Fiscal cliff watch: running out of time to fix the mess.

• Author: Farrell, Lawrence P., Jr.
• Position: President's Perspective

* If the House and Senate fail to act in the coming weeks, massive federal spending cuts will kick in Jan. 2. That is when the automatic sequester--scheduled by law to implement phase two of the Budget Control Act of 2011--becomes effective.

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Sequester would pull approximately $50 billion per year from the Defense Department. As the president has exempted military personnel accounts from the equation, all other portions of the budget will be hit by more than 10 percent.

Because of the way federal budget outlays are allocated, the initial hit to procurement will be somewhat smaller, but will grow over time.

In previous defense drawdowns that did not exempt military personnel, procurement tumbled by 50 to 75 percent. Personnel, operations, maintenance and research-and-development spending came down anywhere from 10 to 35 percent--much less than procurement.

Earlier obligated funds won't be touched, making the 2013 landing a bit easier, but this approach will make the out years much tougher, especially for unexercised options and new procurement runs of existing programs. The real hurt will be the adjustments to schedules and acquisition numbers which will affect the per-unit price of weapon systems.

The result will be fewer numbers at a higher price. Even if sequester were to be subsequently adjusted back to the original basis, the resulting instability for programs and industry will still end up adding cost.

That is the primary reason why the issue should be settled sooner, rather than later.

But it doesn't look like it is going to happen. The best hope is for the lame duck Congress to postpone the mix of tax increases and spending cuts that are scheduled to happen--the so-called fiscal cliff--to some future time. That time could be February 2013, when there will be a new round of debt ceiling negotiations, or the expiration of the fiscal year 2013 continuing resolution at the end of March.

Pentagon officials repeatedly have said that they are not planning for sequester at this time. Lawmakers, meanwhile, have hinted that sequester won't happen, but still have no idea how to make it go away.

So maybe there is still some reason to be optimistic. Of course, all will eventually be resolved one way or the other. One can only hope that the administration and Congress choose a rational path with a real plan rather than leave it on automatic pilot.

In these difficult times, the need for government and industry to talk early...