Spending Cuts Loom, But No Sense Of Crisis Rocks Congress

House Budget Committee Chairman Rep. Paul Ryan, R-Wis. arrives on the West Front of the Capitol in Washington, Monday, Jan. 2
House Budget Committee Chairman Rep. Paul Ryan, R-Wis. arrives on the West Front of the Capitol in Washington, Monday, Jan. 21, 2013, for the Presidential Barack Obama's ceremonial swearing-in ceremony during the 57th Presidential Inauguration. (AP Photo/Win McNamee, Pool)

By David Lawder

WASHINGTON, Jan 31 (Reuters) - Big automatic cuts in federal spending are fast approaching again, alarming the defense sector but generating little activity in Congress to avoid them.

The cuts, known as a "sequestration," were postponed for two months as part of the legislation that ended the standoff over the "fiscal cliff" on Jan. 1.

But the sense of crisis that accompanied the thought of across-the-board reductions then has all but vanished, replaced by a widespread sense of inevitability.

"I think we're going to have" the cuts "for some period of time, and I think the squeals from constituents will compel some compromise that will emerge in the second half of March," said Steve Bell, economic policy director at the Bipartisan Policy Center and a former Republican House Budget Committee staff director.

The defense industry's concern stems from the fact that half of the $85 billion in spending reductions will come from the budget of the Department of Defense, with the other half hitting a wide array of other government programs.

Outgoing Defense Secretary Leon Panetta as well as his designated successor, Chuck Hagel, have warned that the cuts will impair military readiness.

Congress' lack of urgency as it hurtles toward the launch of spending reductions on March 1 may be affected by Wednesday's news that the U.S. economy contracted in the fourth quarter.

The GDP report showed government spending tumbled at a 6.6 percent rate, with defense outlays plunging at a 22.2 percent pace, the largest drop since the third quarter of 1972.

But failure to find replacement savings by the March 1 deadline is not expected to spark a financial crisis because the cuts, split evenly between military and domestic programs, would start to bite gradually.

Unlike the "fiscal cliff" cuts, these are not accompanied by the threat of massive tax hikes, ultimately imposed only on the wealthiest taxpayers as a result of the legislation that ended the fiscal cliff standoff.


Worry runs deep through the defense sector, from weapons maker Northrop Grumman Corp to President Barack Obama's nominee for defense secretary, Hagel. They are calling on lawmakers to find a solution.

Hagel said the cuts would be "devastating" to the Pentagon.

"It would harm military readiness and disrupt each and every investment program," he said in written answers to senators' questions before a confirmation hearing on Thursday. "I urge Congress to eliminate the sequester threat permanently and pass a balanced deficit reduction plan."

While there are no public signs of negotiations between Republicans and Democrats to avert the cuts, the blame game is well under way.

Republican House of Representatives Budget Committee Chairman Paul Ryan said earlier this week he believed the automatic cuts "will probably happen" because Democrats were not willing to accept further cuts to domestic programs to shield military spending.

Top Senate Democrats have put the onus on House Republicans, saying they are unwilling to accept higher tax revenues as part of a balanced approach to replacing the cuts.

Another factor is at work in the House - the increasing influence of deficit hawks who believe the military should shoulder more of the deficit reduction burden. Traditionally, Republicans, including Ryan, last year's Republican vice presidential nominee, have tried to protect military programs.

"The momentum has shifted to those in the caucus who believe that the only savings we're ever going to get are going to be the sequester savings," said Bell.

Those fiscal conservatives believe Obama will not negotiate with them or agree to any significant cuts in social programs.

He added that it was possible that in the absence of a deal, Congress could provide some legislative language that gives domestic agencies and others some flexibility in making their cuts, rather than accept them in their current, across-the-board form.

Some Democrats are voicing concern the cuts could do serious economic damage.

"I think there should be a sense of urgency, because ... we're looking at an economy struggling to recover and the number of people who we want to have jobs who are still unemployed," said Democratic Senator Jean Shaheen of New Hampshire.

"A failure to take action on what we know is going to have a significant impact on that is simply unacceptable," said Shaheen, a member of the Senate Armed Services and Appropriations committees.

Northrop Grumman, which builds electronics and unmanned surveillance planes, warned that profits this year would fall sharply due to the increasing pressure on the defense budget.

"Our nation needs a balanced, strategic approach to our fiscal challenges ... not blind, indiscriminate budget cutting" Northrop Grumman Chief Executive Wes Bush told an earnings conference call.


The Pentagon has begun to detail its cost-cutting plans in workforce and regional terms. It has enacted a freeze in civilian hiring, a move that hits employment for veterans since 44 percent of civilian defense employees are vets.

The military services also are planning to lay off temporary or contract employees, which could affect up to 46,000 workers. They will also delay routine maintenance of ships and aircraft that had been planned for the third and fourth quarters, officials said.

The Navy estimates its planned cuts will reduce spending by $1.4 billion along the East Coast, including canceling $271 million in maintenance at shipyards in the Norfolk, Virginia, area and $81 million in aircraft maintenance at Cherry Point, North Carolina.

The Navy also is planning to cancel $681 million in spending in California, $339 million in the Pacific Northwest, $299 million in Florida, $197 million in the U.S. Northeast and $110 million in Hawaii, officials said.

If automatic spending cuts under sequestration go into effect on March 1, the Navy would have to cut a further $4.08 billion in spending through the end of the current fiscal year, over and above the $6.3 billion it is trying to reduce now.

Those cuts would require further delays in repairs and a reduction in the number of steaming and flying days, the Navy said. The Navy might also have to reduce the number of carrier strike groups in the Middle East, it said.

The Army and Air Force also are expected to implement spending reductions before March 1 and are due to submit their plans to Deputy Secretary of Defense Ashton Carter later this week.



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