What Budget Reductions May Mean for the Future of the Defense Industrial Base

By William Rauch posted 17-04-2014 13:13


What Budget Reductions May Mean for the Future of the Defense Industrial Base

Senator Mark Warner

Address to the Atlantic Council and National Defense Industrial Association

April 1, 2014



For the past several years, the Department of Defense has struggled with continuing resolutions and budget uncertainty.  With the passage of the 2013 Bipartisan Budget Act and an omnibus fiscal year 2014 spending bill, the Pentagon now has certainty on its budget levels, but must adjust to accommodate flat-lining defense spending for the foreseeable future.  Some investment and equipment modernization accounts are certain to face cuts this year and in the future, necessitating that the defense industrial base adapt to a "new normal" of reduced spending.  The reality is an austere fiscal environment.  Not only is the defense industry taking 70% of the reduction, but from fiscal years 2012 to 2017, there will be a decrease of about $118 billion dollars in the actual outlays from which the defense industrial base operates.


Energy security is also one of the biggest challenges facing our nation in the world today.  The situation in Russia and Ukraine demonstrates how important energy is to geopolitics.  The Department of Defense (DOD) is one of the biggest users of energy.  If the DOD has to make up for increased costs of energy, that money will have to come from revenues and operating funds from other sources.  So energy costs could threaten our short- and long-term security.


Senator Mark Warner has served on the Budget, Finance, Banking and intelligence committees and he is Chair of the Alliance to Save Energy.  He sat on the Budget Conference Committee (“gang of six”) that drafted the Bipartisan Budget Act and is the senior senator of Virginia, a state with a significant concentration of defense industry facilities.  His remarks addressing budgets, the future of the American Defense Industry and Energy follow:


  • Information/Technology can empower countries but can lead to instability.


    There have been enormous benefits from the information revolution, especially in the last 2-3 years, with nations having access to tremendous amounts of information and the ability to empower populations across the globe.  But we have also seen the beginnings of the instability that technology can bring as well.  As recently as 3-4 years ago, nations were being held up as examples of economic growth combined with emerging democracies that seemed to be ideal models.  But now some of these nations, such as Syria, Libya, Brazil, Turkey and Ukraine have levels of instability that would not have been predicted 2 or 3 years ago. 


  • The United States (US) must maintain leadership in the world via a strong economy and military.


    It is essential that America maintain a strong economic, military and moral presence in the world.   Without that kind of American leadership, we are unlikely to be able to see the rallying of allies and others around the world who look, time and again, for the United States to step up and take the lead. 


  • Talk of Isolationism by Congressional colleagues and young Americans is of utmost concern.


    It concerns me when I see the folks that I work with in Congress, increasingly ride swaths, particularly young Americans, who say why do we need to be involved?  Why do we need to play a role?  Why is what’s happening in Crimea of any importance to the United States of America? 


  • What happens in Ukraine impacts the economy in both Europe and the US.


    As Russian troops mass on the Eastern borders of Ukraine, the various scenarios that could play out from there would have dramatic effects not only upon the European economy but upon our economy as well.  So it’s doubly important that we make the case to my colleagues and to Americans at large, that America must stay involved.  We must stay active.    


  • The US cannot be involved in world affairs without a strong economy and military.


    That is one of the reasons why the budget debates are so critical and important to our future.  If we don’t have the economic strength, if we don’t have the military strength, then our ability to be involved will be dramatically decreased.


  • The speed and escalation of the crisis in Ukraine is troubling.It marks the first crossing of the territorial integrity of a European nation since World War II.


    It is remarkable to see the speed and escalation of the crisis in Ukraine.  What started as a popular revolt, throwing out President Yanukovych, setting up a new regime, and the response of Mr. Putin and the Russian forces, it’s hard to imagine that we’re seeing, in effect, one of the first (with the exception of the breakup of Yugoslavia) crossings of the territorial integrity of a European nation since the second world war. 


  • Russia’s actions violate existing treaties and agreements, especially the 1994 Budapest agreement.


