Defense cuts now likely to prevent sequestration nightmare

Cuts to military spending are accelerating and promise to make a wide impact on the defense industrial base, but the Defense Department will likely manage to avoid a “doomsday” scenario that would result from the congressional supercommittee’s failure to identify more than $1 trillion in federal budget cuts, according to an industry forecast.

TechAmerica’s DOD forecast, presented Oct. 19 and 20 at its annual Vision Conference in Springfield, Va., predicts a 50 percent likelihood that Congress will avert sequestration, which would happen if the Joint Select Committee on Deficit Reduction fails to deliver acceptable budget cuts and would involve sweeping cuts to federal spending. Instead, TechAmerica predicts Congress will pass legislation that includes revenue gains and savings in entitlements in addition to roughly $900 billion in reductions already mandated by the Budget Control Act.

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The forecast gives the “nightmare scenario” a 10 percent chance of occurring.

The drawdown of military forces in Iraq and Afghanistan play a key role in the TechAmerica forecast, with a rapid decline in overseas contingency operations and a total re-focus of strategy expected. It will also mean decreases to research, development, testing and evaluation, as well as procurement.

Post-budget cuts, operations and support will consume 65 percent of the fiscal 2012 base budget, and will effectively reverse 2007 increases in end strength – hitting the Army and Marine Corps hardest, TechAmerica’s forecast predicts. The budget will decline through fiscal 2015 and go flat from 2016 to 2022.

The report foresees wide impact on industry, including far fewer new starts, smaller programs, challenged prices and profits in a tighter overhead environment, increasing preference for fixed-price and growing contention over the insourcing-outsourcing debate. It’s also likely that while top-tier prime contractors will survive and seek to move into “non-core markets,” there will be more competitive challenges at the sub-contractor, supplier and systems engineering and integration levels, the report stated.

However, the cuts’ impact will also present new opportunities in the cyber arena, the report states. The “emerging environment is a game-changer for defense,” the forecast notes. “Industry will have to transition to a new, 21^st century paradigm. Tighter budgets translate to a more competitive market, increasing the importance of ‘keep sold’ and contractor performance.”