manufacturing

Deficit panel leaders reject Gates on shielding defense budget

BLOOMBERG NEWS FILE PHOTO / JOSHUA ROBERTS
A PROPOSAL by leaders of a federal deficit-reduction panel, suggesting as much as $100 billion in defense cuts in 2015, contradicts the goals of Defense Secretary Robert Gates (photo) and faces a fight in Congress.
Posted 11/12/10

WASHINGTON - A proposal by leaders of a federal deficit-reduction panel, suggesting as much as $100 billion in defense cuts in 2015, contradicts the goals of Defense Secretary Robert Gates and faces a fight in Congress.

The plan, offered Nov. 10 by deficit panel co-chairmen Erskine Bowles and Alan Simpson, calls for canceling a version of Lockheed Martin Corp.’s F-35 jet and ending production of the Textron Inc.-Boeing Co. tilt-rotor V-22 Osprey and a General Dynamics Corp. Marine Corps combat vehicle. It also would terminate a new Army ground combat vehicle that Boeing, BAE Systems Plc and General Dynamics will bid on.

The proposed defense cuts reflect lawmakers’ need to rein in defense spending as part of restoring fiscal balance and may provide political cover for Republicans, such as commission member Senator Tom Coburn of Oklahoma, who say military spending shouldn’t be exempt in the national debate, analysts said.

“Republicans are facing the difficult question whether, if we’re serious about cutting the debt, defense spending can be exempted permanently from consideration when it represents the biggest part of the discretionary budget,” said Republican strategist John Ullyot.

“The recommendations have put that debate squarely on the table, and have given fiscal hawks much more ammunition than ever on including defense programs as part of the overall budget examination,” Ullyot said.

Wartime Cuts Opposed

Representative Howard McKeon, a California Republican who is likely the next chairman of the House Armed Services Committee, said he opposes “cutting defense in the midst of two wars.”

“The commission mistakenly assumes that years of war funding have put the Department of Defense in a position to absorb cuts; this is simply not the case,” he said. “The department faces a train wreck in procurement and maintenance accounts.”

The defense cuts were part of a $3.8 trillion deficit- cutting plan to trim Social Security and Medicare, reduce income-tax rates and eliminate tax breaks including the mortgage-interest deduction.

The plan would reduce the annual deficit from $1.3 trillion this year to about $400 billion by 2015 and start reducing the $13.7 trillion national debt. Defense accounted for at least 55 percent of overall discretionary federal spending this year, according to the Office of Management and Budget.

‘Opening Salvo’

“This is the opening salvo of a long campaign,” said Robert Stallard, a defense stocks analyst at RBC Capital Markets in New York. “The recommendations will reinforce investors’ concerns that the defense industry faces both revenue and profit-margin pressures for the foreseeable future.”

The proposals would be a “tough” sell in Congress, Senate Budget Committee Chairman Kent Conrad said in an interview on Bloomberg Television yesterday.

While Gates has proposed $100 billion of cuts in administrative expenses, “he then transfers the reduction to other parts of the defense budget,” said Conrad, a North Dakota Democrat who sits on the deficit panel.

“What this proposal says is, ‘no, we can’t afford to make that transfer,’” Conrad said. “This report says, ‘yes, you are right, Mr. Secretary, but we have to bring those savings to the bottom line.’”

Gates has pushed for no reduction to the 1 percent annual real growth envisioned through 2015, allowing the military services to keep all of a separate, planned $100 billion in efficiency savings and stable funding for the $382 billion F-35 program.

Tough Economic Times

“My greatest fear is that in economic tough times people will see the defense budget as the place to solve the nation’s deficit problems, to find money for other parts of the government,” Gates told reporters Aug. 9.

The Pentagon needs to make “a compelling argument for sustaining” the overall defense budget amount, he said.

It would be “disastrous” to “slash it in an effort to find some kind of dividend to put the money someplace else,” he said.

The National Commission on Fiscal Responsibility and Reform needs agreement from 14 of its 18 members before a plan can be sent for an up-or-down vote in Congress.

Gates’s view that defense can be held steady while entitlement programs such as Social Security and Medicare contribute most savings “is arithmetically and politically untenable,” said Loren Thompson, defense analyst with the Arlington, Virginia-based Lexington Institute.

‘A Fierce Debate’

Mackenzie Eaglen of the Washington-based Heritage Foundation, which favors increased defense spending, said the recommendations are “certain to generate a fierce debate about how America can begin to restore fiscal responsibility.”

“While debate is healthy, it should be a fair fight,” she said. “This report is not spreading the pain equally, given that it proposes to cut defense to the bone during a time of war no less.”

The deficit panel’s $100 billion in defense cuts refers to budget “authority to spend” and translates into deficit savings in 2015 closer to $90 billion in actual money spent in the fiscal year, said commission spokesman Frederick Baldassaro. The 2015 defense budget is now projected to be about $666 billion.

Potential cuts include freezing noncombat pay at this year’s level for three years, trimming $20 billion of $137 billion in 2015 planned spending on weapons. That includes ending production of Lockheed’s Marine Corps F-35 version for a savings of $3.9 billion in 2015.

The proposal also includes substituting cheaper Lockheed Martin F-16s and Boeing F-18s for 680 Air Force and Navy F-35s models, saving an estimated $2.3 billion in 2015.

Ending the V-22 program at 228 aircraft could save $1.1 billion, while canceling the Marine Corps Expeditionary Fighting Vehicle would save $650 million in 2015.

Another $28 billion in proposed 2015 defense efficiencies would be shifted to the general Treasury instead of into military equipment accounts, a step Gates opposes.

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