House Hard-liners Cast a Shadow Over Defense Spending
WE HAVE BEEN RELENTLESSLY OPTIMISTIC in the past few years over the outlook for the defense industry, which has enjoyed huge annual spending hikes from Congress. But the gravy train now faces a major obstacle: fiscal hawks in the new House, who will put all spending on the table.
THE SWEEPING CONCESSIONS MADE BY KEVIN McCARTHY to win the Speakership haven’t been fully digested on Capitol Hill; many of the changes are procedural or reform tenure rules in committees.
BUT THERE ARE TWO BOMBSHELLS: First, just one House member could begin a process to oust the Speaker; second, deep spending cuts will be required or else there will be no hike in the debt ceiling, which could lead to the once-unthinkable: a U.S. debt default.
A DEBT DEFAULT CRISIS probably is months away, but in the meantime there will be an intense focus on spending cuts. With deficits expected to exceed $1 trillion annually for the next several years — and the national debt at $32 trillion — even Democrats will consider spending cuts (tax hikes are out of the question).
A FOCUS ON DEFENSE OUTLAYS: Republican spending hawks want to freeze all 2023 outlays at 2022 levels, and they have plenty of targets, starting with the Internal Revenue Service and the Justice Department. But the biggest issue may be defense, which got an increase of nearly $75 billion this year, to about $850 billion.
MOST OF THE HARD-LINE REPUBLICANS who nearly scuttled McCarthy’s bid are in favor of freezing — at the least — spending for defense while actually cutting outlays for Ukraine. If they don’t get that outcome, they could move to oust McCarthy or shut down the government.
WHILE A DEFENSE SPENDING FREEZE WOULD BE CONTROVERSIAL, it could pale in comparison to a brawl over Social Security and Medicare; some GOP hard-liners want to slow spending for the massive entitlement programs. Even a modest Social Security change — cutting the formula for annual cost of living hikes, for example — would be a political disaster for the GOP, in our opinion.
DEFENSE SPENDING IS RELATIVELY POPULAR: It provides jobs and there’s plenty of geopolitical reasons to support it, as the Wall Street Journal editorial page constantly argues. A freeze in defense spending would send a signal to U.S. allies — and adversaries — that American resolve may weaken from the South China Sea to Ukraine.
BOTTOM LINE: A serious crisis over defaulting on the U.S. debt looms by summer. Eventually there will be a deal, but Democrats will have to agree to some spending restraint — and the defense sector is a juicy target. The days of 10% annual Pentagon spending hikes are over, still another sign that Washington may be abandoning stimulative fiscal and monetary policies.
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