Edging Toward the Fiscal Cliff
|Carlo Muñoz and Jeremy Herb||December 25th 2012|
The clock has all but run out on the defense industry's efforts to stave off billions in looming budget cuts under sequestration. At the Pentagon, administration officials have given Defense Department number crunchers the green light to begin planning for the $500 billion in budget cuts set to go into effect in January. Weeks of intense, last-minute negotiations between Speaker John Boehner (R-Ohio) and President Barack Obama on a potential deal to avoid January’s “fiscal cliff” of looming tax hikes and automatic spending cuts appeared to come to an unceremonious end last Thursday.
While lawmakers and the White House may still craft a bargain by year's end, most in the defense industry are showing pessimism.
"I don’t think anything [will] happen now," the source said about further efforts at a compromise.
The pervasive message of doom and gloom over the fiscal impact of sequestration that came from the U.S defense sector largely fell on deaf ears on Capitol Hill, according to one defense industry source.
Defense company executives expressed frustration at being pushed aside in the deficit talks between President Obama and congressional leaders, where attention has centered on the fate of the Bush-era tax rates that are set to expire in January.
Earlier this month, several top industry chiefs struck a hard line on the GOP's stance against tax increases, in an attempt to steer the debate back to the devastating impact sequestration would have on the Pentagon.
But as congressional Republicans and the White House slugged it out over tax increases and spending cuts, defense issues were largely relegated to the sidelines, despite having over half of the $1.2 trillion in cuts under sequestration over the next decade falling on DOD accounts.
"I think there's a creeping sense of pessimism in the defense sector … I don’t think most people in the industry really understand why their pleas have [been ignored]," top defense analyst Loren Thompson said last Friday.
Despite its best efforts, defense lobbyists could not move sequestration's impact on U.S. national security to the front burner during the fiscal cliff debate in Washington, according to Thompson.
He added that among lawmakers and the White House “there was no great urgency about avoiding cuts to the defense budget," since even when the cuts go into place, the U.S. defense budget will still dwarf those of any near-peer nation across the globe.
But Thompson believes the U.S. defense sector will be able to handle the looming fiscal hit to the Pentagon's bottom line, at least in the near term.
"They don’t want sequestration but they’re capable of dealing with it," Thompson said, adding that after the initial hit in January, defense firms will have more financial leeway in managing the additional rounds of DOD reductions.
That breathing room may provide more time to come up with a mid-term solution to sequestration, according a defense source.
Some in the defense industry remain hopeful a compromise may be found early next year.
There's resignation among defense firms that the fight over sequestration is all but over for this year, but they are “hopeful that we won’t have to live with it all year," a source told The Hill.
"I think people resigned to the fact that this needs to be addressed in January," the source said.
Murmurs of a possible mid-term deal began bubbling up on Sunday, when Sen. Mark Warner (D-Va.) said there is some room for a compromise to be worked out..
Warner, who appeared alongside Sen. Kay Bailey Hutchison (R-Texas) on CNN's “State of the Union,” said that deal would likely fall short of the long-term fix Congress is looking for. But both Senators agreed a mid-term deal may be reached and relieve some of the fiscal pressures stemming from sequestration.
Thompson agrees that a plan like the one described by Warner and Hutchison was doable in the new year, but that grand compromise being sought by lawmakers on both sides of the aisle is still a far way off.
"We may get an ad hoc legislative delay [on] implementation, or we may get increase in debt ceiling," Thompson said. "But nobody’s talking grand compromise anywhere."
Carlo Muñoz and Jeremy Herb write for The Hill, from where this article was adapted.