The new debt ceiling and spending agreement reached by President Joe Biden and House Speaker Kevin McCarthy has major implications for Pentagon spending and acquisition programs for at least the next two years. The agreement would suspend the nation’s debt ceiling through January 1, 2025, pushing subsequent debt negotiations beyond the next presidential election. At the same time, the agreement includes new federal spending limits that bring back memories of the Budget Control Act that only recently expired.
The agreement would lock in the president’s $886 billion national security request for FY24, which includes $842 billion specifically for the Pentagon. The deal would result in defense budget growth of around 3.2 percent in FY24, which several Republican lawmakers deemed inadequate when the request was released earlier this year. The budget would then be capped at 1 percent growth in FY25, meaning national security spending would be limited to $895 billion that year, which is $10 billion less than projected in the administration’s latest request. Real buying power will decline when accounting for inflation.
Perhaps the biggest immediate impact of the deal is that defense hawks will lose their momentum to continue bolstering the defense budget through the congressional markup process, which will specifically affect acquisition accounts. Lawmakers added around $72 billion in defense spending in the last two budget cycles, of which $46.7 billion (65 percent) was for procurement and research & development. Any topline increases defense hawks had hoped for in FY24 would have also been heavily weighted toward acquisition, particularly procurement. Since 2012, Congress has increased procurement spending by an average of $4.8 billion per year compared to requested levels, compared to an average annual increase of $1.6 billion for research, development, testing, and evaluation.
We saw this effect on acquisition accounts when the BCA was originally implemented over a decade ago. After those spending caps were in place, the Pentagon’s base procurement budget request in FY13 was $18 billion less than planned, and the RDT&E budget was $6 billion short of previous expectations.
That isn’t to say acquisition plus-ups won’t be possible in FY24 or FY25, but they will be far more limited in scope than in recent years. Any money added to the acquisition accounts would have to be offset in other areas of the budget, such as operation and maintenance. If Congress wants to specifically increase procurement, they could also potentially move money from the RDT&E account. The procurement account is the larger of the two coffers, but the DoD has been prioritizing growth in research and development as it shifts its focus toward near-peer conflict. To that end, the Pentagon’s RDT&E account has seen average compound annual growth of 5.9 percent since 2012, compared with 2.8 percent CAGR for procurement. Cuts to the RDT&E budget would have long-term ripple effects that the Pentagon wants to avoid. We also don’t have any recent examples of Congress harvesting money on a large scale from either procurement or RDT&E to bolster the other account. Over the past decade, Congress has either added funding to both accounts or removed funding from both accounts in a given year, albeit at different rates.
Despite the new spending limits, total defense spending will ultimately be higher than the FY24 request level because of funding for Ukraine. Security assistance for Ukraine is provided through supplemental bills that are not subject to spending limits. With the FY24 fiscal year approaching in October, a new round of military aid will be required to sustain the flow of weapons and ammunition to Ukraine. Much of the funding will be used to replace equipment donated directly from U.S. stocks.
In theory, lawmakers also have the option of using those supplementals to bypass spending caps to boost the base budget, as they did during the BCA years. On multiple occasions, Congress funneled money for base budget priorities into the war coffers as a loophole to exceed BCA spending limits. Congress would likely have a more difficult time using that tactic this time around. Since the Ukraine supplementals aren’t supporting U.S. troops in a war zone like the war budgets of the past, it would likely require more political capital for lawmakers to successfully merge DoD base budget priorities into them.
There is a potential sliver lining for the Pentagon in the form of incentives to avoid prolonged continuing resolutions. The deal includes a mechanism that triggers a 1 percent budget cut if Congress fails to pass its 12 appropriations bills by the end of the year. The Pentagon may still face a short-term CR that cold run through December, which isn’t ideal, but the agreement hopefully minimizes the potential of a full-year CR that would disrupt new-start programs and constrain other projects. There is still a risk of triggering the cut if congressional dysfunction wins out, but that risk appears small at this time.
The new spending limits could also ignite a renewed hunt for various savings throughout the defense budget. For example, lawmakers may be more willing to retire legacy equipment or potentially even consider eliminating excess infrastructure through the Base Realignment and Closure (BRAC) process. Some acquisition programs could also be scaled back or scrapped, but the services have already done extensive work eliminating unnecessary programs, so there isn’t much low-hanging fruit left on the tree.
Editor’s Note (6/5/23): Lawmakers are already looking for loopholes to bypass the defense spending limits.
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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. Shaun's perspective on defense procurement and budget issues has been cited in a variety of defense periodicals, including Defense News and National Defense Magazine. 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. In addition to providing original analytical content for the U.S. Defense Budget Forecast, Shaun oversees an internal defense budget forecasting process involving Forecast International's team of skilled systems analysts following release of the DoD's annual budget request. Shaun is also in charge of managing Forecast International's Weapons Inventory database.