    Russia’s actions are a clear violation of existing treaties and agreements, especially the 1994 Budapest agreement wherein Russia and the United States and others promised to protect the territorial integrity of Ukraine.  That has now been violated. 


  • Russian forces massing on Ukraine’s eastern border may lead to an even greater violation and puts many of the former Soviet bloc nations at risk.


    With forces massed in the East, this could easily lead to a potential and much greater violation in which not only Ukraine, but many of the nations of the former Soviet bloc are at risk.  Latvia and Lithuania must be watching with great interest.


  • The US response to Russia over Ukraine.


    The President and his administration have imposed sanctions on key Russian and Crimean officials and the major bank in Russia.  Yet the sanctions that have been imposed so far, and I understand the President’s position that we have to have room to escalate the sanctions, have had very little effect even to the point of being derided by the Russians.  The senate passed, with broad bi-partisan support, a package of approximately $1 billion that would be loan guarantees and other assistance to Ukraine to try to help their struggling economy get through this very difficult transition time.  We’ve seen similar actions from our European allies. 


  • In addition to military strength, Mr. Putin’s influence over Ukraine is energy and he uses that as a weapon in his foreign policy.


    One of the most important and key aspects of Mr. Putin’s ability to have influence over Ukraine and over most of Europe, is the enormous dependency Ukraine and Europe have upon Russian gas and oil supplies.  Fifty percent (50%) of the gas that transfers to Western Europe passes through the pipelines in Ukraine.  Thirty percent (30%) of Germany’s natural gas supplies are dependent upon the Russian gas supply.  And while Russia has pledged to protect and maintain those supplies—we’ve seen as recently as January, 2009—in the midst of a cold snap—when Russian authorities cut the flow of gas by about 20%,  it resulted in an 18% price increase.  Here again, Russia has demonstrated its ability to use energy as a weapon in its foreign policy.  In addition, Gazprom has just announced a price increase as a result of the circumstances in Ukraine. 


  • The US can hurt Mr. Putin’s influence over Ukraine via energy by expediting approval of gas exports to that region and using our energy expertise and supplies as part of our foreign policy.

    Administratively, by executive action or legislatively, we can expedite and approve a number of American gas companies to export US gas to that region.  Six or seven years ago it was predicted that America would be awash in natural gas and have the ability to be energy independent, something we have aspired to for quite some time.  It’s here now, virtually within our hands.  We need to be able to use these energy supplies as part of our foreign policy and vis-ȧ-vis energy security.  As of today, the US has approved 6 of the more than 20 pending applications.  Our call on the Administration is simple.  Expedite and approve the balance of these pending applications—or tell Congress why not—over the next 60 days.  I believe expediting and approving the exportation of natural gas would send—if not immediate relief—to Europe and to the Ukrainians—a long term signal that we will stand with Europe—with Ukraine—and decouple Putin’s ability to maintain this energy leverage he has over these nations.


    There are a number of other things we can do.  And one of these the President did take up during the summit last week with the European Union (EU).  That is, make energy security a top priority—in terms of EU-American relationships.  Another area of low-hanging fruit is recognition that within the package of aid that we are offering to Ukraine, American companies assist in increasing Ukraine’s energy productivity.  Or in the terminology we use here in the states—increasing energy efficiency.  Because of Ukraine’s enormous dependence upon cheap Russian gas and oil—Ukrainians use their energy consumption at about a 5:1 greater ratio than what we do here in the US.  Having Ukraine simply increase their energy efficiency would help in a very short period of time.  There are a number of American companies that could provide immediate technology assistance.


    Another more aggressive action we need to be looking at is the reversal of the flow in those pipelines so that gas could not only be sent from east to west but potentially from west to east.  This would alleviate, at least for a short term, some of the Ukrainian reliance upon Russian natural gas and oil supplies.


  • Make the aid package to Ukraine dependent on taking action against cyber-crime which is rampant in Ukraine.

