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Cutting Through the Fog of Sequestration

We look at the impact of spending cuts on the defense budget.

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The Budget Control Act of 2011 outlined cost reductions to offset U.S. debt ceiling increases of as much as $2.1 trillion in multiple steps: $400 billion immediately, $500 billion a bit later, and the remainder after Congress enacts further reductions. The initial tranche of spending limitations totaled $917 billion over 10 years, which would cover the first two boosts to the debt ceiling. The final advance would require further cuts that could total $1.2 trillion-$1.5 trillion. Since the bipartisan supercommittee tasked with identifying the reductions announced its failure to come up with a compromise in late November 2011, the law currently on the books will require across-the-board cuts of $1.2 trillion to begin Jan. 2, 2013--otherwise known as sequestration. In this article, we look at the impact of the cuts to the defense budget and emphasize certain aspects of the sequestration cuts that are set to hit the defense sector in a meaningful way. Our analysis assumes that Congress will not pass a budget for fiscal 2013 and thus cuts will take place from appropriated fiscal 2012 levels.

First Round of BCA-Based Cuts
Defense budget cuts from the BCA 2011 are large. In the following table, we compare proposed spending before and after the passage of the BCA. The first line includes the fiscal 2012 proposed base budget from the Department of Defense. It includes specific values for 2012-16 and a 1.8% growth rate thereafter, which we derive from DoD data. The next row shows the proposed fiscal 2013 base budget, which includes the cuts from the BCA 2011. Proposed cuts are calculated as fiscal 2013 spending targets less those from the prior estimate. As a percentage of fiscal 2012 levels, the new spending levels represent a significant 9% reduction. Cumulative cuts total nearly $487 billion over the next nine years.

Neal Dihora does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.