Of course, this would be high-stakes game of chicken for both the White House and Congress. It would seriously disrupt planning throughout the Department of Defense and defense industry, shake market confidence in the United States, and slow U.S. economic growth. But recent reports have indicated that the effects of defense sequestration, tax hikes and spending cuts would be slower and less damaging in the short term than the rhetoric would suggest -- leaving room to go off the cliff and cut a deal early in the 113th Congress without causing lasting damage to the economy, national security, or domestic programs. Lawmakers from both parties might therefore see going off the cliff as a practical way of reaching a broader consensus in 2013 about balancing the nation's revenues and expenditures.
If we do go off the fiscal cliff, all is not lost for the Pentagon. The exact effects of allowing sequestration to take effect still remain unclear, but they are likely to occur more gradually than generally understood. Sequestration mandates a $52.3 billion reduction of DOD spending in Fiscal Year (FY) 2013, which amounts to a 9.4 percent cut of budget authority from nonexempt accounts during the nine remaining months of FY 2013.
Focusing on the $52.3 billion cut to defense budget authority distorts how sequestration would affect defense spending for the rest of the fiscal year. Budget authority is often spread across multiple years and therefore is an improper metric for examining the immediate impacts of cuts in economic terms. Instead, outlays -- money actually spent -- provide a better measure.
Some of the key ways that sequestration could affect defense during the rest of FY 2013 include:
- The DOD civilian workforce. As spending on civilian personnel is largely consumed in the first outlay year, the civilian workforce potentially faces significant layoffs or furloughs. Unlike uniformed personnel, civilian personnel are not exempt from sequestration. Expert analysts have estimated that if sequestration goes into effect, DOD would need to reduce its civilian workforce by as much as 13.7 percent during the remainder of the fiscal year.
- Military health care. Military health care services are subject to sequestration since they are primarily funded through nonexempt operations and maintenance accounts. This could result in delayed payments to providers and possible denial of services.
- Program cancellations. Despite widespread concern, most procurement programs will not be affected right away. Sequestration does not affect prior-year funding obligations, so already authorized and planned purchases will go ahead as scheduled. Sequestration allows already planned programs to continue, but over time it would reduce quantities bought, delay deliveries, and increase unit prices.
- Military end strength. Since President Obama exercised his authority to shield military personnel accounts from sequestration, pay and benefits would remain intact and end strength would not be cut beyond already-planned levels for FY 2013.
The Pentagon would likely try to mitigate some of these effects by asking Congress for liberal reprogramming authority, in order to shift money from one account to another. If Congress grants this authority, DOD would be able to allocate any defense cuts strategically rather than being forced to cut each plan, program and activity would equally during FY 2013. It would likely shift funds away from lower-priority base budget operations and maintenance accounts to fund higher priorities, such as the Overseas Contingency Operations budget that supports deployed troops.
The Defense Department might also mitigate these effects by deferring any cuts until the fourth quarter of FY 2013. Under such a plan, the department would continue operating at planned FY 2013 spending levels as specified in the continuing resolution until a decision is made by Congress and signed by the president to undo the cuts. This would allow the Pentagon to continue resourcing ongoing operations and maintain readiness at existing levels for the near term. Of course, this would be a very high-stakes gamble: if Congress did not reverse sequestration or increase the DOD budget for the fourth quarter, the effects would be devastating. Going off the fiscal cliff might not be as bad as many analysts have warned -- and it might even have some political benefits -- but that doesn't mean the risks aren't significant.