August 01, 2011

Pentagon Facing One-Two Budget Punch

The Pentagon budget is about to get whacked.

The debt ceiling deal struck by the nation's top lawmakers includes $350 billion in cuts to the defense budget over the next decade, according to the White House.

And the deal's second round trigger -- a penalty if lawmakers are unable to get their act together -- would slash another $500 billion over 10 years.

Of course, it might not come to that. What is guaranteed is the initial $350 billion in cuts, which experts say the Defense Department can weather.

"The bottom line is these [initial] cuts are not life-altering for the Pentagon," said Gordon Adams, a professor at American University and a former Clinton administration budget official who specialized in defense spending. "They live to fight another day."

Overall defense spending accounts for 20% of the entire federal budget. Last year, the Pentagon spent $530 billion, without even counting war costs.

The $1 million soldier

The cuts in the debt ceiling bill start slowly -- only a few billion dollars in the first two years -- before ramping up toward the end of the decade.

That should give the Pentagon enough flexibility to get spending growth under control without wholesale changes to strategy or major weapons systems acquisitions.

"That's a pretty common method of budgeting," said Travis Sharp, a fellow at the Center for a New American Security. "But it makes the cuts somewhat less real, because they will be subject to revision by future Congresses."

Already, companies that rely on defense spending are feeling the impact. Shares of Northrop Grumman (NOC, Fortune 500), Lockheed Martin (LMT, Fortune 500), Raytheon (RTN, Fortune 500) and General Dynamics (GD, Fortune 500) were all down around 2% on Monday.

But the real pain will hit if Congress can't agree on a second round of budget cuts by the end of December. In that case, the "trigger" will be pulled and defense will get hit with another $500 billion in cuts over 10 years.

"In a scenario where a trigger is activated, you are dealing with cuts far beyond what the Pentagon wanted," Sharp said.

"The Pentagon will have to make major changes in force structure and strategy," Sharp said. "From the Pentagon's perspective, this approach is exactly what they wanted to avoid."

The emphasis on Pentagon spending isn't a real shock. In April, President Obama signaled a desire to cut security spending by $400 billion by 2023, and asked Pentagon officials to study ways to come up with the money.

Already, several credible fiscal plans have called for reducing Pentagon spending by $1 trillion over the next ten years or so. (Read:How Washington screwed up the budget)

Even with cuts of that magnitude, the military would retain its position as the world's best fighting force, with unmatched capabilities on land, at sea and in the air.

But that is of little comfort to defense hawks on Capitol Hill, some of whom have already voiced opposition to the bill.

"If fully implemented, the consequences to our nation's defense infrastructure would be severe," Republican Sen. Lindsey Graham said Monday on Twitter. "And these deep cuts would come at a time when threats to our nation are increasing, not declining."

Even stronger opposition is likely to come from House Armed Services Committee members -- who are some of the most entrenched lawmakers on Capitol Hill.

Still, the initial cuts could have been worse for the Pentagon.

"It's almost a walk in the park," Adams said. "But not quite."