Department of Defense Fears the Budget Axe

According to Forecast International's latest analysis of the U.S. defense market, the DoD budget is facing mounting pressure from both sides of the aisle as lawmakers struggle to rein in trillion-dollar deficits. "The extent of the damage remains to be seen, however, as there is a fundamental disagreement over whether the Pentagon's coffers should be subject to the same scrutiny and cuts as non-security budgets," says Shaun McDougall, Forecast International's North America Military Markets Analyst and author of the report.

What is clear is that DoD spending will be constrained in the years ahead, especially when compared to the expansive budget growth over the past decade. The White House projected about 1.8 percent real growth in FY11; growth is then expected to fall to 1.1 percent in FY12 and to below 1 percent after that. Furthermore, war funding will taper off as the U.S. completes its mission in Iraq, though volatile conditions in Afghanistan leave some budgetary questions unanswered.

This top-line growth will be unable to support current DoD requirements, as Defense Secretary Robert Gates has claimed the Pentagon will require around 2 to 3 percent budget growth above inflation to sustain the military force structure. He has laid the groundwork for a budget savings initiative under which the DoD would make significant cuts to operations & maintenance, contract services, and overhead in order to transfer over $100 billion to force structure and modernization efforts. The plan is not absent shortcomings, such as the fact that the majority of savings have been pushed to the outyears. In addition, there is a growing concern that the services could lose some or all of their savings as the government attempts to pay down the deficit.

"What is clear for now is that the Pentagon has lowered its expectations and is adopting a planning construct that assumes minimal budget growth," says McDougall. The DoD also considers maintaining and modernizing its force structure a top priority. Although there is often little in terms of low hanging fruit when it comes to rising personnel costs, the DoD has shown that it at least intends to make sacrifices in order to prevent cuts to its acquisition budget, and indeed to provide substantial growth to support its wide-ranging weapons programs.
These fiscal uncertainties are especially troubling for a defense acquisition system that has been plagued with severe cost growth. Secretary Gates has said that affordability must be considered a key parameter throughout the acquisition cycle, which will inherently limit the DoD's ability to modify program requirements or take risks with technologies or schedules.

A number of major weapons programs are in the offing, including the SSBN(X) ballistic missile submarine, the Ground Combat Vehicle (GCV), long-range strike platforms, a presidential helicopter, and more. SSBN(X) will strain the Navy's shipbuilding accounts, the former presidential helicopter program was canceled because of high costs, and lawmakers have already expressed concerns about the affordability of the GCV. With each of these efforts, "Designing to affordability, and not just desire or appetite, is critical," says Secretary Gates. What remains to be seen is whether the Pentagon can live by this philosophy, and whether it will be willing to walk away from programs that fail to meet these standards.