Another $500bn of US defence cuts would be an 'unmitigated disaster'

28 June 2012

by Joel Shenton

Industry is likely to be the first casualty if the US fails to avoid further major defence cuts, as Howard Wheeldon, managing director of policy and public affairs at ADS, tells DefenceManagement.com …

In the United States the relationship between the country's $15.7 trillion national debt and the future of government spending continue to be the subject of furious debate.

In the last few years, America's 'debt ceiling', the maximum amount the US Treasury is permitted to borrow to supplement tax income and run the country, was lower than the amount the country's spending plans demanded. The debt ceiling needed to be raised, and in 2011 the US Congress agreed to do this on the condition it was accompanied by agreements to reduce government spending.

In the first tranche of cuts set out in the agreed solution, 2011's Budget Control Act, some $917bn of government spending over the next ten years was eliminated. But it was just the beginning, and anything up to $1.5 trillion of further cuts are still to be decided by a joint select committee on deficit reduction, the so-called 'supercommittee'.

While the 2011 deadline for the supercommittee's agreement on further cuts has long passed, the requirement to cut back spending has not gone away, and this means the US faces the ticking time bomb – due to go off in January 2013 - of automatic cuts brought about through 'sequestration'.

For the US Department of Defense (DoD), sequestration could see a further $500bn of cuts announced over the next decade. This would be on top of the $487bn of cuts already agreed to over the same time frame. The sequestration cuts could kick in as early as 2013, and under sequester, the $525bn dollars due to be spent on defence would be reduced to $470bn in that year alone. That's a fall roughly the same size as the entire UK defence budget, and it would take effect every year for the next 10. Even the world's biggest defence spender would struggle to absorb that, and it would be likely to have an effect on every aspect of Pentagon spending.

Howard Wheeldon, director of policy and public affairs at British defence industry body ADS, believes that America's importance as a defence customer means sequestration would be an "absolutely unmitigated disaster" for the defence industry worldwide.

"Clearly there is a huge fear, not just within US companies but across the European sector, that sequestration if it occurred could have a very damaging effect," says Wheeldon. "It is also true, of course, to say that fears about the Eurozone have equally damaging fears, but unfortunately with the existing range of defence cuts that we're seeing over here - and that have already occurred in the US - confidence is very, very low."

It's such a difficult thing to imagine that the US House Armed Services Committee has so far not produced plans as to what could be cut. The reaction within industry is also one of disbelief that sequestration would be allowed to happen.

"The general consensus is that they just do not believe that sequestration will actually happen," says Wheeldon. "My own personal view is that I don't think it will happen either. I think we'll get to an election stage – and November is going to be a key month for me rather than January – and whatever is decided in November, if we haven't had any hint of settlement beforehand, that is going to be crucial."

Regardless of what is still to come, the original $487bn of cuts is already having an impact outside the US, Wheeldon says.

"There's already a ripple effect now, we're already seeing the effects of pullbacks in US defence expenditure. The slowing down of the F-35 program obviously has a follow-on effect here due to the components we supply to it. The ending of, or the slowing down of, various other mature programs also. So yes, there is already an impact here and there is bound to be an increased level of impact here.

"The other side of the coin is the inward investment that UK companies in particular, but also some continental European countries, have put into the US. That investment is at risk, and I'm talking about companies like BAE Systems and Rolls-Royce. Rolls-Royce has been there for a very long time. They bought Allison back in 1994, it's been a great investment for them, but they are going to be affected."

The biggest effect of any of the cuts is likely to be jobs. Outside of the tens of thousands of US military job cuts that would almost certainly accompany $500bn of US defence cuts, industry would be forced to make its own reductions.

"Sequestration's potential is far more damaging outside defence, in a combination of all the other departments, than it is specifically in defence because there are outlying jobs all the way across the board," says Wheeldon.

"In defence itself, clearly there would have to be job cuts. I think you would see an immediate pullback in terms of jobs in the range of 10 to 15 per cent. If we got to that stage, companies like Lockheed, Boeing, Northrop, they would be forced to act immediately. The damage to immediate programmes wouldn't happen in 2013 but it would happen in 2014 so they would have to make their plans very, very quickly."

Defence Secretary Leon Panetta's view that sequestration would be disastrous, appears to be universal, but there is still disagreement over how to react, how to fight sequestration and what to do if it eventually takes place.

"It cannot be allowed to happen," says Wheeldon. "Common sense has got to prevail and there must be agreement on this."