    Another proposal I’ve put forward with Senator Mark Kirk from Illinois is a little more American focused, but I think it should be part of any package going forward.  I am very supportive of the Congressional action to send this billion dollar aid package to Ukraine.  But I do believe there needs to be some responsive action from the Ukrainian regime.  And that is a recognition that—if you look at almost any of the estimations of where cyber-crime and cyber-activities against America have originated over the last 4 or 5 years, Ukraine always ranks in the top three to eight.  Former President Viktor Yanukovych basically turned a blind eye to this type of cyber-criminal activities, some of them quasi-state-sponsored that were coming out of Ukraine.  I know I was one of the victims of the credit card breaches that have become lumped into the Target breach in December, 2013.  That all originated out of Ukraine. 


    I also believe one of the contingencies of this billion-dollar aid package needs to be enhanced collaboration between American and Ukrainian law enforcement authorities on cracking down on cyber-criminals.  There exists today very little in the way of extradition treaties.  But if we can find those criminals and there can’t be any type of justice in Ukraine, then they get justice in America or somewhere else in the West.  Recognize that we expect and want Ukraine to join and bring frugal affiliation with the West.  And part of that frugal affiliation means “rule of law,” particularly in this area of cyber activities.  It has to be enhanced and it has to be followed.


    This is an area that we have received a response from the Administration that says they are interested but that we don’t need law.  But if we don’t see action from the Administration, then we will move forward with legislation in this area. 


  • Surprise at the American and European response to the Ukraine crisis.

Before we get to the budget, I want to say that I’m actually somewhat surprised that the sense of potential crisis is not greater, both in America and throughout Europe.  Given the potential crisis and risk to other former Soviet bloc countries by the massing of Russian troops along the eastern border of Ukraine, I am surprised that the European response is not greater at this moment in time.  Our lack of ability and will to respond and our announced decision to not respond with defense forces essentially allowed Russia to take advantage of a territorial opportunity and invade Crimea.


The question will be—and I think history will judge us—should Russia take further action in eastern Ukraine—with the troops massed there—and the rather sorry state of the Ukrainian defense forces—if we don’t see reaction from NATO and the West, I think we will rue the day that we don’t step up.  What those steps should be and how we send that message as strongly as possible is the subject of a great deal of discussion and debate.  But in a region that is rife with challenges, this area presents some of the most extraordinary geopolitical challenges of our time.


Over the next 30-60 days, I think we will be judged by how we act and how we send as strong a message as possible that there will be dire, dire consequences should Mr. Putin further violate the territorial integrity of Ukraine.


  • The ability to draw a line in the sand and enforce that position requires a strong defense and a strong domestic budget.


    To do that and to maintain the ability to have the kind of economic and military strength that allows us to draw red lines that we actually enforce, rather than just speak about, requires a strong military.  We have to have a strong defense budget and a strong domestic budget as well.  I am a firm believer in the former chairman of the Joint Chiefs of Staff, Michael Mullen’s comments, that the greatest threat to our nation is not an external threat but when we amass a $17 trillion dollar and counting debt that we carry on our balance sheet


    And while we have cut our deficit from $1.4 trillion dollars a year down to $500 billion dollars, only in Washington would a $500 billion dollar deficit be a sign of high-fiving between the political parties of what great progress they’ve made.  I would point out that a $17 trillion dollar deficit, which grows at $4 billion dollars a night, is unsustainable.  One factor that I think drives home the point, a 1% increase in interest rates, which will happen since the Fed can only keep the interest rates low for so long, increases our debt service on that debt by $120 billion dollars a year.  And that’s a linear equation.  You up the interest rate to 2%, that number ($120 billion) doubles to $240 billion.  Just the 1% increase is the equivalent of creating two new Departments of Homeland Security each year.


  • Congress, allowing sequestration to happen, was nothing short of stupidity on steroids.


