Deficit deal raises concerns about defense cuts

WASHINGTON Tue Aug 2, 2011 8:21am EDT

WASHINGTON (Reuters) - The U.S. deficit-reduction deal's provisions that could cut $850 billion in national security spending over the next decade drew criticism from some lawmakers on Monday and sent defense stocks lower.

But with Republican legislators vowing to block a second round of cuts in military spending and the State Department and U.S. foreign aid also on the chopping block, it appeared the Pentagon would be spared a dramatic downsizing.

The pact between President Barack Obama and lawmakers on Capitol Hill, which was approved by the U.S. House of Representatives on Monday, would trim security spending by $350 billion over 10 years by limiting its growth relative to inflation.

A second round of almost $500 billion in cuts could take effect, according to the White House, unless lawmakers pass legislation stipulating spending reductions elsewhere.

The agreement raised uncertainty about plans for Pentagon spending and caused defense stocks to slump. The Standard & Poor's Aerospace and Defense index was down 0.8 percent, while Lockheed Martin, maker of the F-35 Joint Strike Fighter -- the Pentagon's largest arms program and a frequent target of defense critics -- was down 1.68 percent.

Among the Republicans denouncing the deal was Senator Lindsey Graham, a member of the Armed Services Committee, who said it threatened to "destroy our nation's defense infrastructure" at a time of rising peril.

House Speaker John Boehner, meeting with worried members of the House Armed Services Committee before Monday's vote, defended the bill.

He said that in the final stages of negotiations with the White House, he had won agreement to expand the definition of "security" spending, so future cuts would also fall on the departments of State and Homeland Security, said Representative Mike Coffman, Colorado Republican.

Coffman said the second round of security cuts would be "ugly" for the Defense Department. The committee's chairman, Representative Howard McKeon, of California, drew what appeared to be a line in the sand against cuts beyond the initial $350 billion.

"There is no scenario in the second phase of this proposal that does not turn a debt crisis into a national security crisis," McKeon said in a statement. "Defense cannot sustain any additional cuts either from the joint committee or the sequestration trigger."

TOUGH BUT MANAGEABLE CUTS

The deficit-reduction agreement aims to lower spending by $917 billion over a decade by setting caps on discretionary spending. Security spending would fall by $4 billion in 2012 and by an additional $2 billion in 2013. After that it would begin to climb again.

It was unclear how much of the reduction in the first two years would actually fall to the Pentagon. The deal struck by the White House and lawmakers is based on the broadened definition of security spending, which includes homeland security, nuclear arms, veterans affairs, foreign aid and the State Department.

The Defense Department is by far the largest area of security spending and would likely take some of the biggest hits. But lawmakers have traditionally favored defense spending over foreign aid and the State Department, raising fears that those areas would be severely cut back.

Senior military officers told lawmakers last week they were having difficulty finding the $400 billion in defense cuts over 12 years that Obama proposed in April. They warned that cutting substantially more than that would require a fundamental rethinking of U.S. military strategy.

Analysts said the cuts would be tough but manageable.

"They've signed up to the $400 (billion in cuts proposed by Obama)," said Gordon Adams, a professor at American University and former OMB associate director. "And frankly when you're planning on spending $6.7 trillion over the next 10 years, and somebody says you're going to get $6.3 (billion), well shoot ... It's not what you want, but it's not rocket science to get there."

He said the cuts were mostly "back-end loaded" and the difficulty would be in agreeing on further reductions between now and November, as called for in the agreement.

"We're not yet at the serious end game on solving the long-term deficit problem," Adams said. "They kicked the big issues down the road."

(Additional reporting by Andy Sullivan, Lily Kuo and Amir Bibawy. Editing by Warren Strobel and Christopher Wilson)