As the budget standoff continues on Capitol Hill, it is almost certain that sequester soon will be upon the nation. Automatic, across-the-board budget cuts will affect discretionary spending government wide. But everyone wonders how it will all be sorted out.
Congressional leaders such as Rep. Paul Ryan, R-Wis., chairman of the House Budget Committee and Sen. Patty Murray, D-Wash., who chairs the Senate Budget Committee, have already stated that they expect sequester will happen. That these lawmakers — who are assumed to be key players in the middle of crafting a reasonable path forward — are saying outright that sequester is going to occur is truly astounding.
Right now, the military is suffering for two major reasons. The first one has to do with the impact of declining war spending, known as “overseas contingency operations.” OCO has wound down, and the military has been trying to return certain budget items to the base budget.
Everyone knew this would happen as the rationale for what is funded in OCO and base budgets seemed quite flexible, and money could wash back and forth. The Defense Department now faces the inflexibility of operating under a continuing resolution because its fiscal year 2013 budget has not yet been approved by Congress. The military currently finds itself short of funds in its operations and maintenance (O&M) accounts.
To compensate, the service departments have placed draconian restrictions on O&M spending. For example, only critical travel is now permitted, temporary employees are to be let go, hiring freezes are in place and permanent civilian employees are to give up 22 paid workdays this year. Additionally, major maintenance for aircraft, ships and ground vehicles is anticipated to cease, as is the refueling of a Navy aircraft carrier.
This is just for starters and does not include the effects of sequester. When that happens, things will get much worse.
What the department needs is a real budget, not a continuing resolution. Only with a proper spending plan can the colors of money be properly programmed and O&M expenses addressed. The department has been anticipating an additional bill as the price for escaping sequester — perhaps another $10 billion per year. With a real budget in place, this would be workable.
Another consideration in this discussion is the state of the nation’s economy. It has seen slow growth and extended periods of unemployment, currently at 7.9 percent. Concerns about the long-term picture should be fueled by the release of a new Congressional Budget Office report that looks at economic trends between 2013 and 2023. It projects a 2013 deficit of $845 billion, but additional deficits of $4 trillion over 2013-2022. That compares to last year’s estimate of an additional $2.3 trillion.
This anomaly is explained by the CBO methodology of assuming current laws will remain in place, such as the potential tax increases that didn’t take effect in 2013. Congress and the administration made most of them permanent with the American Tax Payer Relief Act of 2012. And the total deficit for 2014-2023 is now $7 trillion. Revenues grow to 19.1 percent of GDP in 2015, while outlays grow to 23 percent of GDP by 2023. That is the basic reason deficits continue to grow.
CBO analysts point out that there are still unresolved issues. One is whether sequester takes place at all. Another is the statutory limit on debt that needs to be adjusted in mid-May. They noted that if the Medicare “fix” for doctors is adjusted again in 2014, the Budget Control Act of 2011 or sequester is overturned, or certain 2013 tax provisions are extended, the public debt will rise to 87 percent of GDP, versus the 77 percent now projected.
Factors that contribute to these trends are the slow growth of the labor force; the aging population demanding more healthcare and higher subsidies for health insurance; growing healthcare costs; and rising interest payments on the debt. All in all, not a good news story and one certain to get worse as Congress and the administration make adjustments to ease the pain of cutbacks in government services and defense spending. Think reduced food inspections, furloughs of thousands of federal workers, reduced federal grants to states, air travel safety and Federal Aviation Administration services. How about no flying whatsoever for one day a week?
These are all short- to medium-term effects. The real game changer that would cause us to take spending seriously is a projected jump in interest rates in 2017 — when three-month Treasury-bills are projected to go up to 4 percent and 10-year Treasuries above 5 percent. That would more than double interest payments on existing debt. By that time, the debt would be $2 trillion higher. This is a big deal.
Aside from the macro trends, the Defense Department has some serious internal problems. Center for Strategic and International Studies analysts David Berteau and Clark Murdock have produced a revealing new study. Their findings derive from budget analysis by Todd Harrison of the Center for Strategic and Budgetary Assessments.
They point out that because of internal Defense Department inflation — increasing personnel and operational costs — military personnel, operations, maintenance and construction spending will consume the entire projected defense budget in 2021. That would leave no room for investments. To get to a 32 percent investment cushion — what the Defense Department had in 2010 — the size of the force will have to be reduced from 1.5 million today to less than 900,000. And for certain, a new military strategy will have to be derived.
One harbinger of just how serious a fix defense is in can be seen in the pending recall of a Navy carrier battle group from the Persian Gulf as a result of insufficient operational funds. Expect the discussion concerning the defense force of the future to again address the contentious issues of active-reserve mix, pay and benefits, the future of critical acquisition programs, end-strength issues and service budget shares.
The analysis thus far has concentrated mostly on curtailing discretionary spending, but the two-thirds of the budget that remains on automatic pilot — mandatory spending, that is entitlements and interest on the debt — has been left out, as it has so far by Congress, except for a 2 percent hit to Medicare in the Budget Control Act.
In the ultimate adjustment, mandatory spending must be addressed. In the short term, however, expect only a partial fix to all the issues.
It is also safe to predict that sequester may actually happen for a time, until the pain and the outcry become acute and loud enough to propel the country’s leaders to action. And if sequester actually comes to the Defense Department, the administrative issues of process, flexibility, oversight and risk management will prove to be difficult. No matter which outcome unfolds, the Defense Department is in for major adjustments.
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