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U.S. Republican Budget Sets Likely Ceiling for Defense Spending

The U.S. House Republican 2012 budget proposal represents the ceiling for talks on national security spending next year even as it leaves the Obama administration’s original $671 billion request intact, analysts and lawmakers said.

The proposal, unveiled by Budget Committee Chairman Paul Ryan of Wisconsin yesterday, provides $553.1 billion for regular Defense Department operations and $117.8 billion for military operations in Afghanistan and Iraq for fiscal year 2012, which begins Oct. 1.

“That is about the most defense is going to get,” said Todd Harrison, an analyst with the non-partisan Center for Strategic and Budgetary Assessments in Washington.

Harrison said that Ryan’s budget blueprint and the Pentagon’s request for 2012 will be the “high water mark” in the debate over government spending and reducing the deficit.

The proposal likely will represent the marker from which House Democrats, along with Tea Party Republicans who won the November election on a platform to cut government spending, will try to reduce the defense budget.

Any House proposal would have to be approved in the Senate, which is led by Democrats. Senator Ben Nelson, Democrat of Nebraska who leads the Senate Armed Services panel on strategic forces, said that his committee is in the process of having hearings to “determine what the level of the budget would be for this next year.”

“I have got to believe that it would be lower than the topline,” Nelson said in a Capitol Hill interview yesterday.

Ryan’s Plan

The Republicans’ first comprehensive budget plan since the November elections would cut the deficit next year to $995 billion from about $1.4 trillion now. It wouldn’t balance the government’s books until 2040.

Ryan’s plan would slice more than $6 trillion over the next decade out of programs including Medicare, Medicaid, and food stamps while calling for cutting taxes, with the top corporate and individual tax rates set at 25 percent.

As part of his 2012 blueprint, Ryan accepted Defense Secretary Robert Gates’s proposal to yield $178 billion in savings over the next five years. Out of that amount, $100 billion would be spent elsewhere in the military and $78 billion would be applied to deficit reduction.

“To a certain extent, Secretary Gates has enabled us at least temporarily to take defense off the table because he has initiated his own round of defense cuts,” said Senator Joe Lieberman, a Connecticut independent, who leads the Senate Armed Services Committee Airland Subcommittee.

‘Cut Defense Last’

Lieberman said he would “cut defense last” as part of efforts to reduce the deficit. “Ultimately, everything has to be on the table,” he told reporters in Washington yesterday. Lieberman said that Ryan’s plan is “a genuine response to the problem of debt.”

“He’s had the guts to start a genuine debate,” Lieberman said.

Ryan’s proposal “supports our thesis that defense budgets are not about to face dramatic declines given what appears to be bipartisan support” for Gates’s plans, Jason Gursky, New York- based analyst at Citigroup Inc. (C) wrote in a note today to clients.

Gursky recommends buying the top U.S. defense contractors including Northrop Grumman Corp. (NOC), Lockheed Martin Corp. (LMT), Raytheon Co. (RTN), Boeing Co. (BA), and General Dynamics Corp. (GD)

Appetite for Cuts

Representative Robert Andrews, Democrat of New Jersey, predicted Democrats will partner with some Republicans to find more cuts in defense.

“There is appetite in both parties to make responsible reductions in defense spending,” Andrews said yesterday in an interview. Starting with Gates’ efficiency proposals does not mean “we are going to finish with it,” Andrews said.

Representative Todd Akin, a Missouri Republican who leads the House Armed Services Seapower and Projection Forces Subcommittee, said that many Tea Party Republicans came to Washington to “cut everything.”

“A lot of the Republicans that are here are fiscal hawks but not necessarily defense hawks,” Akin said.

Akin said that he disagrees with “the premise” that “everything is on the table” and “everything the federal government spends money on is of equal value.”

Providing for the national defense is a priority spelled out in the U.S. constitution, Akin said.

Budget Fix

“All parts of the budget, including defense and revenues, will have to be part of a budget deal,” said Maya MacGuineas, the president of the Committee for a Responsible Budget, a bipartisan, non-profit organization in Washington focused on fiscal policy. “Given the need to put a budget fix in place as quickly as possible, we need to turn our attention to developing a comprehensive plan that can garner broad-based support. Time is not on our side here.”

CSBA’s Harrison said he does not see any “substantial” cuts to defense in 2012. Defense is more likely to be on the “chopping block” later in the decade, starting with the 2014 budget, the first budget to be proposed after next year’s presidential election, Harrison said. “Later in the decade the situation could be substantially different,” he said.

The Standard and Poor’s 500 Aerospace & Defense index fell less than 1 percent to 408.76 yesterday. The capitalization- weighted index that includes top defense contractors including Lockheed Martin, Boeing, Northrop Grumman, and General Dynamics has gained 9.7 percent this year compared with a 5.4 percent gain for the broader Standard & Poor’s 500 index.

To contact the reporter on this story: Roxana Tiron in Washington at rtiron@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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