Five years ago, on the eve of passage of the Budget Control Act, then-Secretary of Defense Leon Panetta wrote a letter to the Senate Armed Services Committee warning of a cataclysmic collapse of defense acquisition if the law went into effect.
Many of the lawmakers who had a hand in creating the law viewed it as so draconian that it would never pass. It did, and immediately clamped a lid on defense spending through fiscal year 2021.
Panetta’s letter enumerated the dire consequences he envisioned of 10 percent, across-the-board budget cuts and began five years of doomsday rhetoric from the military, Congress and the defense industry. In the ensuing five years, almost none of Panetta’s predictions has come true while major defense contractors have watched their stocks soar, according to Todd Harrison, a defense budget guru at the Center for Strategic and International Studies.
At a meeting this week with defense reporters, Harrison listed 11 salient predictions in Panetta’s letter. Only one – that the ground forces would be cut to levels not seen since 1940 – came to pass. The Army and Marine Corps in 1948 had a total 639,000 troops. The services are on track to downsize to 632,000 troops in 2018.
More alarming were Panetta’s predictions for major acquisition programs. He forecast cancellation of the F-35 Joint Strike Fighter, the Littoral Combat Ship (LCS), all ground combat vehicle programs, all Army helicopter programs, the B-21 bomber and elimination of the ground-launch leg of the nuclear triad. Major space initiatives and the Ohio-class replacement program would be delayed, Panetta warned. The Air Force’s fleet of tactical attack aircraft would shrink to the lowest level ever while the Navy would have fewer than 230 ships, Panetta said.
“A lot of the things that were predicted in Panetta’s letter just didn’t come true,” Harrison said. “There are a lot of reasons. Number one: We never actually got cut down to the budget cap level. We’ve had deals.”
The Navy, for instance, had 271 ships in fiscal 2016 and the number is rising. The Air Force this week declared the F-35A combat ready and Northrop Grumman [NOC] took home the B-21 bomber contract earlier this year.
Industry got in on the doomsday rhetoric, threatening mass layoffs and production-line closures. Lockheed Martin [LMT] even suggested publicly that they would issue layoff notices to all of its employees but ultimately backed down.
Harrison said the panic was premature or outright unfounded because of the delay between cutting budget authorities and cutting actual cash outlays. Budget authority is the money Congress has appropriated, but the government has not yet put on contract. It takes time before budget authority becomes outlays, when the government cuts a check to a contractor.
“You only have economic impact when it becomes outlays,” Harrison said. “There is a several-year delay. For procurement spending it can stretch out three, four, five years before budget authority becomes outlays. The same is true with research and development funding.”
“These companies should have known that the impact would be delayed and it would be gradual,” Harrison said. “It would not be sudden. You would not see suddenly a million jobs lost.”
Industry complained to Capitol Hill that it could be forced to impose massive layoffs under BCA spending levels while, on the back end, they embarked on a campaign of consolidation and gradual downsizing. Some also took the opportunity to acquire smaller firms, see: Lockheed Martin and Sikorsky. Lockheed Martin also closed several facilities and pared its workforce systematically, Harrison said.
“As a result, you look at their performance on Wall Street and they are really stars over the past few years,” Harrison said. “These companies are doing really well…The defense industry, I think, eventually did get it and they responded appropriately in how they structured their businesses. DoD is still trying to play catch-up to this, though.”