Some clarity on budgets emerges, but industrial base outlook remains murky.

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

The way ahead for the defense budget is shaping up to be a two-step process. The Defense Department's 2013-2017 program objective memorandum (POM) has been constructed without reference to the sequester which was triggered by the failure of the Super Committee and, then, Congress to come up with $1.2 trillion in federal spending reductions in November.

The Defense Department will be submitting the fiscal year 2013 budget that meets the first set of spending caps mandated by the August Budget Control Act. The plan amounts to a reduction from the president's proposed fiscal 2012 budget request of $250 billion over the five years of the POM. The average yearly take is just below $50 billion a year in 2013, growing to around $55 billion a year from 2014 through 2017. Fiscal year 2012 will come in at $525 billion, $28 Billion less than the president's request of $553 billion.

The two-step process will materialize if, at a later date, all or part of the sequester has to be activated and the POM reworked. Thus the 2013 budget may be dead on arrival as the saga continues to play out. Some in Congress have suggested reaching a deal that mitigates the sequester's effect on defense spending, but the president has promised to veto such a move, even if it could get through Congress. The final resolution of any defense budget deal may well have to await the outcome of the 2012 elections. A continuing resolution for 2012 is a real possibility.

The impact of this is to cast a pall of uncertainty over the 2013 budget and the out years of the POM, at least through early 2013.

Some scenarios have the investment accounts coming down $30 billion to $60 billion per year (15 to 30 percent on average). At a recent conference that was hosted by Credit Suisse and NDIA board member Jim McAleese of McAleese & Associates, some significant takeaways emerged.

According to Principal Deputy Undersecretary of Defense/ Comptroller Michael McCord, the Defense Department is likely to decrease its budget 28 percent from the recent high. That compares to a 31 percent build-down after Vietnam and 36 percent after the Cold War. McCord also confirmed large restructuring and delays to large programs. He stated that, most likely, the Army will back-end force structure cuts and front-end procurement cuts. Though it is interesting to note that the Army has just announced a reduction of 8,700 civilian workers for 2012. Expect other services and agencies to be announcing early...