Bloomberg News

Defense Industry Seeks Relief as Fiscal Cliff Draws Near

December 27, 2012

The defense industry is urging Congress to delay the fight over taxes and focus on avoiding the automatic budget cuts that begin in six days.

The Aerospace Industries Association, which represents more than 300 aerospace and defense companies and their suppliers, said policy makers must find a way to avoid the across-the-board cuts known as sequestration even if they can’t resolve broader conflicts over tax rates and entitlement programs such as Medicare.

“Risking American lives and livelihoods for political leverage is wrong,” said Marion Blakey, the group’s president and chief executive officer, in a statement.

“The victims of this political gamesmanship will be the warfighters who risk their lives to protect our country and the American workers who will start losing their jobs when this game implodes on Jan. 2, 2013,” Blakey said.

While defense companies have lobbied for months against the budget cuts, their effort has been overshadowed by the partisan dispute over extending tax cuts as the deadline for the so- called fiscal cliff begins to approach.

If sequestration takes effect as scheduled, it would require cutting about $55 billion from the Pentagon’s fiscal 2013 budget, Deputy Defense Secretary Ashton Carter has said. That amounts to an across-the-board cut of roughly 9 percent from the department’s $613.9 billion total budget request, which includes war spending.

Defense Cliffhanger

A Gallup poll conducted Dec. 21 and 22 found almost half of Americans -- 48 percent -- say President Barack Obama and Congress are unlikely to avoid the fiscal cliff, a combination of tax increases and spending cuts that would total more than $600 billion in the coming year. That polling result is up from 40 percent who said they felt that way a week earlier.

Obama cut short a Hawaii vacation to fly to Washington and the Senate returns to work today in an effort to find a compromise plan.

“What we’re trying to communicate here is the urgency of the situation,” said Daniel Stohr, the aerospace association’s chief spokesman. “They at least need to address sequestration. That won’t wait. There’s a sense the tax portion of the fiscal cliff negotiations aren’t as urgent because you can fix it retroactively.”

If the budget cuts occur, Stohr said, “Once those jobs are gone, they’re gone permanently.”

‘Apocalyptic Claims’

Still, calls to separate budget cuts from the tax debate “are likely to fall on deaf ears,” said Todd Harrison, a defense analyst at the Center for Strategic and Budgetary Assessments in Washington.

“They have been making downright apocalyptic claims about sequestration for over a year now and it hasn’t stirred Congress to action,” Harrison said by e-mail. “I don’t see why this will be any different.”

When asked if his group’s proposal has won endorsements from any lawmakers, Stohr said, “not as yet,” while noting that Congress has been out of town for the Christmas recess.

As the deadline approaches, those advocating loudest against defense cuts have moderated their rhetoric.

Defense Secretary Leon Panetta, who has warned against a fiscal “doomsday” if sequestration occurs, issued a memo to defense employees last week aimed at calming nerves.

Gradual Impact

“I do not expect our day-to-day operations to change dramatically on or immediately after Jan. 2, 2013, should sequestration occur,” Panetta said in the memo. “This means that we will not be executing any immediate civilian personnel actions, such as furloughs, on that date.”

He also noted that military personnel are already exempt from the cuts.

Robert Stevens, chairman and chief executive officer of Lockheed Martin Corp. (LMT:US), warned in July that his company may have to dismiss about 10,000 employees if sequestration occurs in January. There is now more time before Lockheed would need to resort to such action, Stevens said at a Dec. 14 Bloomberg Government breakfast.

Even if federal budget cuts begin next month, “I don’t envision now in the relatively short term any reduction in force” until the Pentagon specifies changes in contracts, “which may not happen until April or after April,” he said.

While the outcome of the fiscal cliff debate is still anyone’s guess, the industry strategy to separate budget cuts from tax relief “feels unpromising,” said Michael O’Hanlon, a defense analyst at the Brookings Institution in Washington.

“It would essentially undo the entire logic of the fiscal cliff and sequestration -- that different groups have different relative priorities and so no one is going to release his or her ‘hostages’ without other hostages begin released too,” O’Hanlon said by e-mail.

“So I think this idea is not viable,” he said.

To contact the reporter on this story: David Lerman in Washington at dlerman1@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net


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