As we look back on the first five years under budget caps imposed under the Budget Control Act of 2011, it’s an appropriate time to ask how federal contractors are doing and look forward to expectations for the next five years. It’s important to note that Congress has never permitted the full force of the spending cuts to take effect, so the impact has been less dramatic than it might otherwise have been.
That said, it definitely has not been a positive development for industry, as the caps have unnecessarily restricted our nation’s investments and introduced deep uncertainty and delays into federal acquisition across the entire aerospace and defense sector.
On the surface, the largest companies have weathered the cuts remarkably well. Stock values continue to perform and returns for stockholders remain strong. This is in large part due to outstanding management at the top levels, strategic use of short-term measures like stock buybacks and aggressive efforts to achieve greater efficiency through improved processes and right-sized workforces.
Companies have also realigned resources to place a renewed emphasis on foreign markets and commercial lines at the expense of domestic defense investments.
However, there’s a limit to how far into the future these measures will remain effective. In addition, many of these measures are unavailable to smaller companies in the supply chain. The stress the budget caps impose on companies is more keenly felt in the lower tiers of the supply chain. As a result, smaller companies have experienced reduced cash flow and lost contracts.
The caps also impose restrictions on flexibility in contracting and prevent appropriate levels of long-term planning for contracts. As companies try to steer a course for forward planning, they have to dodge funding uncertainty and program delays imposed by insufficient spending on procurement and R&D. This dynamic is further compounded when Congress resorts to continuing resolutions to keep the government open when they fail to reach a timely agreement on spending bills.
Contrary to expectations at the time, the ability to execute on contracts is more impacted by congressional budgetary delays than by adhering to budget caps to avoid triggering sequestration.
Looking forward, there’s reason for cautious optimism on the defense spending side. President-elect Trump was vocal during the campaign about lifting budget caps on defense. With government unified under single-party control for at least the next two years, there’s an opportunity for agreement on this front.
AIA is calling for base defense spending to increase from the $539 billion agreed to in the recent National Defense Authorization Act for 2017 to $620 billion in the fiscal year 2018 defense appropriation. This amount is consistent with spending levels contemplated under the last pre-sequester budget proposed by Defense Secretary Robert Gates.
However, there’s concern that domestic investments in programs at the Federal Aviation Administration, NASA and the National Oceanic and Atmospheric Administration could suffer as a result. The aerospace and defense industrial base shares resources across the aviation, defense and space sectors. Our warfighters benefit directly from accurate weather prediction and commercial innovations.
So boosting defense investment at the expense of civilian investment doesn’t make sense from either a national security or a business standpoint. AIA is also calling for increased investment in our space enterprise and in the modernization of our outdated air traffic management system.
The outlook for our industry is strong. We have continued to grow sales and exports, and we’re on track to exceed the positive trade balance of $81.6 billion we posted in 2015. But we could be doing much better. The artificial constraints imposed by the BCA caps hamper our industry’s ability to support national security and undermine our nation’s ability to invest in the future.
As a nation, we have a choice. We can continue down the road laid out by the Budget Control Act, which fails in its stated purpose to eliminate deficits, constrains growth opportunities afforded by federal investments in defense and infrastructure modernization and endangers our national security through reduced readiness.
Or we could chart a new course. Increase investments in modernization. Take off the shackles on economic growth. Properly provide for our national defense. Address the true drivers of our debt and deficit issues: mandatory spending and revenues.
AIA is calling for the latter. Congress should repeal the Budget Control Act and reach a new agreement on measures that will address our debt and deficit issues without constraining the investments we need to ensure our economic and national security far into the future.
Retired Lt. Gen. David Melcher is president and CEO of the Aerospace Industries Association.
