House Budget Committee Chairman Paul Ryan (R-Wis.) laid down a marker with his proposal to cut the U.S. budget deficit by $4.4 trillion over 10 years. Ryan’s bold plan focuses on curtailing entitlements such as Medicare and Medicaid, while sparing the Pentagon from cuts and the rich from tax hikes.
U.S. President Barack Obama fired back on April 13 with his own plan to reduce government borrowing by $4 trillion over 12 years. But the Democratic leader’s proposal would both raise taxes on the wealthy and cut security spending — to the tune of $400 billion.
If the debate stays within those two goal posts, the outcome should be manageable for defense contractors. Bernstein Research analyst Douglas Harned notes that even if Obama’s $400 billion cut prevails, it would be spread over a dozen years. The result, Harned calculates, is that the baseline defense budget would decline by about 0.5% a year after adjusting for inflation. That’s hardly draconian, and much lower than the deep cuts in military spending seen in the U.K.
The danger, however, is that as lawmakers on Capitol Hill finally get serious about deficit reduction, weapons platforms could be targeted for even deeper cuts. Rep. Barney Frank (D-Mass.) is part of an odd bipartisan cadre of liberal Democrats and fringe Republicans that wants to slash security spending by nearly $1 trillion during the next decade. Not long ago, that idea was greeted with laughter. But Obama’s new proposal has emboldened them. “Six months ago we weren’t even in the ball game,” Frank tells Aviation Week’s Jen DiMascio. “We’re going to keep it up.”
Frank and his allies point to the huge increase in U.S. defense spending during the past decade. There has been a lot of hand-wringing in the U.S. about China’s new military capabilities, although by some estimates the proportional gap between U.S. and Chinese defense spending has actually widened since 2000, as it has with the rest of the world. “Washington is tired of defense,” says Lazard Capital Markets analyst Michael Lewis. “The negative sentiment against defense is the highest I’ve seen on the Hill in 10 years.”
And therein lays the danger. Lewis believes the programs most vulnerable to attack are big-ticket items, including shipbuilding, fighter aircraft such as the, and electronics. “If you see much more of a cutback, it’s going to make it very difficult for defense contractors to generate organic growth,” he says.
But reaching an agreement to bring the deficit under control will require a grand compromise between Republicans and Democrats. A key question is whether Republicans will yield on their opposition to raising taxes. Late last year, they exacerbated the deficit crisis by forcing Obama to agree to extend tax cuts that were set to expire. Now Ryan and his colleagues could be forced to make a choice: protect funding for the military or the wealthy from higher taxes. Stay tuned.