An 11th-hour deal was reached, and a government shutdown was averted last week. This should finally put to bed the debate about the 2011 federal budget — which has $78 billion less than the president’s original 2011 submission.
But it is just the beginning. Now the debate shifts to the 2012 budget. Many of the “compromise” areas and social issues of the 2011 budget standoff will resurface. But the next round will cast a broader net.
If there is a lesson for the White House and Congress from the recent crisis is that even the threat of a government shutdown has lasting consequences, many of which are detrimental to the nation’s economy. For government employees and contractors dependent on the government, the ramifications were all over the map, depending on whether some employees were “essential”, and what contracts were in place.
Some functions that are deemed vital would continue in a shutdown, such as security and fighting the nation’s wars. But, ironically, the government workers that would have to perform those functions wouldn’t be paid during a shutdown, even though they were required to come to work. This is a disturbing outcome, especially so for deployed military troops with families at home trying to make mortgage and rent payments, plus putting food on the table. And even though the shutdown didn’t occur, the worry and stress were considerable, and one would guess have not dissipated.
The uncertainty that comes with the threat of a shutdown also is debilitating for government workers and contractors, as some parts of the federal government actually canceled important activities that involved thousands of participants who had already made travel and hotel arrangements. Even without a shutdown, the effect was the same for these previously scheduled and important events. The inefficiency of all this will add considerable cost to downstream tasks and programs.
As to what this means for defense spending, there are a number of concerns.
The president’s 2012 budget marks a high point for defense and the beginning of a downturn. Defense received $692 billion in 2010 (base and war budgets) and budgeted $708 billion for 2011, which is likely to be slightly less based on the latest agreement. The proposed budget is $675 billion for 2012. The baseline increases from $530 billion in 2010 to $553 billion in 2012. Overseas contingency operations funds drop to $117 billion in 2012, which explains part of the decline in overall funding in that year. The other part of the downturn in 2012 was driven by efficiency savings of $178 billion over five years. Defense Secretary Robert Gates directed $100 billion in efficiencies from the services, and $78 billion was mandated by the Office of Management and Budget.
This downward trend is likely to be accelerated by deficit considerations and the debate over raising the debt limit. Democrats and, increasingly, Republicans are demanding more from defense as they seek to reduce the deficits going forward.
The federal budget situation, to be sure, is dire, and will shape the future of defense. Douglas Elmendorf, director of the Congressional Budget Office briefed the Senate Budget Committee in January on the budget and economic outlook for the coming decade. In February, he gave the same presentation to the House Budget Committee. He projected the 2011 budget deficit to be $1.48 trillion, and said, “The recovery now under way might be expected to lessen the budget imbalance in 2011 by increasing tax revenues and decreasing spending for certain income support programs, such as unemployment compensation.”
But, incredibly, only four days after his presentation to the House, the president submitted his 2012 budget, which projected a deficit in 2011 of $1.65 trillion. That was a jump of $200 billion in just four days. Out-year deficit projections were unchanged, but the average annual deficits going forward are almost certain to reach or exceed $1 trillion. Given our inability to keep track of the numbers, over even short periods, one must wonder if the projected deficit for 2012 of $1.1 trillion will actually be that low. Most likely, it will not. And the out-year deficit projections are even more suspect.
The real concern is the interest on the debt. The “Green Book” for 2012 shows that interest due will be $434 billion in 2013 and climb to $687 billion by 2016. Now that the deficit projections have increased, interest payments will go up. The important thing to note is that debt payments have the highest priority, and, if push comes to shove, will crowd out other portions of the budget, including defense.
As an aside, no one believes that budget projections are sustainable. The question then is, when will budget adjustments actually be made and how and when will defense be affected. Some answers may come during the debate to raise the U.S. debt limit, which today is upwards of $14 trillion. The other part will be informed in the negotiations on Capitol Hill over the 2012 budget.
Defense industry analyst Pierre Chao has estimated that when net interest on the federal debt exceeds 3 percent of Gross Domestic Product, it usually represents a tipping point for strong decreases in defense spending. The numbers for 2013 show interest at 2.6 percent of GDP, 3.08 percent in 2014 and 3.38 percent in 2015, remaining well over 3 percent through 2016. These calculations were done without factoring in the increased deficit in 2011, and the probability of higher deficits in 2012 and beyond.
Conclusion: Even if defense survives significant 2012 budget cuts, the probability is that 2013 or 2014 will be very tough years for military budgets.
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