'We're willing to negotiate where the cuts come from, but we're not going to give up the savings,' said Oklahoma's Rep. Tom Cole, echoing many other congressional Republicans. (Getty Images)
WASHINGTON — US lawmakers are stumbling into a season of budgetary crises, with spending cuts once dubbed “draconian” and “devastating” now largely viewed by House Republicans as immovable conservative canon.
Nine months after Congress interrupted Americans’ New Year’s Eve celebration with its “fiscal cliff” drama, lawmakers are beginning a multiround fiscal fight — and each battle could prove more bitter than the last.
As part of a crisis-to-crisis saga that will span the autumn months, conservative House Republicans — joined by some GOP senators — want to lock in federal spending rates at sequestration levels. That would mean, as mandated by the 2011 Budget Control Act, the Pentagon’s planned base budget would shrink by nearly $50 billion annually, according to several Washington think tanks.
“I certainly think that’s where we’re at right now,” Oklahoma Rep. Tom Cole, the House Republican Conference deputy whip, told Defense News on Sept. 27. “I think we’ve made it clear we’re willing to negotiate where the cuts come from, but we’re not going to give up the savings.”
House Armed Services Committee member Rep. Rob Bishop, R-Utah, said during a brief interview the same day that he, too, senses “there’s a real appetite in the House” to lock in sequester funding levels for most federal agencies.
Bishop and other congressional hawks want to prevent the Pentagon from having to set its budget permanently at sequestration levels. But that could prove a tough sell among his ultraconservative Republican colleagues.
“That’s just a matter of law,” Cole said, referring to sequestration’s annual cuts to planned defense spending. “You’ve got show us where you’re going to find the savings to do that.”
Locking in all federal spending at sequester levels would mean widespread uncertainty for Pentagon planners, defense companies and for America’s overall economic strength. Industry officials already are positioning their companies for life in a leaner US defense market, and last week several CEOs descended on Capitol Hill to press lawmakers to end sequestration.
Defense “executives know that if sequestration continues, there will be an erosion in company fundamentals,” said Loren Thompson, chief operating officer of the Lexington Institute, Arlington, Va.
“Many [executives] are resorting to stock buybacks and other strategies aimed at assuring shareholder returns remain high,” said Thompson, who is also an industry consultant.
As the fall fiscal fracas — which could feature three or four partisan slugfests — emerges, it is increasingly clear that House and Senate Republicans are being pulled to the right by ultrafiscal conservatives who began joining both chambers in 2010.
In short, these tea party-affiliated members want government to both spend and do less. Experts say that means more federal budget cuts. It also means they will fight hard to ensure all spending levels lowered in 2013 via sequestration are not restored without other savings.
The next battle on which Republicans and Democrats will duke it out is set for mid-October. Treasury Secretary Jack Lew told lawmakers last week that Washington will run out of money to pay its debts on Oct. 17, and he implored them to strike a deal allowing the government to borrow more.
House Republican leaders, influenced by their ever-more-conservative caucus, signaled the lower chamber will advance a debt-ceiling bill in the coming weeks that targets federal spending.
“On the debt limit, we’re going to introduce a plan that ties important spending cuts and pro-growth reforms to a debt limit increase,” House Speaker John Boehner, R-Ohio, said on Sept. 26. “We’re not going to ignore Washington’s spending problem, and we’re not going to accept this ‘new normal’ of a weak economy, no new jobs and shrinking wages.”
Lawmakers and experts say one thing is becoming a “new normal” in Washington: funding levels for the Pentagon and other federal agencies slashed by sequestration, as set forth in the 2011 Budget Control Act.
Defense hawks in both chambers desperately want to find a way to replace the remaining nine years of sequestration, or dramatically lessen them. But they’re having a hard time injecting the cuts into the conversation.
One senior House Armed Services Committee member, Rep. Mike Turner, R-Ohio, said during a recent interview that, to him, “the most important element is sequestration.” But, he added with a shake of the head, the remaining $450 billion cut to planned Defense Department spending “isn’t even on the table.”
Pro-military House Republicans such as Turner want President Barack Obama to enter the fray with a plan that would turn off the defense cuts.
“The president should be coming to the table with a plan to set aside sequestration,” Turner said.
White House officials counter that the president’s fiscal 2014 federal plan did just that, proposing to replace sequestration with a list of tax hikes, spending cuts and other debt-paring items.
'Baking in' the Cuts
In the Senate, Republicans members balked last week at using a temporary government-funding measure to defund the president’s health care law, known as Obamacare. But some began posturing for future fiscal legislation to “bake in” sequestration funding levels, meaning the annual budgets of the Pentagon and other federal departments essentially would be rebaselined.
“I’d sure like for the final package to be a smaller number,” Sen. Richard Shelby, R-Ala., ranking member of the Senate Appropriations Committee, told Defense News on Sept. 25. “$967 [billion], that’s what I’d like.”
Veteran Senate Republicans such as Shelby and Sen. Tom Coburn, R-Okla., are considered more eager to cut fiscal deals than their House counterparts. But they sense the climate is right for pushing less federal spending.
“There can’t be a sweetener that gets me unless [a spending bill] is totally cutting spending,” Coburn said in a television interview.
House and Senate defense hawks suddenly find themselves aligned on Pentagon spending — rhetorically, at least — with Senate Democratic leaders, who want to pass a mini-omnibus appropriations bill in mid-November. That measure would cover all of government for the remaining months of fiscal 2014.
Most notably for the Pentagon and US defense firms, Senate Appropriations Committee Chairwoman Sen. Barbara Mikulski, D-Md., said last week that Democratic leaders want to replace the 2014 and 2015 rounds of sequestration in that kind of bill.
“We would like to cancel sequester in a balanced way” that would include $110 billion of new “strategic” federal spending cuts and new tax revenues by closing loopholes, Mikulski said.
She even offered an olive branch to Republicans: “Let’s look at some items in mandatory spending.”
One leading GOP Senate defense hawk, Lindsey Graham of South Carolina, told reporters he is interested in trading “tax-code reform for entitlement reform” as lawmakers look for a way to “replace sequestration.”
But a series of interviews with Democratic and Republican lawmakers last week revealed the chances of the kind of medium- or large-sized fiscal deal that would address sequestration are declining.
“We’re conscious the law can change. But I think it will be very difficult to change,” Cole told Defense News. “I would think ... in a larger debt-ceiling negotiation, sequester would be an element. I think once you get into the larger negotiation, anything’s doable.”
Cole was quick to point out House conservatives will require that any movement to exempt the Pentagon from sequestration must include other debt-paring measures that both parties in both chambers can agree to.
“That would take Democratic cooperation on the entitlement side, because there’s simply not enough money on the discretionary side to do that,” Cole said. “I think it’ll be very tough to get. Not impossible, but we’ll see.”
Congress is set for a showdown over the nation’s massive debt and borrowing level in a few weeks. Lawmakers and sources say there’s a small chance sequestration is on the table.
But defense companies are not waiting to take moves to protect their bottom lines.
“The incentive structures for top industry executives are focused mainly on keeping shareholders happy,” Thompson said.
“Northrop Grumman is buying back a quarter of its outstanding shares between now and 2015,” he said. “If it can retire shares faster than revenues and returns decline, then earnings per share will rise despite the erosion.”
But such moves, while necessary, will have their own consequences.
“Of course,” Thompson noted, “money spent on buybacks is not available for investment in new technology.”