Defense Spending No Longer ‘Sacred Cow’ to Republicans Searching for Cuts

As the House Budget Committee worked on a Republican plan to cut more than $6 trillion of government spending over a decade, the panel’s senior Democrat proposed a symbolic amendment saying national security costs should be included in any responsible deficit-reduction effort.

Seventeen of 22 committee Republicans, including Chairman Paul Ryan of Wisconsin, joined all 16 Democrats in an April 6 vote backing Maryland Representative Chris Van Hollen’s measure.

For the party of Ronald Reagan, who made bountiful Pentagon budgets a cornerstone of his “peace through strength” foreign policy, it was a telling vote: As anti-tax, small-government Tea Party sympathizers gain influence, defense is no longer sacrosanct for Republicans.

“Historically, you’ve had a lot of Republicans who have refused even to consider the possibility of cuts in the area of defense,” said first-term Republican Senator Mike Lee of Utah. “I don’t think we have that luxury anymore.”

That makes the Pentagon budget -- more than half of federal discretionary spending -- a target for potential compromise as Congress and the White House seek a package of cuts before voting to raise the government’s $14.3 trillion debt limit. How much is cut hinges on how much freshly elected deficit-busters can win over earlier generations of defense hawks.

“A lot of the new members recognize that if we are going to be serious about deficit reduction, you can’t have any sacred cows and you have to take a hard look at defense,” said Van Hollen, a member of a bipartisan group negotiating a debt- reduction plan with Vice President Joe Biden. “The budget committee vote was a clear indication that there’s a lot of room for discussion.”

Budget Grows

Annual defense spending has grown every year since 1998, rising 155 percent to $690 billion in 2010 from $270 billion. That tops a 147 percent jump in annual Medicare outlays and an 86 percent increase in Social Security payments over the same period, according to data compiled by Bloomberg.

Defense Secretary Robert Gates in January proposed a five- year spending plan with $78 billion of net savings from canceling some programs, reducing troop numbers and cutting overhead. Republicans backed Gates’s goal in a budget plan that passed the House in April.

“We’re not just talking about cutting things that we don’t like, while not cutting things that we like,” said South Carolina Republican Mick Mulvaney, a budget committee member.

‘Aggressive Group’

First-term Republican Representative Joe Walsh of Illinois said he’s among lawmakers pushing Republican leaders to cut even deeper. “There’s a fairly aggressive group of us that wants us to take a close look at defense,” he said.

On April 13, President Barack Obama proposed an additional $400 billion in national security cuts over 12 years. Gates has ordered a Pentagon-wide spending review to identify potential savings.

After dropping on news of Obama’s plan, most defense contractor stocks have recovered ground. The 13-member Standard & Poor’s 500 Aerospace and Defense Index, which fell 1.2 percent in two days after the announcement, has since risen 3.1 percent. Raytheon Co. (RTN) slid 3.8 percent on April 13-14 and has since gained 3.7 percent; Northrop Grumman Corp. (NOC), after a 2.5 percent two-day fall, has rebounded 5.9 percent. Lockheed Martin Corp. (LMT), the biggest defense contractor, fell 3.3 percent over two days and has since gained 0.6 percent.

Investor Confidence

The cost of insuring bonds sold by Raytheon, Northrop Grumman, Lockheed Martin, General Dynamics Corp. (GD) and Boeing Co. (BA) has fallen, a sign of rising investor confidence in their creditworthiness. On average, the annual cost for five-year credit default swaps on those companies fell to 46.88 basis points, or about 47 cents per $100 of debt, on May 27 from 51.23 on April 14, according to CMA, which is owned by CME Group Inc. (CME) and compiles prices quoted by dealers in the privately negotiated market. One basis point is 0.01 percentage point.

Gates has said Boeing’s new Air Force refueling tanker, Lockheed Martin’s F-35 Joint Strike Fighter, plans to build more Navy ships and new ballistic missile submarines are among programs that should be funded.

Unless Congress slashes more deeply than Obama has talked about, weapons makers may not be hurt as much as investors initially feared, said Byron Callan, a defense analyst with Capital Alpha Partners LLC in Washington.

‘More Resilience’

“Those stocks could hold up with a little more resilience than people had expected,” Callan said.

The challenge of trimming weapons programs was illustrated in a 2012 defense authorization bill that the House approved on May 26, with Republicans voting 227-6 in favor. The bill includes $272 million more than the Pentagon requested for the General Dynamics Abrams battle tank and would keep alive -- ignoring Obama’s veto threat -- General Electric Co. (GE) and Rolls- Royce Group Plc’s work on a second engine the military says it doesn’t need for Lockheed’s F-35 fighter.

Republican leaders so far haven’t committed to cutting deeper than Gates’s initial $78 billion recommendation. “I would not be for that,” said Arizona’s Jon Kyl, the second- ranking Senate Republican and a participant in Biden’s negotiations.

That view could cost some Republican lawmakers, said former Republican House Majority Leader Dick Armey, who started the Washington-based group FreedomWorks, which backs Tea Party goals of low taxes and less government.

“If you think you can sit in office and be a zealot on cutting everything except your pet projects, it don’t work that way,” Armey said. “An awful lot of activists in the Tea Party movement are veterans who had hands on experience with wasteful and inefficient spending in the Defense Department.”

‘Light Cut’

Gates’s proposed reduction represents about 2.5 percent of Pentagon spending over five years and is little more than a “light cut,” said Todd Harrison, a defense analyst with the nonpartisan Center for Strategic and Budgetary Assessment research group in Washington.

Michael O’Hanlon, a senior fellow at the Washington-based Brookings Institution, said even national security hawks should be open to considering cuts “because our economic picture is so serious.” he said. Still, he said defense cuts “entail risk” and lawmakers should spread reductions to include entitlement programs such as Medicare.

As leaders from both parties say some areas are off limits in the debt talks, including higher taxes and Social Security changes, defense may emerge as a key to any deal. Lawmakers in the Biden negotiations have so far identified about $200 billion of savings they can agree on, Van Hollen said -- nowhere close to trillions of dollars Republicans say they want in exchange for raising the government debt limit.

Higher Up Tree

“There’s not much low-hanging fruit,” said Robert Bixby, executive director of the Concord Coalition, which advocates deep deficit cutting. “They need to climb higher up the tree.”

Oklahoma Republican Representative Tom Cole, whose district includes the Army’s Fort Sill and Tinker Air Force Base, said savings beyond the Gates plan aren’t popular in his party and, at the least, would require concessions by Democrats on domestic-spending cuts.

“To further reduce defense while you’re spending more in other areas, I think that would certainly be a tough sell to those Republicans who are security hawks, and that’s a big part of the Republican base,” Cole said.

To contact the reporters on this story: Catherine Dodge in Washington at cdodge1@bloomberg.net; Laura Litvan in Washington at llitvan@bloomberg.net

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

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