Back in office, President Obama returns to confront the challenges of sequestration. The ‘fiscal cliff’ that the US defence sector is now teetering on has implications beyond America’s shores. Professor KEITH HAYWARD, RAeS Head of Research, assesses the situation.
This is a full article published in Aerospace International: November 2012
The US defence and aerospace industries, together with the air transport infrastructure is on the edge of a fiscal cliff. Unless the US Congress and the Executive Branch can reach a compromise on measures to curb the US deficit, over $1 trillion will be automatically cut from Federal spending on 2 January. This is sequestration.
The chances are that this much dented can will receive another nudge down a very twisted road, and a temporary deal will be done. Programmes will be sustained and the aeroplanes will still fly in US airspace. But the underlying problems driven by the deficit and an increasingly polarised American political system will remain, leaving long term projects in limbo and defence companies facing perhaps years of uncertainty. Procurement reform will be delayed – again; and long term improvements in value for US tax payers’ money will be buried under bitter ideological dispute over tax and spend.
A 30 year-old law
The legal basis for Sequestration dates from the Gramm-Rudman-Hollings Deficit Reduction Act of 1985. It was designed to force attention on the cumulative deficit caused by Federal spending and the gap between it and revenue – mainly taxes. If Congress cannot agree on measures designed to bring the two back in balance, an ‘automatic’ axe falls. In theory, the cut should fall proportionately on all spending departments. In practice, very large programmes, mainly in defence and welfare, have been exempt. The killer this time is that as both areas have vastly increased spending since 1985, should sequestration apply gigantic swathes of activity in defence and welfare would be hit.
The law and procedures are so complex that even Phil Gramm got details of his own legislation wrong in a recent Wall St Journal article. He wrote that there was a short window with the incoming Congress– due to be installed later in January following this November’s elections – for a filibuster-free debate. Sadly according to other sources, including an incumbent Senator, no such “get out of jail free” card is on the table: no deal by2 January, no money 3 January.
Although Congress failed to deliver the appropriate legislation prior to the November electoral fun and games, the lame duck period after 6 November may provide an opportunity to get another stay of execution in the form of a simple Budget Resolution to raise the current budget spending cap. And this might then move on.
This would buy time, but it would still only post pone a real solution to a real economic problem. Continued uncertainty will have a continuing impact on the real world of procurement and Federal support for aerospace and civil aviation.
Let’s all go to the Tea Party
This is where things get very tricky, and the global aerospace and defence community has to take note of US domestic politics. Here we enter the world of the Tea Party and the apparently systemic deadlock at the heart of the US government.
To simplify: on the right a Republican Party increasingly dominated by extreme liberal economic thinking. Tax cutting is a pledged item on many Republican politician’s individual manifesto and mandate; welfare entitlement to be hammered; defence to be protected. On the left, the Democratic Party is a mirror image more or less, although defence gets some support; increased taxes are preferable to programme slicing. So far, they have also proved more amendable to debate the issues; this might not survive a Republican presidency, nor continued Republican intransigence.
In the past, the Congress did deals; compromise was honoured and log-rolling, mutual back scratching achieved results. Presidents got their budgets and Congressmen got investment in their States or Districts. This time-honoured process is anathema to the Tea Party. Deadlock not deals is the new way. Currently, the House of Representatives is run by the Republicans; the Senate has a Democratic majority, but not big enough to overturn a filibuster from the Republican side. The House has the lead on fiscal and economic issues, but both Houses have to agree on legislation.
The Elections on 6 November made little difference to the basics. The Republicans still hold the House; the Democrats made some modest gains in the Senate (lost control was widely predicted); and Obama regained the prize. Individually, some of the newer Republicans may have a less radical edge, but there is still a very hard core of Tea Party driven members.
Equally worrying for President Obama, despite emollient speeches on Election night calling for bi-partisanship, the election revealed a degree of visceral hatred for the President from the right that could auger poorly for the next few years. This is where the entrenched polarisation of US politics spills out into the defence and aerospace community. Deadlock will impact on business in the US, and by implication, further afield.
Sequestration – falling off the cliff
But what if the dreaded sequestration occurs? At a macro level, 4% goes off the US GDP, several million more people lose their jobs and the US will see its credit rating drop, thus making the deficit even harder to fund.
Sequestration would lop $500bn from procurement over the next decade. On top of planned reductions, this threatens 10,000 jobs at Lockheed Martin alone. Although the US Department of Labour has implied that layoffs are not imminent, companies believe Federal law demands notice of major layoffs sooner rather than later. The full industrial impact may be delayed as contracts run out and are not renewed. Leasing contracts and construction would also find funding slashed; both short term upgrading and maintenance and long term investment in military infrastructure. This would lead to long term diseconomies as office space consolidation will be stymied.
There is an element of corporate lobbying in play, trying to force either party to the deadlock to reach a compromise, or otherwise head off the 2 January crisis. But the threat to jobs in the US defence industrial base is real enough. The US aerospace trade association, AIA, forecasts a total of 132,000 aviation jobs (including civil aviation) are at risk. Federal employment would clearly be hit: estimates put DoD civilian job losses at close to 108,000.
Procurement reform would go by the board: multiyear funding which would increase stability in programme development and save money long term would be impossible in the face of across the board, arbitrary cuts. Prioritisation is impossible under Sequestration, which will tend to have a random impact on projects, with the less well defended and supported activities such as technology acquisition, even though the most important for future capabilities, going to the wall.
