Intel Insights: Federal Spending Cuts Loom Large for Region

The failure of the Congressional “super-committee” to achieve consensus on reducing the U.S. budget deficit by $1.2 trillion over the next ten years will trigger automatic cuts in federal expenditures. This will have profound implications for the world, the nation, and the Potomac Communities.

As things currently stand, half of the budget cuts are to come from non-defense expenditures, the other half from the defense budget. If these cuts were to happen, not only would government services we have come to rely on be affected, but we would also run the risk of limiting our military and diplomatic options in an unsettled world.

To understand the magnitude of the budget issues our nation faces, let’s look at a few facts. An astonishing 44 percent of all Americans receive some kind of federal government benefit. These benefits include such things as student loans, mortgages, veterans’ benefits, social security, Medicare, and Medicaid, just to name a few. The salaries and pensions of civilian and military federal employees are part of these expenditures too. Any effort to freeze or curtail them could impact our area.

Our local economies rely on the federal government to function smoothly. In Prince William County, 24 percent of the labor force is employed by the governmental sector; the vast majority working for the federal government. In Stafford County, the percentage of the workforce employed by the government is even higher – at 28 percent. As high as these figures are, they understate the actual proportion of the workforce that could potentially be affected by these budget cuts. While 72 percent of all Prince William County and 68 percent of all Stafford County workers are nominally employed by the private sector, a large portion of this part of the labor force works for government contractors. As programs are cut and strategies are modified, many of these workers could find themselves without jobs.

Prince William County receives around $2 Billion in federal expenditures. Over half of that amount is from the Department of Defense. At least $537 million of this amount is in DoD salaries; add $100 Million and you’ll have the total federal salary figure for Prince William County. An even larger amount, $694 Million, is spent on federal retirement and disability payments to county residents.

Stafford County workers receive over $59 Million in federal salaries; at least $4.5 Million is from the DoD. Stafford County residents also receive at least $238 million in federal retirement and disability payments.

Additionally, both counties reap the benefits of federal procurement contracts valued in excess of $390 million, of which $320 Million is from defense-related spending.

Clearly, significant cuts to procurement accounts and in the federal workforce would have profound implications for the Potomac communities. But, what is less clear is how far these cuts will actually go.

As the weeks go by we will see many proposals being floated to avoid some of the more drastic cuts that could occur in the wake of the “super-committee’s” failure. But, some reductions were already in the works before the “super-committee’s” efforts became bogged down. The Defense Department had already agreed to $350 billion in cuts over the next ten years. As a result, each of the military services will see a reduction in personnel. The Air Force will have a Selective Early Retirement Board for Colonels in January on top of other personnel reductions. They held a similar board for Lieutenant Colonels in October.

The Navy has already convened early retirement boards for their equivalent ranks. Both services are reducing personnel to meet congressionally-mandated ceilings. The Army and Marine Corps will reduce manpower as they withdraw forces from Iraq and Afghanistan.

Defense Secretary Panetta believes, though, that the reductions in Defense spending will go too far if the automatic cuts enacted by Congress aren’t changed. He warns that the U.S. is on a path to create a 1940-size Army, a 1915-size Navy, and the smallest Air Force the nation has ever seen.

On the surface, such a diminished force structure could send a signal of weakness to potential adversaries. But weapons systems are much more capable now and as long as they are properly integrated with intelligence systems, we will still be able to field powerful forces. The key will be to ensure weapons systems and force structures are built around a viable military strategy – and not the other way around.

Panetta and like-minded members of congress from both parties are working to reduce the impact of the automatic cuts in Defense spending brought about by the “super-committee’s” failure. There is broad agreement that the defense budget needs to be cut, but not by $1 trillion. If Panetta and Congress can turn off the automatic spending cuts the Pentagon is currently facing, then the Potomac communities may be spared some of the economic impact. But, if they are unsuccessful in doing this, then this region will face some very tough times indeed.

Cedric Leighton lives in Lorton and is the Founder and President of Cedric Leighton Associates, a Washington area strategic risk and management consultancy.