December 04, 2012
In reiterating their call to White House and congressional leaders to prevent steep budget cuts from taking place in January, defense executives are now publicly acknowledging that additional defense spending reductions and tax increases will have to be part of the solution.
Cuts to defense spending are wrapped up in the nation’s larger economic problems. Unless Congress acts to change current law, the federal discretionary budget will be slashed by nearly $1 trillion. And Congress is also facing an end-of-the-year expiration of tax cuts and the continued weight of trillions in national debt. Washingtonians refer to the looming collision of economic issues as the fiscal cliff. And although President Barack Obama and congressional leaders have discussed a framework for solving the problems, they remain publicly divided on the issues.
For the last year, the defense industry has aggressively sought to avoid the budget cuts known as sequestration, $500 billion of which are targeted at the Pentagon. That is still the case, but the message articulated by defense executives Dec. 3 at the National Press Club included a broader appeal for leaders to rise above parochial interests and get a deal on the deficit, or at least a concrete framework for achieving one. David Langstaff, president and CEO of TASC, leaned farthest forward in that direction, saying the Pentagon could withstand up to $150 billion in additional reductions.
“Those of us who stand for national security should be the first to step up and be willing to sacrifice something. By doing so, we can ensure responsible cuts, not haphazard or assigned without judgment, priority or mission-essential capabilities in mind,” Langstaff said. “National security needs to be holistic, long-term and sustainable. The responsible action for all of us — in industry and in government — is to face the need for reductions and to get on with it in a manner that protects national security.”
Even the CEOs of larger companies said the White House and Congress should consider all options to get a deal that can help spare the Pentagon the current “meat ax” approach to reductions. “From UTC’s perspective we’ve been very clear that we think there ought to be comp tax reform,” said David Hess, president of Pratt & Whitney. “Certainly part of the solution here may involve personal tax rates, but I think there’s corporate tax rates that need to be considered.”
The alternative is sequestration, which despite reports of a delayed impact, is already having an effect on an industry that is now absorbing a reduction of $487 billion to its anticipated spending over 10 years.
Companies are reluctant to hire new workers, are curbing new investments and hoarding their capital, said Wes Bush, chairman of Northrop Grumman. “These are things that have been happening … and continue to happen.”
It is not just the mechanical application of budget cuts scheduled to begin on Jan. 2, but the climate of uncertainty that has caused companies to rethink their plans in ways that are already impacting the Pentagon’s massive supply chain.