

“Now they get to go another two months with quite possibly same outcome they would have faced if we hadn’t done the deal,” Smith told The Hill. “What does the agreement look like that stops sequestration March 1 that we couldn’t get on Jan. 1?”

Defense industry analysts were split over whether the inclusion of the two-month delay was a positive sign for future spending fights.

Loren Thompson, an analyst at the Lexington Institute who consults for defense firms, said the deal suggested a compromise will be found.

“It shows when the chips are down, the political parties compromise,” Thompson said. “The fact that the White House and Congress could agree on taxes means they probably also will find common ground to change the across-the-board spending cuts.”

Others were less optimistic.

“The only cause for optimism is sequester didn’t happen,” said Russell Rumbaugh, a defense analyst at the Stimson Center. “What the deal means is uncertainty. We don’t know anything.”

Mackenzie Eaglen of the conservative-leaning American Enterprise Institute warned that the two-month delay could lull the industry into a false sense of security.

“There may be a false sense of hope that because Congress and the president punted that the next time around there will ultimately be a fix for sequester, when it could simply be signaling the opposite,” Eaglen said.

“At the end of the day, sequester is everyone’s favorite bargaining chip,” she said.

“[Senate Majority Leader] Harry ReidHarry Mason ReidTo Build Back Better, we need a tax system where everyone pays their fair share Democrats say Biden must get more involved in budget fight Biden looks to climate to sell economic agenda MORE (D-Nev.) said repeatedly he was upset at how quickly Democrats agreed to the two-month punt, which means it’s the trump card going into the debt-ceiling deal and [continuing resolution] negotiations.”

Since the deal to raise the nation’s debt ceiling set sequestration in motion in 2011, the defense cuts have been tied in with the Bush-era tax rates that expired Jan 1. But after this week’s deal, the sequester is now pushed into the fight over the debt-limit, where Republicans are demanding new spending cuts and entitlement reforms.

Harrison said that could make averting sequester even tougher.

“It might be more likely now because it implicitly links resolving sequestration to the debt ceiling, and the way the debt ceiling is likely to get resolved is by spending cuts over and beyond sequestration,” Harrison said. “Add those together and that’s an awful lot of spending cuts to come up with.”

The Aerospace Industries Association (AIA), a trade group that’s led the fight against the across-the-board defense cuts, said Wednesday it was “relieved that the heavy ax of sequestration will not fall today.”

“We expect Congress will use the next two months to find thoughtful alternatives to ill-conceived, indiscriminate budget slashing,” AIA CEO Marion Blakey said in a statement. “Sequestration is a slow motion catastrophe.”

Even if the cuts are prevented, most defense observers — as well as top industry officials — believe it’s now likely there will be additional Pentagon cuts beyond the $487 billion reduction already on the books over the next decade.

“The [Pentagon] knows that, the industry knows — that’s no longer a big surprise,” Rumbaugh said. “What the actual levels will be is still a massive uncertainty.”