The defence industrial base would have to contend with increased annual financial uncertainty and legal unknowns. There would be some lag in effects, but research, development and production would be hit. Even without full Sequestration, the procurement process will not be improved by continued Congressional deadlock. Another lost opportunity to increase value for money, and to make long term structural savings in the Federal budget.
Although formally the DoD is not planning for sequestration, and will not until directed by the White House Office of Management and Budget, the Pentagon is working on several scenarios ranging from the full $500bn to a ‘mini’ sequestration of $100bn following a compromise deal struck by the lame duck Congress between November and January. In all cases, work on Appropriations for 2013 would be wiped clean. Even if the affects can be mitigated, all of the sequestration options promise a difficult 2013 out in the field. Quite apart from the potential impact on the defence industrial base, the threat of sequestration and the prospect of managing its fall out is distracting officials from operations and other more pressing issues. Operational budgets will fall outside sequestration, and in extremis, Congress might vote continuations on individual programmes. But all is uncertainty.
Air traffic chaos?
Outside of the defence world, a sharp and sudden cut in Federal spending could take over 2,000 air traffic controllers out of their towers, as well drastically reducing the number of security and border officials, perhaps over 10,000. Most of the impact would be felt in smaller airports. The impact on the larger airports would be less, but sequestration could take out over 90,000 tonnes of air freight a year and 73 million passengers. At best, delays at US airports would increase. This would have a massive impact on airline finances, never particularly robust at the best of times.
But no one can really guess at the outcome of such a move. Such an impact would be totally out of left field. The FAA also predicts that prolonged financial uncertainty would affect the introduction of the Next Gen ATC system, delaying its introduction by a decade or more. The FAA stands to lose $1bn a year from its budget.
NASA spending would similarly face difficulties, with again imponderable consequences for long term aeronautical technology acquisition and space programmes.
Not just a local difficulty
The adage that if the US economy catches a cold, the rest of the world suffers pneumonia has been to some extent invalidated by the rise of the new economies. For aerospace and aviation, the old saying still has validity. Planned cuts notwithstanding, the US defence market is still the world’s single largest and most lucrative. European defence companies, led by the Brits, have long sought to grow their share. That would also imply a share of any deep hit to the US defence budget.
Ditto the airline industry. Again, the US is not the fastest growing market, but reduced trade and business in and to the US will not be good news for struggling European carriers.
But what might happen exactly?
Well, according to Washington analysts, not a lot in the very short term. The President would issue an order mandating agencies to start making cuts. On the basis of figures set out by the Office of Management and Budget, officials would begin to specify exactly where the axe would fall. Congress also has 20 days to adjust its terms. So in practice, the process occurs in slow motion, with further bits of wriggle room. More measured voices point out that by 2015 the defence budget would again begin to rise, above $600bn by 2020. And the US would still be spending more on defence than the rest of the world combined.
A real or apparent threat?
So, even in the event of sequestration, the actual impact on defence might be less than feared. The odds are still on a pre Christmas compromise, at least on the specific issue of sequestration. Tea Party ideologues aside, there are constituents to think of; and there will a number of ex-Congressmen and Senators, even in the Republican Party (especially those culled by the drift to the right) who might feel impelled to accept one last public duty and vote for a continuation. Defence may also attract some dispensation from the Republican side, and defence spending always has local supporters on both sides of the Congressional aisles.
And, crossing fingers, the new Congress may yet rediscover bi-partisanship. It should also be remembered that President Obama has fought his last election. He could take a harder line threatening Republican interests more directly to force a compromise. This would, of course, only serve to make the short term prospects more hairy for defence and aerospace. On the other hand, a magnanimous victor could try to woo what is left of moderate Republicanism as they try to come to terms with what must be seen as November’s failure.
Initial reaction from the financial world has been a tad more optimistic. The election did remove one important uncertainty – who would control the White House? Obama’s economic policies are likely to be a continuation rather than contain radical new departures. This could be over sanguine given the politics of deadlock have not been fundamentally altered.
The underlying problems of the US political economy may not have a short term solution: there are structural issues that need resolving at the heart of the US economy as well as in the more limited arena of defence procurement. But there is little or no certainty that these will be sorted out easily during 2013. Respected analysts of Congress are talking of conditions of permanent deadlock: the Separation of Powers at the heart of the US Constitution was in normal times an invitation to debate, discuss and to decide, effectively a deal-based system of government. These are not normal times. There is what one great analyst of American government called a ‘paranoid’ strain in US politics that can defy logic and rationality for a very long time. The worry is that we have not quite reached the high water mark of this particular Mad Hatter’s tea party.
Aerospace professionals will just have to keep up with US politics if they are properly to assess future prospects in the world’s most important defence market. Uncertainty is not good for anybody’s business.
Aerospace International Contents - October 2012
News Roundup – p 4
Defeating the missile threat - p 12
An update on national ABM systems
The new flying squad - p 16
Will the UK’s new National Police Service lead to savings?
Sequestration, Congressional deadlock and the aerospace community - p 18
Deadline looms for US defence spending
New Chinese stealth fighter- p 21
The J-31 breaks cover
Leading by example - p 22
Marshall Aerospace’s business and training
Graphene - material of the future - p 26
How graphene could revolutionise aerospace manufacturing
Making operational improvements sexy - p 30
Airbus’ vision for 2050
Letters – p 33
Role of the NPL in aerodynamics
The last word – p 34
Keith Hayward on UAVs and the law
This is a full article published in Aerospace International: September 2012. As a member, you receive two new Royal Aeronautical Society publications each month – find out more about membership.