The 'S Word': The Sequestration Fight and the US Defence Budget

Washington, DC is currently consumed - and in some ways paralysed - by the political fight over the budget. Whereas before the manoeuvring by the two parties looked like a well choreographed routine, there are now real questions as to whether the political leaderships have the ability to cut the Gordian Knot, and reach a settlement by the deadline of 1 March. There are accusations from both sides that some politicians are dragging their feet because they secretly want sequestration to occur.[1] In the current political battle civil servants, government departments and defence firms all fear becoming 'collateral damage'.

Shortfalls: Budgetary and Political

In December, when America first faced the threat of sequestration, rather than solving the impasse, politicians - after a gruelling battle - could only agree to postpone the problem until March. But now the deadline is looming and there are few signs that real progress has been made. If the political leaderships do not reach agreement, sequestration - an array of steep cuts across the whole government, valued at almost $1 trillion, automatically come into effect. For the Department of Defense this would mean a 10 per cent cut to nearly all military programmes. Although the military withdrawal from Afghanistan is not expected to be affected by the sequestration cuts (indeed, it helps; the war has been very expensive), the 'pivot' to Asia is likely to be affected as both the Navy and Air Force will have to spread their budgets further. President Obama used the 'bully pulpit' provided by the State of the Union Address to make his case about the budget to the American people.  In the Republican rebuttal to the President's Address, by rising star Senator Marco Rubio, he ended by praying that the two parties 'could come together and solve our problems.'

Both parties obviously understand the stakes, but it is not clear that they will be able to overcome the political gulf between them (and the toxic atmosphere which makes compromise so difficult - even politically dangerous - for the Republicans) to reach an agreement before the end of the month.[2] It is this distance from a solution which is causing so much consternation. 

Sequestration Showdown

The concept of sequestration was introduced during the 2011 fight over raising the debt ceiling; the amount of money that the government could borrow. Congress agreed to the Executive Branch's request to raise the ceiling in return for President Obama signing into law the Budget Control Act, which aimed to instill some fiscal discipline into government spending. The cut would amount to  $917 billion from the federal budget over 10 years.[3] The Act was deliberately designed so that no programmes avoided sequestration, thus concentrating both parties on solving the budget dispute, which revolve around the levels of future government spending and taxation, and the balance between them. A bipartisan 'super committee' was established to devise a deficit reduction plan but by December this had failed to produce a compromise deal.

The shadow of sequestration has paralysed much of the federal government and has had a tangible effect on the running of the US military. The Pentagon currently has a freeze on hiring and has cut back on maintenance at military bases and facilities.  Executive education is also on hold; even when it is a pre-requisite for promotion.

Some government agencies are now planning on the basis of at least a short period of sequestration happening before politicians reach a budget deal.  The Department of Defense is preparing to implement sequestration, even while warning that it would leave the US military a 'hollow force' at a time of great challenge. In the most serious move to date, outgoing Defense Secretary Leon Panetta recently announced that the US Navy could no longer afford to have two aircraft carriers patrolling in the Persian Gulf. This can be seen as an attempt to cajole Republican hawks with concerns about Iran to support a budget settlement. 

The Air Force's currently planning is that if sequestration occurs it must cut some of its pilot training programmes, a significant decision  considering the primacy of this work to the Air Force. The Office of the Secretary of Defense has plans to furlough all its 700,000 civilian employees one day a week for the twenty-two weeks after 1 March. The Air Force also has plans to furlough staff.  Little wonder that Virginia and Maryland, states with a lot of federal government employees, are worried. The knock-on effects to these local economies would be serious. Interestingly, Senator Mark Warner of Virginia has criticised US defence firms for not speaking out about the dangers of sequestration.

Why Have Defence Firms not Been Speaking Out More? 

The main defence industry lobbies, including the Aerospace Industries Association, have campaigned against sequestration. However, beyond that there is no unified approach and individual defence firms have reacted in different ways to the sequestration threat.  First, there is one outlier, Honeywell, which has accepted the necessity of defence cuts (though not sequestration) and is supportive of fiscal reform.[4] Second, those defence firms that focus on providing services to the government - and are therefore in the immediate firing line of cuts - are concerned and preparing for lean times. Third are a range of firms who have neither changed their business model nor campaigned, based on the expectation that sequestration will not occur; a bet that looks increasingly risky. Finally, there are a number of major firms that have contracts to provide major defence systems to the Pentagon in the future.  These contracts would not be significantly affected for three to five years, and even then the budget cuts would be spread over time. These firms, such as Lockheed Martin, are relatively sanguine about sequestration.

The variety of approaches taken by defence firms, reflecting their different strategic positions, accounts for the industry's overall restraint in discussing sequestration.  However, as the deadline draws near and no settlement is in sight defence firms may want to unite and speak louder against sequestration - or join Senator Rubio in prayer. 

Notes

 

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[1] See for example, John Keller, 'Strike-one for the Defense Industry', The Aerospace & Defense Blog, Military and Aerospace Electronics, November 7, 2012.

[2] In a sign of their continued influence, the Tea Party gave their own rebuttal to the State of the Union Address, which was delivered by Senator Rand Paul.

[3] The Budget Control Act of 2011, Public Law 112-25, 112^th Congress of the United States of America. August 2011. U.S. Government Printing Office.

[4] Honeywell's chief executive, Dave Cote, is prominent in the 'Fix the Debt' campaign. Robert Wright, 'Honeywell Defence Chief Backs Sector Cuts', Financial Times, November 20, 2012.