by Shaun McDougall, Military Markets Analyst, Forecast International.
President Donald Trump has called on department secretaries to deliver 5 percent cuts for their upcoming FY20 budget requests, opening the door for a potential decline in defense spending. At the same time, Trump said the defense budget would “probably” total $700 billion in FY20. Initially, it was unclear if this $700 billion figure applied only to the Pentagon, or to the total national security budget, which also includes programs and agencies outside of the U.S. Department of Defense, such as nuclear programs within the Department of Energy.
If the $700 billion figure applied to the Pentagon alone, then it would actually be an increase over FY19 levels and close to the $701 billion the DoD was originally planning for FY20. However, the president later made comments suggesting the $700 billion budget would actually apply to the larger national security budget, which would signify a cut for the DoD. The White House requested $716 billion in national security spending in FY19, and was planning for $733 billion in FY20. However, a $700 billion national security budget in FY20 would reflect a cut of around 2 percent from FY19 levels, and a 4.5 percent reduction from the $733 billion originally planned. Following the defense increases provided in FY18 and FY19 by the latest two-year budget deal from Congress, the administration had been projecting a relatively flat defense budget that grew with inflation in the outyears.
While the $700 billion figure is not set in stone, budget planners must now begin the process of determining where to potentially reduce spending. The additional funding that materialized in FY18 and FY19 has helped the military bolster maintenance work in an effort to improve readiness, and the Pentagon may be reluctant to take funding away from this increasingly critical area. In fact, the Pentagon recently laid out a plan to increase the mission capability rates for F-16, F-18, F-22, and F-35 aircraft to 80 percent, which will require continued investment in the area of sustainment.
Infrastructure is one possible target for cuts. While the Pentagon could push for another Base Realignment and Closure (BRAC) round, Congress is typically wary of this approach due to the possibility of upsetting constituents over a base closure. Thus, the Pentagon may look elsewhere for marginal savings in its infrastructure budget.
Acquisition is always a potential target for budget cuts. The level of cuts the DoD would face under a $700 billion national security budget wouldn’t necessarily result in any earthshaking program terminations, but some sacrifices may have to be made. With the Pentagon’s focus turning strongly toward preparation for conflicts with near-peer adversaries in the wake of Chinese and Russian military expansion, budget cuts would likely steer clear of some of the most advanced technology, such as that used for bombers, fighters, and warships, for developing new hypersonic missiles, and for cybersecurity. This prioritization of developing and fielding new equipment may ultimately result in a hit against legacy systems, possibly leading to various upgrade programs being scaled back or canceled.
This trend had already materialized to some degree before budget cuts were even on the table. For example, the Army recently terminated its Bradley A5 upgrade in order to accelerate development of the Next Generation Combat Vehicle, which will eventually replace the Bradley. The Marine Corps also ended its AAV7 amphibious vehicle survivability upgrade to free up funding for the new Amphibious Combat Vehicle.
The DoD could also tweak procurement rates for various systems to offset some funding in FY20 and beyond, while maintaining overall procurement targets. The Army’s helicopter accounts have been particularly susceptible to this tightening during times of budget uncertainty. It is also possible that projects currently in development could see their timelines pushed back.
Perhaps an even bigger problem awaits the Pentagon in the form of Budget Control Act spending limits, also referred to as sequestration, that return in full force in FY20 and FY21. The BCA caps currently limit national security spending at $576 billion in FY20 and $590 billion in FY21. If the administration were to adhere to its original spending plan, Congress would have to raise those caps by around $84 billion in FY20 and $87 billion in FY21. Keep in mind that any funding requested in the Overseas Contingency Operations account is not subject to the caps.
If lawmakers are unable to reach an agreement of that magnitude, then the Pentagon may be facing an even more significant cut to its topline. A potential power shift on the Hill following the upcoming mid-term election could also bolster the Democrats’ search for more domestic funding to match any increases provided for defense above the BCA caps. At that point, the question becomes how much sway the fiscal hawks in Congress will have in negotiating a deal that doesn’t explode the deficit yet again. One thing is for sure: the road to an FY20 budget will be more dynamic and contentious than the surprisingly smooth FY19 process.
As editor of International Military Markets, North America, Shaun has cultivated a deep understanding of the vast defense markets in the United States and Canada. Further, Shaun played an integral role in the development of Forecast International’s U.S. Defense Budget Forecast product, which offers an unprecedented level of insight into the Pentagon’s acquisition budget.
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