Pentagon Budget Cuts Coming in 2012

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Pentagon Grocery Stores, Troops May Lose in $825 Billion Cuts

The Pentagon’s chain of subsidized grocery stores to major weapons systems and troop strength may be on the chopping block to pay for as much as $825 billion in budget reductions that Defense Secretary Leon Panetta said would inflict “real damage” on the U.S. military. The Defense Department is facing the largest reduction in spending since the end of the Cold War, when military budgets declined by about 35 percent in constant dollar terms between 1985 and 1998, according to Pentagon data. To meet its targets, the Pentagon may have to consider cuts in a range of programs, from the number of F-35 fighter jets to the $9 billion in subsidies for the Defense Commissary Agency, which operates 252 grocery stores around the world. Reducing the size of the 1.43 million active duty forces may yield the most savings. President Barack Obama signed a measure Aug. 2 raising the $14.3 trillion U.S. debt ceiling until 2013 and reducing $2.4 trillion in spending over the next decade. The deal requires $325 billion reduction in the defense budget in the first phase over 10 years. Officials would begin by eliminating $28 billion from the 2012 budget request. Another $500 billion in military spending may be cut over the next decade, for a total of $825 billion, if a special committee of lawmakers can’t agree by November on $1.2 trillion in deficit savings. That spending reduction would “trigger a round of dangerous across-the-board defense cuts” that may do “real damage” to the U.S. military, Panetta said, calling it a “doomsday mechanism.” Menu of Options The Pentagon already is conducting a review to identify programs that will meet the $325 billion goal, he said. Cutting another half a trillion dollars would produce an outcome that “would be completely unacceptable” and no contingency plans to do so are under consideration, Panetta said yesterday at a news conference. Still, as the Defense Department is forced to excise programs, it has a menu of options that several studies have identified over the years, said Gordon Adams, a professor at the American University in Washington. The choices range from about $31.2 billion in weapons cuts identified in November by former Senator Alan Simpson and former White House Official Erskine Bowles, co-chairs of the National Commission on Fiscal Responsibility and Reform, to $1 trillion in reductions that Senator Tom Coburn, an Oklahoma Republican, laid out in his July report “Back in Black.” ‘Done this before’ Defense spending typically declines when wars end, Adams said. In constant dollars, the Pentagon’s budget declined 40 percent between 1952 and 1958 after the Korean War buildup, according to Defense Department data. “We have done this before,” said Adams, a former official in the White House Office of Management and Budget during the Clinton administration. “Even at $800 billion below what is currently forecast for defense, the sky does not fall and the U.S. military will survive.” Defense spending, including war costs, rose to $717 billion in fiscal year 2010, or a 92 percent increase from 1998. From that peak, an $825 billion reduction in projected spending over the next 10 years would approximately amount to an 18 percent decline in nominal terms or 34 percent in constant dollars, according to a Bloomberg Government analysis. The projections don’t include future war-related spending while the White House estimates include $50 billion annually for conflicts through to 2021. The cuts may mean the Pentagon has to scale back its strategy for fighting two conventional wars as well as worldwide counterinsurgency missions, Adams said. Troop Strength The U.S. has about 1.43 million active duty military personnel, including 570,719 in the Army, 335,038 in the Air Force, 328,227 in the Navy and 201,466 in the Marine Corps, according to the Pentagon. For every reduction of 10,000 military personnel the U.S. saves about $1 billion annually, said Adams. Former Defense Secretary Robert Gates in January said the Army strength will be reduced by 27,000 starting in 2015 and the Marines’ head count will decline by about 20,000. Both services may have to cut more, Adams said. Reforming the Pentagon’s health care and military compensation system may yield additional savings, Adams said. Still, lawmakers shy away from the measure because it reduces benefits, Adams said. “That’s the third rail.” The Congressional Budget Office in a June 2009 report said reforming the military’s Tri-Care health-care system could save as much as $60 billion by 2020. F-35 Jets Reducing the military’s strength may allow the Pentagon to avoid buying new weapons and equipment needed for a larger force. Lockheed Martin Corp. (LMT)’s F-35 Joint Strike Fighter, the Pentagon’s largest program at $382 billion, is in the crosshairs of several deficit-reduction studies. None of them have been endorsed by the Pentagon. Canceling or delaying the U.S. Air Force version of the F- 35 jet and replacing it with a more modern version of the F-16 plane, also made by Lockheed, would save about $47.9 billion, according to “Debt, Deficits, & Defense,” published in June 2010. The report was prepared by the Sustainable Defense Task Force, whose members were drawn from 14 think tanks including the Cato Institute, the New America Foundation and Taxpayers for Common Sense. The Pentagon plans to buy 2,443 F-35 planes whose development has been delayed and costs have grown. V-22 Osprey The Task Force and the Bowles-Simpson proposals also recommended eliminating the Expeditionary Fighting Vehicle developed by General Dynamics Corp. (GD) for the Marine Corps. Gates agreed, cutting it out of the Pentagon’s 2012 budget proposal that is awaiting congressional approval. Both panels proposed capping production of the V-22 Osprey, a Marine Corps tilt-rotor aircraft made by Boeing and Textron Inc. (TXT), at 288 planes. Sikorsky Aircraft Corp.’s MH-60 Black Hawks could be substituted, they said. Halting V-22 production would save as much as $12 billion, the Debt, Deficits & Defense study said. The Pentagon intends to buy another 122 V-22s valued at about $8 billion in addition to the 174 already on contract, Sean Stackley, the Navy’s top weapons buyer said. The number of Navy aircraft carriers may also decline from the current 11. Spending cuts may extend beyond people and weapons to other expenditures not directly tied to military operations. Grocery Stores If the Defense Commissary Agency were a private corporation, it would be one of the largest grocery-store chains with about $6 billion in annual sales, Coburn said in his report. Previous administrations have attempted to eliminate the subsidy and failed because retirees including military chiefs of staff are loath to give up that benefit, Adams said. Reducing overhead costs alone may contribute as much as $120 billion of defense spending, Gates said on his last day in office. Such costs were $212 billion in the 2010 fiscal year, larger than the gross domestic product of Israel, a July 2010 report prepared by the Defense Business Board said. Its members include management consultants, former executives of defense contractors and retired defense officials. The group, whose annual operating cost is about $750,000, advises the defense secretary about “best business practices,” according to its website. If the overhead cost was a “separate country, it would rank 49th in GDP” among the world’s nations, the advisory board said. To contact the reporter on this story: Gopal Ratnam in Washington at gratnam1@bloomberg.net. Read more at www.bloomberg.com

 

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