Budget Moves Buoy Defense Industry

Issue Brief

It has been an unsettling year for defense contractors. While industry profitability continues to ride the crest of record post-cold-war military spending, the Obama Administration has sent numerous signals that the sector’s flush times may be coming to an end. In March, President Obama seemed to set the tone for his dealings with the defense industry when he warned, “the days of giving defense contractors a blank check are over.” In April, defense secretary Robert Gates proposed terminating or cutting back dozens of major weapons programs, and approved plans to “insource” thousands of defense jobs previously contracted out to the private sector. In May, the President signed into law the “Weapon Systems Acquisition Reform Act of 2009,” imposing tough new standards on virtually every facet of weapons development.

None of this came as a surprise to defense companies. Many had been expecting the big military-spending increases of the Bush years to level off once U.S. troops began to depart Iraq, and members of both parties in Congress had been assailing the uneven performance of defense contractors since Bush first took office. Furthermore, there was extensive evidence that Republicans were more inclined to spend money on military technology than Democrats; in fact, a Merrill Lynch study of Pentagon spending patterns over the past 50 years found that the single most powerful predictor of whether weapons spending would go up or down was which party was in control of the government. It’s not that the Democrats always cut military spending — they presided over four of the five biggest military buildups in the last century — but these days they seem to prefer spending their defense dollars on people rather than weapons.

However, as the administration’s defense team races to complete its fiscal 2011 budget next week, it is making choices that confound stereotypes about Democratic spending priorities. First, even before President Obama decided to send 30,000 additional troops to Afghanistan, the administration had already decided to spend more on overseas contingencies in 2011 than the $130 billion it planned to spend in 2010. Second, Jason Sherman of insidedefense.com reported this month that the White House will support increasing the regular defense budget (not including overseas contingencies) by $14 billion above what was planned for 2011, meaning it will rise from the $542 billion forecast in May to $556 billion. Third, Vago Muradian of Defense News reported this weekend that total increases above the May plan for the regular defense budget across the 2011-2015 spending period will reach $100 billion.

It appears that a major factor driving increases in the regular budget was the desire by Secretary Gates to keep military modernization plans on track. For example, funding available to the Army to develop its next-generation ground combat vehicle during the 2011-2015 period was doubled. Gates also disclosed last week that the Air Force will begin receiving funding in fiscal 2011 for a future bomber “family” that may include both manned and unmanned aircraft. And the Pentagon is increasing development outlays for its biggest new weapons program, the F-35 joint strike fighter, while reiterating support for the effort.

These are not the actions of an administration bent on freeing up defense dollars for an ambitious domestic agenda. The fiscal 2011 defense request will vigorously fund everything from overseas contingencies to military healthcare to weapons modernization – with the total request rising for the first time to above $700 billion. When the surprisingly robust funding of weapons accounts is combined with heavy demand for military goods and services in Afghanistan and record sales of weapons to allies, it seems that rumors of the defense industry’s demise under President Obama are quite exaggerated.