Panetta and Clinton wade into domestic politics

The Obama administration's top two foreign policy officials waded deeply into domestic politics on Tuesday, calling for tax hikes to help close the budget deficit and warning against making deep cuts to the budgets of the Pentagon and State Department.

Defense Secretary Leon Panetta and Secretary of State Hillary Clinton made an unusual joint appearance before a military audience at the National Defense University Tuesday, using their combined political stature to push Congress toward a "balanced" debt reduction deal that wouldn't fall disproportionately on their two departments.

The two officials have known each other for decades, with Panetta serving as the head of the Office of Management and Budget and then as White House chief of staff during the Clinton administration. They appeared comfortable together on stage, referring to each other by their first names and frequently telling jokes. When the moderator asked about their two "gigantic" departments, Clinton - whose budget is roughly 1/12th the size of Panetta's -- quipped, "Well, he's gigantic," drawing laughter from the crowd.

Still, they focused on a serious message about the risks of future budget cutting. Panetta - like his popular predecessor, Robert Gates - made clear that he would use some of his own political capital on behalf of the State Department even as his own Pentagon faces unrelenting budgetary pressures.

"Our national security is our military power, our Defense Department, but it's also our diplomatic power and the State Department," Panetta said, adding that deep, across-the-board cuts to the two agencies "would have devastating effects on national defense and devastating effects certainly on the State Department."

The last-minute deal President Obama signed with Congressional leaders to raise the debt-ceiling deal calls for roughly $400 billion in defense cuts, but also included a triggering provision that would automatically cut more than $500 billion in additional Pentagon spending if specific targets were not reached. Panetta and other top Pentagon officials have been loudly warning that cuts of that size would damage the military's ability to carry out its missions.

"It would result in hollowing out the force," he said Tuesday.

Neither official is a stranger to budget politics, and many of their comments had a distinctly partisan overtone. Panetta, the former OMB chief, said balancing the budget would require tax increases and changes to entitlement programs like Social Security. Cutting discretionary spending like the Pentagon's budget would not free up enough money, he argued.

"If you're serious about dealing with budget deficits, you can't just keep coming back to the discretionary parts of the budget," Panetta said.

Clinton, for her part, noted that the federal budget had been balanced during her husband's two terms in office because of combination of spending cuts and higher taxes, a formula that she said would work again today.

"This is not ancient history," she said. "We had balanced budgets."

Asked if tax increases, which are anathema to most Republicans, would need to be part of any future budget-balancing package, Clinton answered with hesitating: "Yes absolutely."

Both officials aknowledged that the budget pressures on their depatments show no sign of easing. Panetta, for example, said senior Pentagon officials were weighing a proposal to massively revamp the existing retirement system for the nation's 1.4 million troops.

"It's the kind of thing that you have to consider," Panetta said. "Everything has to be on the table."

The recommendation from a high-level advisory panel established by former Defense Secretary Robert Gates calls for tossing out the existing retirement system, which gives a fixed pension to anyone who has served for 20 years or more, and replacing it with a 401(k) plan with government contributions. The troops wouldn't be able to access the funds until they reach 65, the country's normal retirement age. Military officials estimate the change would save roughly $250 billion dollars over the next 20 years.

Panetta told the audience that if the retirement policy were to be revamped, he would seek to ensure that current troops were grandfathered to ensure they received the full benefits promised to them. The comment drew loud applause from the hundreds of uniformed military personnel in the crowd.

"I know my audience," Panetta joked.

Most of the session focused on the budget and other domestic issues, but the two officials also faced questions about Libya. Panetta and Clinton said Muammer al-Qaddafi's hold on power seemed to finally be weakening amid advances by the country's rebels, ongoing NATO airstrikes, and the defections of key loyalists like the country's Interior Minister, who fled to Cairo earlier this week.

"The sense is that Qaddafi's days are numbered," Panetta said.

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