Defense Faces Fiscal Churn Beyond 2015

The defense sector breathed a sigh of relief when Congress passed the Bipartisan Budget Act earlier this year. The respite, however, has been short lived. 

The Defense Department was given a partial reprieve from sequestration in budget years 2014 and 2015 — about 30 percent — and by law will have to return to the Budget Control Act caps in fiscal year 2016. The services saw the budget deal as an opportunity to regroup and get on a more manageable glide path to lower spending levels. The Bipartisan Budget Act also marked a return to regular order — real budgets with more balance between accounts. 

But it didn’t take long for Defense Department leaders and service chiefs to call for further budget relief in 2016 and beyond. The administration asked Congress for an additional $115 billion over the BCA caps for the five-year defense plan. The Defense Department’s so-called “green book” lays out the details, although it does not include war funding, known as overseas contingency operations.

Analysts at the investment advisory firm Capital Alpha noted that the only service returning to mid-2000s investment spending is the Air Force. By fiscal years 2018 and 2019, the Air Force share of investment spending rises to 44 percent of Pentagon-wide modernization funding. The Navy gets 37 percent and the Army 17 percent. The fiscal years 2013-2019 compound annual growth rate of Air Force and Navy procurement is 4 percent while the Army’s is only 2 percent. All three services show large drops in investment from 2014 to 2015, but they begin to grow again in 2016 and out. If the additional $115 billion doesn’t materialize, then deeper force structure cuts will be the order of the day.

It is difficult under almost any circumstance to see Congress giving much, if any, relief in 2016 and beyond. This puts procurement accounts at risk and stirs concern about the future of the defense industrial base.

NDIA has undertaken a defense industrial base study under the leadership of Senior Fellow Brett Lambert, former industrial policy chief at the Defense Department. Lambert and NDIA Chairman of the Board Arnold Punaro recently testified in front of the House Armed Services Committee’s subcommittee on tactical air and land forces.

Punaro laid out the case for maintaining a robust industrial base. He stated that the United States needs to ensure that its forces are supplied with the best equipment in order to give our troops the edge. He also noted that the industrial base is a key national asset. While the military is able to surge forces, the nation can’t surge an industrial base that is not already in operation. It needs to be in production to be able to respond. Design and engineering teams need to be working on advanced systems.

Punaro stressed that decision makers must focus on defining the criteria for sustaining a robust defense, and that criteria needs to be based on what is needed to meet war-fighting capability.

Lambert underscored this point by suggesting the Defense Department should focus on what it buys rather than on what it spends. Military leaders frequently assert that they never want a fair fight. The crucial question is whether the nation is preserving critical capabilities and sufficient industry competition as budgets draw down.

Ensuring the health of the industrial base will require careful planning. Unlike in previous years where most of the money went to prime contractors, now most Pentagon contract dollars trickle down to the lower tiers of the supply chain. Currently, only about 30 cents of every dollar goes to primes while 70 cents flows to subcontractors.

Among the key concerns is the need to preserve competition in next generation fighters and engines. Lambert cited the case of the British government having to turn to the United States for help with a nuclear submarine design, a capability it had lost. If the United States lost a critical capability, we would have no one to turn to.

During a question-and-answer session following Punaro’s and Lambert’s statements, Rep. Brad R. Wenstrup, R-Ohio, noted that most American citizens don’t appreciate the extensive commercial technology that came from Defense Department investments. Examples include the Internet and GPS satellites. He suggested government and industry leaders should do a better job educating the public on the value of defense technology investments. The benefits of these investments take years or decades to materialize, so it is important to ensure they continue.

Today’s industrial base issues speak to larger questions about the nation’s national security strategy. Retired Air Force Gen. Chuck Wald has suggested that there is a need for a true bottom-up analysis to identify key functions and missions for the U.S. military and what resources are needed to satisfy these demands. This proposed analysis is not on the order of a Quadrennial Defense Review, but a more detailed assessment of necessary capabilities, systems and the technologies that underwrite them. These capabilities should not be those that “would be nice to have,” but rather those we must have. They would constitute the critical minimum and should form a baseline that provides an affordable target for investment.

The Defense Department needs a better plan for managing the fiscal crunch. The military services cannot afford to approach the fiscal year 2016 budget exercise without a better idea of how to navigate a return to BCA caps. They are unlikely to obtain the relief they are seeking. Many critical issues depend upon a smooth transition to fiscal year 2016. There has to be an appropriate balance among readiness, investment budgets, force structure and, very importantly, a healthy defense industrial base.

Topics: Business Trends, Doing Business with the Government, Defense Department, DOD Budget, DOD Policy