Although a week remains before the details of the Obama Administration’s fiscal 2011 defense spending request are wrapped up, the broad outlines of the plan are becoming clearer every day. Well-connected sources confirm Defense News was correct in reporting this week that $100 billion was added to the fiscal 2011-2015 military spending plan. The sources caution that because of accounting changes such as putting some costs of overseas contingencies in the base budget, the net increase is actually only $70 billion over the five year period rather than $100 billion, but it is still a sizable upward adjustment to the budget plan that was released in May.
As Defense News reported, most of the adds come after 2011, so the near-term impact is not profound. Nonetheless, the likely size of the base budget request in fiscal 2011 will be $547 billion. When overseas contingency funding of $150-160 billion is added to that amount, it becomes clear that total military spending for the year is likely to exceed $700 billion, which is a lot more than President Bush ever requested. Thus, the widely predicted decline in defense spending under President Obama is not materializing the way that “experts” like me anticipated.
All of the negatives exerting downward pressure on military investment accounts that I cited earlier in the year are still intact. The government is running a budget deficit of nearly $4 billion per day. The Democrats have an ambitious domestic agenda. Military personnel costs are rising inexorably. But for a variety of reasons, these factors are not producing the kind of rapid drop in weapons outlays that analysts had foreseen.
Some weapons programs such as the F-22 fighter and the Kinetic Energy Interceptor have been terminated. However, the loss of revenues to industry is being partially covered by increased demand for materiel and services in Afghanistan, record foreign military sales to allies like Saudi Arabia, and some surprise increases in the Pentagon’s investment accounts. Who could have predicted, for instance, that policymakers would restart the next-generation bomber program in 2011, or double funding for the Army’s future ground combat vehicle across the 2011-2015 spending period?
I still think that money will gradually migrate out of military technology and into people accounts over the next several years. I also think it’s unlikely that 5% of the world’s population (us) will continue sustaining 50% of global military outlays. And if China decides it doesn’t want any more IOUs from the U.S. Treasury, all bets are off. But at the moment, the coming defense downturn is looking quite manageable for military contractors. It seems there has been a convergence of views between industry and the new administration: the industry knows it will have to meet higher performance standards, but the government now understands that many of the problems with defense contracts are of its own making. So the rhetoric is being toned down, and the budget outlook is improving.
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