While President Barack Obama proposed $400 billion in defense spending cuts as part of his plan to cut the U.S. budget deficit by $4.4 trillion over 10 years, House Republicans aren’t convinced. The House Budget Committee Chairman Paul Ryan responded to Obama’s ideas with his own proposal to cut the deficit by cutting into social services like Medicare and Medicaid and not cutting into military dollars.
The contentious debate means lawmakers are destined to meet somewhere in the middle and the outcome should be manageable for defense contractors. Even if Obama’s proposed $400 billion cut prevails, it would be spread over a dozen years, meaning the baseline defense budget would decline by about 0.5 percent a year, when adjusted to inflation, said Bernstein Research analyst Douglas Harned in Aviation Week.
However, as lawmakers get more serious about cutting the deficit through slashing military budgets, weapons programs are prime targets for deep cuts. The military programs most vulnerable are expensive defense projects such as shipbuilding, fighter aircraft such as the Lockheed Martin F-35, and electronics, said Lazard Capital Markets analyst Michael Lewis. “If you see much more of a cutback, it’s going to make it very difficult for defense contractors to generate organic growth,” he said in Aviation Week.
Yet Barack Obama warned in a budget briefing that deep budget cuts could cause a renewed recession due to the possibility of federal contracting businesses closing or laying off workers. "We’ve been working very hard over the last two years to get this economy back on its feet," he said. “For us to go backward because Washington couldn’t get its act together is unacceptable,” he said.
However, contracting companies tied to the federal government have been voicing concerns over the continuing resolution that is funding the federal government at 2010 levels. They are also anxiously wondering how the upcoming years will pan out.
"The continuing resolution, or lack thereof, has direct impact on all” of the defense contracting industry, said Shaun Amini, president and CEO of C5i Federal, a small-business defense contractor based in Sterling, Va. “We’re very worried because of the lack of certainty in both current opportunities and future opportunities. The delays impact all of us from a financial perspective as well as in terms of quality of work.”
