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By Howard Wheeldon, Senior Strategist at BGC Partners

18 Nov 10. Bad enough that the US President appears determined to slash spending on defense but it seems that this time he is not alone. No one can be in any doubt on Capitol Hill that the knives are out to attack the $708bn defense budget and that in effect consumes approximately 19% of federal budget spend. That will make for a very difficult ride for long time Defense Secretary, Robert M. Gates, one of the very few remaining Republican hangovers from the Bush administration. Highly respected with every justification Robert Gates is his own man and since his appointment back in November 2006 he has proved time and time again that he is no pushover. At a Wall Street Journal conference Tuesday Gates said that the presidential commission’s plan to slash the defense budget was “math, not strategy”. We might well agree but the trouble is that too few others will. Remarks being expressed in the US defense debate may also ring true of recent SDSR related defense cuts announcements by the UK government just last month. But it is US defense strategy that we are concerned with today and a debate over budget cuts that coincides with a push by NATO members meeting in Lisbon this weekend that will likely attempt to question not only what its future role should be but also why its size and cost base is still linked to the cold war world of yesterday.

Secretary Gates may be described as the best friend of those that support the need for the US and its NATO allies to maintain a vigilant attitude to defense requirement. With China, Russia and many other countries increasing spend on defense whilst the western allies individually talk only of cuts we in the west must ensure that defense is determined by strategic requirement over cost. Gates went on to say Tuesday that “if you cut the defense budget by 10%, which would be catastrophic in terms of force structure, that’s [only] $55bn out of a $1.4 trillion deficit” adding “we [defense] are not the problem”. It is of course not for me to say whether he is right or wrong in such an assertion but the math says that he is most likely right.

Given that defense accounts for around half of US government discretionary spend it is no surprise that the presidential commission should see rationale calling for defense spending to be cut. In fact the Obama commission has called for $100bn to be shaved off defense by 2015. Set against Gates view that the defense budget still needs to rise by a post inflation level of 1% excluding Afghanistan and Iraq costs the gap between the Obama and Pentagon camps is clearly huge. So who wins? Clearly any plan that talks of freezing defense spend must be taken seriously. In fact only yesterday a group led by former Republican Senator Pete Domenici, and former Clinton budget director Alice. M. Rivlin who is now Economic Studies Director at the Brookings Institute and a member of President Obama’s National Commission on Fiscal responsibility and Reform issued a report that called for just that. This though was not the Obama Commission that was talking. It was in fact a bipartisan Debt Reduction Task Force which is in fact sponsored by the Bipartisan Policy Center in Washington, D.C. One may assume that the Gates view on any proposals to cut of freeze defense will be rigidly resisted. The most likely scenario to play out on Capitol Hill in the weeks and months ahead is that if Obama can muster sufficient bipartisan support we could expect the diehard defense budget cutters to win. If that is so then we might anticipate that Mr. Gates would throw in the towel and President Obama would be looking for yet another new member of his team.

That is only one possible scenario though. Another might be that Mr. Gates accepts the need to squeeze the Pentagon to achieve much greater efficiency. In fact the Defense Secretary is already on record suggesting th

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