The 2012 Election Results Are In, But What Does It Mean For The Defense And Government Services Sector?
With the 2012 election behind us, what does the outcome mean for the Defense and Government Services sector? We now have a clearer understanding of the near-term political landscape for the next two years. With Democrats retaining control of the White House and Senate, and Republicans retaining control of the House, it is evident that the country remains divided. However, with the “fiscal cliff” (expiring Bush tax cuts, sequestration, and debt ceiling limit) looming large and approaching fast, Republicans and Democrats may be unable to stay rooted in their partisan positions much longer.
Given the split Congress, it is too early to tell if the President will follow President Clinton’s second term playbook and take a more moderate/compromising approach in his second term and work with House Republicans. The President may also choose to take an even harder line given his reversed position of leverage over House Republicans who will have to run again in 2014. The initial expectation is that the Administration’s preference to fund non-Defense discretionary spending will continue to put pressure on the overall DoD budget through President Obama’s second term (as evidenced by his FY2013-17 Defense plan released last February which showed a negative CAGR of ~0.9%).
However, this decline may be tempered by the continued requirements needed to defend against the enduring and ever increasing global threat environment and the fact that Republicans still control the House. Opportunities for growth should still exist as the Administration shifts its spending priorities, particularly as it relates to resetting the force, support for the VA, and the strategy to pivot from the Middle East to Asia. Additionally, certain mission-critical areas, such as healthcare IT, cybersecurity, intelligence, and C4ISR / unmanned systems, are expected to continue to garner funding.
Near-term, the hope is that the lame-duck Congress will be more motivated to complete a longer-term deal to avoid sequestration now that both parties have retained control of their respective sides of Congress. But with only a five week session left for this Congress, the more likely scenario is a short-term delay negotiated by Republicans and Democrats with a mandate for the incoming 113th Congress to act by a certain date in six to twelve months. Any immediate movement to address the “fiscal cliff,” particularly sequestration, would be welcomed by all parties.
Once this veil of uncertainty is finally removed, sector participants should have a much clearer view on the true budget casualties and funding priorities.