Forecasting the New Administration’s Impact on Defense

With each administration change the specter of uncertainty raises its head: Will the defense budget stay the course? Or, as a discretionary pool of money — approximately 50 percent — will the budget be tapped to plus-up social programs or serve to reduce budget deficits? Or perhaps both? This shift in administration is no different from those of the past, with the principal exception being the stark contrasts in political philosophy of the two candidates. This has fostered greater budgetary anxiety.

“Inside the Beltway” experts have predicted, with mounds of justification, a slight dip to a slight rise in defense allocations — bottom line, a flat budget. If these predictions are accurate, then the impact of the administration change will be minor, with shifts only in program priorities.

But planning for a seismic shift may be more prudent.

The Obama administration left a significant fiscal deficit, along with dangerously low military readiness in the wake of the Budget Control Act. Then along came the unexpected pandemic, which necessitated trillions of dollars in economic relief packages that have driven the nation’s budget deficit to breathtaking levels.

These factors, plus the push by intense elements within the Democratic Party to expand unemployment benefits, fund health care for all, eliminate college debt, and so forth, put additional pressure on the new Biden administration and the subsequent budget.

Consequently, one must now take an earnest look at the possibility of a deeper defense cut than both the military and industry desire. Another general election is years away, and politicians are more inclined to cut now, with increases reserved for election years to secure votes.

Although sequestration is not envisioned, a little budgetary paranoia may be appropriate.

When budgets are reduced, production and force levels in military and industry headcount are impacted. Defense cuts result in increased unemployment, which would further aggravate an economy struggling with COVID-19. Past budget reductions witnessed a shift to research and development in defense. With budget cuts now, the Defense Advanced Research Projects Agency — in conjunction with the services — will look for more proof of concept, 6.2 and 6.3 initiatives, regarding state-of-the-art technology.

The cycle is familiar to many: reduce defense spending, emphasize R&D; then increase defense spending, attend to production.

Foreshadowing this cycle is always the threat, and the threat dampens the severity of this budgetary cycle. For example, the dissolution of the Soviet Union caused a pause in Moscow’s defense spending that Russian President Vladimir Putin is still striving to overcome, whereas China has not lost its stride or momentum in military growth.

In a Nov. 2 Washington Post article, Northrop Grumman CEO Kathy Warden said, “Defense spending is largely threat driven and today’s threat environment warrants a strong defense.” This comment is accurate, and echoed by other leaders in the national security community.

However, the Neville Chamberlains of the new administration may downplay any foreboding threat and thus advocate for defense budgetary cuts, looking instead to alliances, agreements, appeasement, and soft power projection through international aid programs. Some reductions because of the deficit and/or philosophical differences in government spending should be anticipated.

All that being said, defense companies do look and plan for various scenarios. After all, the severity of the threat and the appropriate force structure in response to the threat are open to a rather subjective interpretation.

The impacts on the defense community of a defense budget reduction are numerous, including but not limited to the following direct effects.
Any service program not in existence prior to the Trump administration will be subject to close review and re-justification.

The number of aircraft to be purchased will be reduced, lot buys pushed out, recapitalization delayed, satellite constellations deferred, ship keel-laying slowed — all likely impacted by budgetary pressure and/or shifts in defense prioritization.

Development activity such as in hypersonic weapons, autonomous combat vehicles, artificial intelligence, and other state-of-the-art technology pursuits will be hampered.

Legacy programs will be retired while new acquisitions with lesser effect on service requirements will be canceled — and this may become the norm.

In the next several months, there will be considerable dialogue regarding the defense budget and its impact on military readiness, established programs, and the defense industry, but we will see little if any comments on and concerns about the indirect effects of the new administration’s policy changes on the defense industry. Indirect impacts can have a more lasting negative effect on the industry.

An immediate concern is with foreign military sales (FMS). In many cases, these sales help compensate for fluctuations in the U.S. defense budget; if they are eliminated or reduced, industry suffers. FMS business activity flows for years beyond the budget cycles generated by a new administration.

According to State Department figures, the United States sold $175 billion in weapons to foreign partners and allies in fiscal year 2020, which was a combination of FMS and direct commercial sales.

Current sales and forecast sales in the approval cycle will come under scrutiny. Expect the new administration to focus more on foreign policy versus domestic manufacturing, and nations to demonstrate considerably more concern for human rights infringement, which will impact FMS approvals.

Meanwhile, “Buy America,” another indirect policy decision, will negatively affect overseas sales. Many governments stipulate a percentage of manufacturing be accomplished by their own domestic companies. Although Buy America is well intentioned, it would most assuredly harm overseas sales opportunities.

Subcontractors and suppliers might appreciate the focus on Buy America but might not be able to realize its benefits. COVID-19 restrictions imposed by state and local governments have severely impacted many companies. Furthermore, employees who have become ill have caused small companies, with limited employee depth in certain technical disciplines, to halt production. Illness, policy restrictions, and the enduring negative effects of businesses forced to close from prior sequestration are all severely straining the defense industry. Even if the military budget stays intact, the supply chain will continue to suffer from the smallest budgetary tremors.

Finally, to fully understand the possible environment resulting from a new administration, we must consider tertiary effects.

For example, the new administration has not wavered from its stated position of increasing corporate taxes. This will affect employee headcount and internal R&D activity. The subsequent risk is lower technology readiness levels for articles in development.

Government contracting offices will seek more fixed-price contracts to ensure they remain within budgetary constraints; accordingly, industry will have to propose at higher dollar amounts to reduce the possibility of write-offs and to reserve funds for higher risk mitigation tasks.

Also, the recently formed Space Force may be pressured to justify its existence. Many believe it adds layers of unnecessary bureaucracy with a relatively small force structure.

In the final analysis, industry should expect some overall reduction in the defense budget in order for the government to fulfill social programs while addressing the deficit. FMS may not be sufficient to offset U.S. defense spending reductions, and a corporate tax increase would flow into the equation with its own set of negative ramifications.

Finally, the supply chain, which has suffered the brunt of sequestration, the pandemic — through policy and illness — and tax increases, will feel directly and indirectly any shift from the new administration.

Many in the new government understand the implications well and will work diligently to balance the impacts on defense and thus the economy; however, the White House will feel some obligation to appease those progressive elements within the Democratic party.

Retired Air Force Col. John C. Johnson is a former vice president and general manager of Northrop Grumman. He can be reached at jjohn4236@yahoo.com.

Topics: Defense Department