    There is some good news and I say this from a parochial standpoint in Virginia.  I’m proud of the fact that Virginia is the home, on a per capita basis, to more military personnel, more installations and more veterans than any other state in the country.  And as has been mentioned, recall the fact that sequestration was set up to be such a stupid option, so irrational, that no rational group of people would ever let it happen let alone the future Congresses.  In the future and going forward, never assume Congress is going to be rational.    Only a year ago, in the midst of sequestration, Virginia was facing a $3.2 billion cut in ship construction, a cancellation of nine ship repair contracts and furloughs of 22 days.  The Virginia delegation pushed back on the Pentagon and with this two year budget, we were able to restore most of those cuts.  We have restored 100% of the ship construction, kept eleven carriers, and as of this moment we’ve seen the furloughs cut back from 22 to 6 days.  It is good news that we did get this 2-year budget deal.    


    One of the stupidest things about the short term budget agreement was why would you pick military veterans—COLA issues—as the first entitlement piece to cut?  Once we’ve asked our military to fight two wars in Iraq and Afghanistan, and make greater sacrifices than any other part of the American public, to cut this group was beyond me in terms of stupidity.  Luckily, Congress very quickly woke up to that fact and we fixed that within about a 3 week period.  But it was again, I think, a very wrong place to start.


  • In 2016, sequestration comes back and could curtail one of our carriers.


    Because it is only a 2-year budget deal, in 2016, sequestration comes roaring back with dramatic cuts to our Army and Navy (which may include curtailing one of our carriers).  And I fear at times that many members of Congress have said, “Oh gosh, we’re all done.  We don’t have to worry about this for a short period of time.”


    I go back to my statistics that say a $17 trillion dollar debt is not going down.  It is increasing at a rate of $4 billion dollars a night.  Right now, of the total dollars we spend in Washington—only about 18 cents goes to everything on the military side.  About 16 cents is on the domestic discretionary side.  What our business plan for the country looks like, just on the domestic discretionary side that 16 cents includes everything America spends on energy, environment, early childhood, education, infrastructure, and on research and development.  The House budget plan, the House business plan for America, takes that 16 cents down to about 04 cents over 12 years. 


    Now, I could care less whether you were a Democrat or a Republican.  I have actually been a businessman longer than I’ve been a politician.  My business was investing in businesses.  I would never invest in a business that spent less than 5% of its revenues training and equipping its workforce, investing in plant, equipment, infrastructure, and research.  This is a fundamentally flawed business plan.  The same kind of cuts on the defense side would greatly reduce America’s military footprint around the world and our ability to be that essential power that we need to be.


  • Is there a solution to our budget and debt problems?


The solution is actually not as hard as a lot of the press make it out to be.  We need to do two things.  (1)  On the Democratic side, we need to recognize that our entitlement programs need to be reformed.  Medicare and social security are two of the greatest programs any government has ever created.  But anyone on the Democratic side that refuses to acknowledge that the math doesn’t work can’t read a balance sheet.  When I was young, there were 16 people working for every 1 person in retirement.  Today, you have 3 people working for every 1 person in retirement.  So the average of paying in $1.00 and getting $3.00 back, in terms of Medicare taxes vs. medical payouts, is fine when it was the earlier ratio.  It doesn’t work now.  And none of this self-corrects.  So the sooner we start the entitlement reform—on the Democratic side—the better


(2) The flip side is, we have to reform our tax code.  We have to generate more revenue.  In the early 2000’s, we took, on a 10 year runaway system, $4.5 trillion dollars out of the revenue stream in a crazy fiscal deal, the Cliff deal I think it was.  We put back about $600 billion.  We cannot run the enterprise that we call the Federal government, not expand it, but we cannot run it, the basic enterprise we call the Federal government on the revenue stream we’ve got right now.  So with tax reform, we will find ways to cut back on some of the tax expenditures.  An upside is that we can lower rates. 


I believe the American people are ready for this so called Grand Bargain.  What has stopped it so far have been the extremists in both political parties.  I think we can put together a plan where everyone has a bit of skin in the game.  We need the 21st century equivalent of a war bond campaign where every American has a little bit of skin in the game so that we can get our balance sheet headed back in the right direction.  Then America can continue to make the investments to grow our economy and maintain the kind of force protection to keep this world safe.


Thank you for the opportunity to come here today.