Super Committee Fails to Deliver
The November 23rd deadline came and went, and the 12-member bi-partisan Joint Select Committee on Deficit Reduction, the so-called Super Committee, did not reach agreement on a single measure to reduce the growing government debt of approximately $15 trillion. The military branches have expressed alarm that the DoD will be saddled with budget cuts beyond the planned $450 billion over the next 10 years.
Army Chief of Staff, General Raymond Odierno, believes that additional cuts in funding would deny “the military superiority our nation requires in today’s and tomorrow’s uncertain, challenging, security environment.” Moreover, defense firms are signaling that further cuts will cost more American jobs and weaken technological and industrial expertise.
On the other hand, some analysts and lawmakers disagree with the Pentagon’s warnings, citing that the $450 billion cutback over ten years is actually modest compared to previous budget drawbacks dating back to the Korean War. Now faced with reduced funding and termination of over-budget and past due programs, the DoD has recognized the need to focus its attention on cost saving initiatives throughout the military. The chart below outlines three possible funding scenarios for the defense budget over the next decade.
Defense stocks did not sell off on news of the Super Committee’s failure, as investors have already priced in a downside scenario related to the funding environment. The next several months of budget talks will be critical to alleviating uncertainty in the sector.