The U.S. Defense Department’s fiscal 2013 budget plan to cut $259 billion from spending over the next five years is unlikely to damage America’s defense industrial base largely because it sidesteps major program cuts in a presidential election year, according to analysts.
Part of the justification for leaving the larger programs in place, analysts said, is the potential to use them as bargaining chips during upcoming negotiations over sequestration, the $500 billion in automatic budget cuts that would take effect in January 2013 absent agreement to a broader debt deal between Congress and the Obama administration.
In a Jan. 26 preview of the DoD spending request to be submitted to Congress on Feb. 13, only a handful of programs were canceled or deferred, moves that were far less dramatic than widely anticipated.
A big problem, analysts expect, is that Pentagon cuts could go deeper than envisioned by the administration, which means that many of the programs that dodged a bullet this time around likely will be targeted in a post-election future, like cutting an aircraft carrier, one of three systems that can deliver nuclear weapons; or trimming the most expensive program in history, the multinational F-35 Joint Strike Fighter.
“There are lots of big cuts out there,” said Clark Murdock, an analyst with the Center for Strategic and International Studies, at a Jan. 27 event. “They could have taken off the 11th carrier, they could have done deeper cuts in ground forces.”
Instead, by slipping purchase decisions for a number of programs, DoD created short-term cost savings that will inevitably increase the need for more dramatic cuts in coming years, according to analysts.
Republican House Armed Services Committee Chairman “Buck McKeon can fume all he wants, but $525 billion [in annual defense spending] is not exactly a significant cut to what was spent last year,” said Jim Hasik of Hasik Analytic. “Right now, you’re still borrowing a trillion bucks or more a year, and it has to come out of somewhere in the long term if you don’t want to wind up like Greece.”
The Pentagon received a $531 billion appropriation in 2012.
Indeed, Defense Secretary Leon Panetta and his team maintain — as did their predecessors — that debt remains among the nation’s leading security threats.
The ability to cede large, visible programs will be part of the administration’s strategy, Murdock said.
“Those are all standing right there, but they’re for the negotiation over what’s going to replace sequester.”
And in an election year, the political cost of eliminating major programs would be steep.
“They don’t want to be seen as the guys that killed the 11th carrier,” Hasik said. “There was some timidity here; they’re punting in some extent to the next administration.”
Pentagon officials insist the cuts detailed last week were developed apolitically.
“Make no mistake, the savings that we are proposing will impact on all 50 states and many ... congressional districts, across America,” Panetta said Jan. 26.
Panetta’s budget highlights last week were the first tranche of $487 billion in cuts to planned defense spending over the next decade as mandated by the Budget Control Act that lawmakers passed in August to cut U.S. debt by $2.1 trillion as a condition to raise the nation’s borrowing limit. As part of the deal, lawmakers are to identify $1.2 trillion to be applied to debt reduction, otherwise automatic cuts would be triggered in a process referred to as sequestration. For the Pentagon, that would mean another $500 billion would have to be cut from its budget over the next decade.
Analysts are divided over whether these automatic cuts can be avoided.
The line-by-line breakdown of DoD’s $525 billion fiscal 2013 budget proposal is expected to be released Feb. 13.
Although the detailed budget numbers have not been disclosed, cuts were not divided equally among the services.
“We made a very conscious decision ... in August that we were not going to do what the department traditionally has done in a time when we were drawing down, and that is just hand out proportional cuts to the services,” Adm. James Winnefeld, vice chairman of the Joint Chiefs of Staff, said in a Jan. 26 interview.
DoD officials levied specific cuts based on the results of a comprehensive strategy review, which puts more emphasis on military operations in the Pacific region and fighting on a contested battlefield. This document is intended to shape DoD spending over the next decade.
The strategy favors Air Force and Navy systems, thus those two service budgets are expected to grow. The plan calls for shrinking the Army by 57,000 soldiers, leading to a slimmer budget, which has swelled after a decade of ground combat in Afghanistan and Iraq.
“I believe intuitively that you’ll find the Air Force and the Navy probably did a little bit better proportionally and financially,” Winnefeld said, adding deviating from the strategy could render it useless and send DoD back to the drawing board.
“If we get another budget hit, we’re going to have to probably go back and redo the strategy,” Winnefeld said.
This could mean further modifying the Pentagon’s ability to fight in multiple regions simultaneously and change the pace of personnel cuts, the admiral noted.
Like other top defense leaders, Winnefeld warned of the devastating effect automatic cuts would have on the U.S. military.
“If we see sequestration, we’re going to turn this very healthy process we just went through right on its head, where instead of building a strategy and doing budget decisions that flow from that strategy, we’re going to take and cut with a chainsaw and then we’re going to have to build a new strategy,” Winnefeld said. “I guarantee you, it will have to be a new strategy that would be built out of the ashes of sequestration.”
To avoid sequestration-level spending cuts, DoD would have to make further budget concessions, Murdock said.
“They know at a minimum that there is a second round to avoid a sequester cut,” he said.
Even cybersecurity funding, one of the few areas where investment will increase, will be focused on fixing vulnerabilities rather than advancing capabilities.
“There will be an approach to review a lot of our cyber capabilities,” Chris Coleman, a cybersecurity executive at Cisco, said. “We’re realizing that [U.S.] weapons systems may be exploitable through the cyber mechanism.”
For months, the defense industry had been bracing for dramatic, doomsday-level program cuts. But the 2013 budget preview showed weapon-buying cuts far below those fears.
While cuts will be problematic for some companies, they likely spare major defense firms.
“When they’re slipping programs, they’re actually trying to take care of the industrial base, and they’re sending a signal we’re willing to pay some more for that,” Hasik said.
A number of analysts expressed concern that the Navy’s five-year shipbuilding plan, particularly a decision to buy fewer high-speed transport ships, could pose financial problems for Austal.
The Australia-based company, which makes Navy ships in Alabama, builds one version of the Littoral Combat Ship and is on contract for 10 Joint High Speed Vessel transports, but lost at least eight future ships.
The Pentagon said last week it will carefully monitor the industrial base as a whole and will address shortfalls in the shipbuilding sector.
Analysts say the Pentagon’s decision to make deep cuts in personnel spared deeper cuts to procurement accounts.
“[T]he plan to reduce personnel saves a lot of money to spend on acquisition,” Peter Singer, an analyst with the Brookings Institution think tank, said.
Steve Grundman, an independent analyst and former DoD industrial policy chief, found the ability to make personnel cuts surprising.
“They’re not the kinds of choices that I would have thought the Pentagon could so quickly come to grips with in this restructuring cycle,” he said. “That they have, and at the same time, are willing to take on the ballooning costs of military compensation and benefits, is the primary reason yesterday’s announcement is no bloodbath for defense contractors.”
The budget proposal is forward-looking and could benefit smaller companies, Singer said. “It’s a budget that, while it has cuts in it, is very forward-looking. It’s looking at new domains of warfare and new acquisition programs,” he said. “That’s good for smart, active companies. For companies looking to protect outdated programs of record, it’s not a good budget.”
It is yet to be seen if companies would dig in for what would likely be an uphill battle to avoid program cuts.
Northrop Grumman, in a statement, expressed disappointment that the Air Force chose to end production of one specific version of the Global Hawk surveillance drone.
“Northrop Grumman is disappointed with the Pentagon's decision, and plans to work with the Pentagon to assess alternatives to program termination,” the company said.