New Thinking On Sequestration Is Bad News For The Military — And Its Suppliers

This week, veteran aerospace and defense analyst Byron Callan disclosed a change in his thinking about what budget sequestration means for the defense department. To quote his September 19 Capital Alpha Partners note, “Absent a new threat, with a muddling along economy and no movement in D.C. to address core issues regarding the drivers of future deficits, we think deeper cuts than sequester could be more likely for FY15-17.” Andrew Krepinevich, probably the most influential military thinker of his generation, went even farther at the Air Force Association’s annual air and space conference, suggesting that spending caps established by the 2011 Budget Control Act are likely to become a ceiling on military outlays rather than a floor.

If these assessments prove true, then they would signal a major decline in U.S. military capabilities towards the end of the decade. The service chiefs appeared before the House Armed Services Committee this week to describe some of the damage likely to be wrought by a continuation of sequestration, but they haven’t begun to think through what would happen if military budgets ended up even smaller than the sequestration caps allow. The biggest impact would undoubtedly be felt in modernization — the so-called investment accounts — which the administration has already targeted for 16% cuts in 2014 if sequester goes forward, compared with 12% cuts in readiness and no cuts at all in military personnel.

If you know the history of the last big downturn, then none of this should come as a shock. In the ten years after Reagan-era defense spending peaked around 1985, the buying power of the Pentagon budget fell 37%. But that decline was not distributed evenly across all accounts. Readiness accounts fell by a modest 15%, while military personnel fell 25% — less than the 30% decline in active-duty headcount during the same period. In other words, average pay and benefits for warfighters didn’t fall at all, but the number of warfighters did. On the other hand, procurement of weapons fell by a whopping 68% over ten years.

Apparently it’s a lot easier for politicians to cut weapons programs than military pay and benefits (including the healthcare programs embedded in the Operations & Maintenance account). That has big implications for military modernization if Callan and Krepinevich are right about where military spending is headed. The Obama Administration had already booked big savings from killing weapons before the Budget Control Act became law, and it has continued to slash technology outlays at a disproportionate rate. So if defense funding falls even lower than the chiefs fear later in the decade, don’t be surprised to see programs like the Navy’s next-generation ballistic missile sub being delayed. The Chief of Naval Operations indicated at this week’s hearing that the new sub is sacrosanct, but after ten years of planning his service has failed to set forth a credible mechanism for funding it. And now the budget walls are really beginning to close in.