Cuts to the Pentagon’s budget as part of the new debt-ceiling agreement could total as much as $28 billion just in 2012. Over the course of the next decade, the Defense Department’s budget will be cut by $350 billion, of which $325 billion will come from the Pentagon.
The Defense Department currently has a fiscal year budget of $553 billion in 2012, of which $539 billion is basic defense spending (NYSE:PPA), with the remainder going toward military construction accounts. With planned cuts for 2012 exceeding the amount the Defense Department plans to spend on construction, defense contractors are looking at a serious threat to revenue. The iShares Dow Jones US Aerospace & Defense ETF has fallen 5.61% since the new budget deal was passed by Congress on Tuesday.
The Pentagon will meet with the Senate Appropriations Committee to determine how to distribute its 2012 cuts across different security agencies. The House has already appropriated its $9 billion in defense cuts, of which $6.7 billion will come from procurement. The debt deal places a cap on defense spending in 2012 at $684 billion, which falls $35.4 billion short of the fiscal 2012 request for $719.4 billion in security spending.
While one defense official says that number is manageable, more cuts could follow. The debt deal recently signed into law cuts just short of $1 trillion from the budget in its initial phase — the phase in which defense will have $350 billion cut — but also sets up a special congressional committee that has to find an additional $1.5 trillion in savings by November. If the committee is unable to act by that time, the deal will automatically cut $500 billion more from the Pentagon’s budget over the next decade, starting in 2012.
Defense Secretary Leon Panetta says that the Defense Department could not handle the $500 billion in further reductions. However, that’s what lawmakers had in mind when drafting the deal — it is meant to force their hand in future negotiations so that they come to a responsible and timely decision on how to issue further spending cuts.
Stocks to Watch: Boeing Company (NYSE:BA), Lockheed Martin Corporation (NYSE:LMT), Northrop Grumman Corporation (NYSE:NOC), General Dynamics Corporation (NYSE:GD), Kratos Defense & Security Solutions (NASDAQ:KTOS), Raytheon Company (NYSE:RTN), L-3 Communications Holdings (NYSE:LLL), and PowerShares Aerospace & Defense ETF (NYSE:PPA).