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 July 2012 

Lt. Gen. Lawrence P. Farrell, Jr., USAF (Ret)Sequestration Looming: Defense Should Be Prepared for All Possible Scenarios

July 2012

by Lt. Gen. Lawrence P. Farrell, Jr., USAF (Ret) 

If no further legislative action is taken before January, the Budget Control Act directs a reduction of $97 billion in discretionary federal spending for fiscal year 2013. The calculations work out to $42 billion from domestic programs and $55 billion from defense.

For defense, these cuts would be piled on a $487 billion reduction over 10 years that the administration proposed. The president requested $525.4 billion for defense in 2013. Sequester would reduce that to $470.4 billion. Since the Defense Department has not done any planning or budgeting for this, the automatic salami-slice approach laid out in the law would, by all accounts, be a disaster.

The country is at this impasse because the congressional super committee failed to reach agreement on $1.2 trillion of deficit reduction over 10 years. The stalemate resulted from fundamental disagreement on additional taxes as part of the targeted reduction.

So where does this leave industry? The biggest problem for Defense Department suppliers now is the uncertainty and the lead time needed to adjust. If sequester is triggered Jan. 2, defense companies would have to fire workers. The WARN Act requires a 60 day notification if 50 or more employees are to be laid off. Certain states have increased this notification to 90 days. What this means is that layoff notices will be coming out either just before the November election for the 60 day notice, or about a month earlier than that for the 90 day notice.

But attrition is already under way. Industry adviser James McAleese points out that some companies already have begun to shed employees.  One company said that any employee who is not working directly on a contract might be on the chopping block. And further, for corporate acquisitions, workers who are funded by overhead accounts are being let go. So the impact to industry and workers is real. Studies have estimated that 1 million additional jobs could be lost in the defense industry if sequester is triggered.

This is not the only issue on the table for Congress and the administration to address. A large number of tax breaks are set to expire Jan. 1. The Congressional Budget Office has estimated that spending reductions via sequester and tax increases will tip the economy back into recession. Politicians on both sides of the aisle are nervous about this. Rep. Adam Smith, D-Wash., ranking minority member on the House Armed Services Committee, said that the 10 years worth of tax cuts set to expire total $4.2 trillion, which amounts to $420 billion per year taken from the economy. The prevailing belief is Congress must do something, and soon.

Until now, the president has stated he will veto any congressional attempt to overturn sequester, although he has left the door open to a deal wherein revenue is enhanced. Majority Leader Sen. Harry Reid, D-Nev., has suggested that defense is going to have to bear its share of the burden under any deficit deal. But on June 12, Senate Armed Services Committee Chairman Sen. Carl Levin, D-Mich., hinted that a deal might be in the works to stop the automatic sequestration. “Most of my colleagues in both parties see sequestration as a mindless threat to a sensible budget process,” he said at a press conference.

The only politically feasible alternative to sequestration is a balanced mix of cuts and revenue, including higher taxes, Levin said. One proposal that might be offered is to avoid sequestration but still reduce defense spending by $100 billion over 10 years.

Various scenarios are being contemplated to reach the $1.2 trillion target. If the one-to-one formula is to be employed, increased taxes — most likely closure of loopholes rather than raising marginal rates — would be offset by equal cuts in entitlements. That would leave defense and non-defense discretionary programs to absorb the rest in roughly equal measure.  

McAleese has suggested that if Levin’s numbers are to be taken at face value, they would break down as follows: 40 percent increased taxes, 40 percent entitlement cuts, 10 percent non-defense discretionary reductions and 10 percent defense cuts. A 10 percent defense slice works out to $12 billion per year. Not a great outcome for defense, but much preferable to parting with $55 billion per year. Other formulas are possible. A 30/30/20/20 breakout would result in a $24 billion cut for defense.  A probable scenario is an agreement to delay sequestration pending a “grand bargain” in the spring involving tax reform. Defense might still have to contribute under this deal. Its likelihood is enhanced by the option, once again, of postponing hard decisions.

Sadly, both parties appear to be awaiting the outcome of the election before committing to serious negotiations. The reason is twofold. First, any appearance of compromise clouds the campaign message and unnecessarily excites the base. This is a political dilemma both parties would want to avoid. Second, both parties are hoping to solidify their election gains and thereby achieve increased leverage in follow-on negotiations. Regardless of the outcome, both parties will have increased flexibility after the election.

Most observers will probably say this scenario is preferable to sequester, given the magnitude of cuts and the arbitrary and constraining nature of the law. But we all should be lamenting the failure of Congress to seal the deal when all that was asked was $1.2 trillion over 10 years — only $120 billion per year in a $16 trillion economy. This is disappointing. One would have thought that the United States, of all countries in the world, would have been able to step up to this. This was not even close to the heavy lifting that will be required in just a short time to address the true magnitude of the issues ahead.

Bravo to the Senate if it can show the way to fix this short-term crisis. Difficult as it seems, it is only a first, small step.

 

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