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Pentagon to Keep 2006 Spending Power With Cuts, CBO Says

The Pentagon’s basic budget for next year will be larger than in 2006 when adjusted for inflation even if automatic budget cuts take effect, according to the Congressional Budget Office.

The Department of Defense’s $526 billion request for fiscal 2013, not including war spending, reflects a reduction of $45 billion from previous plans. If automatic cuts known as sequestration take effect in January, the funding would be further reduced to $469 billion, the nonpartisan CBO said in a report released yesterday.

“Accommodating those automatic reductions could be difficult for the department to manage because it would need to be achieved in only nine months -- between the cuts taking effect and the end of the fiscal year,” the congressional budget analysts wrote. “Even with that cut, however, DoD’s base budget in 2013 would still be larger than it was in 2006,” when calculated in 2013 dollars.

The CBO report buttresses the view of some independent budget analysts, such as Gordon Adams of the Stimson Center in Washington and Todd Harrison of the Center for Strategic and Budgetary Assessments, that sequestration wouldn’t be the short- term budget disaster described by Pentagon and defense industry officials.

U.S. Marines from Kilo Company of the 3rd Battalion 8th Marines Regiment patrol in Garmser, Helmand Province in Afghanistan. Photo: Adek Berry/AFP via GettyImages Close

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U.S. Marines from Kilo Company of the 3rd Battalion 8th Marines Regiment patrol in Garmser, Helmand Province in Afghanistan. Photo: Adek Berry/AFP via GettyImages

The independent analysts said the automatic cuts would essentially reverse the buildup after the terrorist attacks of Sept. 11, 2001, and the wars that followed in Iraq and Afghanistan.

‘Very Ugly’

“Even with the sequester, we will be going back to roughly 2007 levels of spending in defense dollars,” Adams said last month at a defense conference sponsored by Bloomberg Government. “And while it’s a very ugly way to get to that level, it is not the end of the world.”

The Congressional Budget Office’s calculation shows “the comments from many -- but not all-- Republicans, most defense manufacturers and the secretary of defense that they regard a budget well above Cold War averages to be a catastrophe is consciously constructed, misinforming hysteria,” Winslow Wheeler, director of the Straus Military Reform Project, which says it advocates a 21st-century military strategy, said in an e-mail.

The report isn’t good news for investors, according to Byron Callan, a defense analyst with Capital Alpha Partners in Washington. “Winding the budget clock back to 2006 or 2007 means even less for industry because of increased pay and benefits” since then, Callan said today in an e-mail. Defense company shares also sell for much more than they did in that era, he said.

Northrop Grumman

The uncertain prospect of automatic budget cuts “has negatively impacted our current hiring and our investment approach,” Wes Bush, chairman and chief executive officer of Northrop Grumman Corp. (NOC), said in a letter to senators the company disclosed today in a filing with the Securities and Exchange Commission. Republican members of the Senate Armed Services Committee asked defense contractors to comment on the budget cuts.

Northrop Grumman, based in Falls Church, Virginia, fell 1.3 percent to $62.02 in New York trading at 10:31 a.m. after declining 6.7 percent in the past year.

Reagan-Era Buildup

The Congressional Budget Office said defense spending in fiscal 2013 also would remain “larger than the average base budget during the 1980s” in the Reagan-era defense buildup if the automatic cuts take effect.

The defense cuts are part of $1.2 trillion in automatic, across-the-board reductions to domestic and national-security programs that will start in January if Congress and President Barack Obama don’t act to avert them. The cuts were imposed after talks failed last year on a bipartisan plan to curb the nation’s soaring debt.

Even without sequestration, the Pentagon faces a shortfall in delivering on its announced plans, the CBO said. It estimated the Pentagon’s program for fiscal 2013 to 2017 will cost $123 billion, or 5 percent more than planned, to execute.

The costs of replacing and modernizing weapons systems “would grow sharply during the next several years, from $168 billion in 2013 to $212 billion in 2018” in inflation-adjusted terms, a 26 percent increase, the CBO found.

Pentagon Response

Defense Department spokesman George Little said the CBO’s reports were based on several assumptions contrary to the Pentagon’s calculations.

“In their analysis, CBO took the department’s long-term budget plans and assumed that Congress would reject some or most important cost-savings proposals,” Little, who didn’t discuss the comparison with 2006 spending, said today at a Pentagon news conference.

The budget office assumed that Congress won’t let the Pentagon raise health-insurance fees paid by retirees “by modest amounts,” which the Pentagon expects would save $13 billion over the next five years, Little said.

The CBO also assumed the Defense Department won’t be able to meet “aggressive targets” for controlling the growth in costs of weapons systems, Little said. The Pentagon is focused on cutting costs because “if you can’t control costs, then it’s hard to live with tough budget caps,” he said.

Little once again said the Pentagon wasn’t planning to prepare for sequestration, which he described in a July 10 briefing as “an absurdity.”

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

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

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