Current Trends In Defense Spending To Continue
The 2011 defense budget released yesterday continues the budget plans outlined by the new Obama Administration in their 2010 request. In many ways this budget contains good news for U.S. and European defense contractors who have done banner business with the Pentagon over the last nine years. Some of what Secretary of Defense Gates and President Obama are doing with the budget is forced by the continuing operations in Iraq and Afghanistan. This along with the restructuring of procurement programs leads to the proposal for the largest defense budget since World War II that is part of the largest U.S. Government spending plan with the largest deficit ever.
The new budget also hopes to accomplish what the 2010 one did not when it comes to ending programs. The C-17 transport aircraft made by Boeing (BA) at its Long Beach, CA facility is not funded. Last year Congress added ten to the budget themselves as well as a few in the 2009 supplemental defense spending bill. President Bush also tried to complete the program but Congress has consistently funded it. Certainly there is a demonstrable need for the long range heavy lift aircraft but the Air Force feels the logistics tail attached to the production is substantial.
The second engine for the core acquisition program of the budget, the F-35 Joint Strike Fighter (JSF), is also de-funded again. Last year Congress added back in funding to keep the project of General Electric (GE) and Rolls-Royce (RR:LSE) going as risk reduction for the Pratt & Whitney (UTC) main engine. The JSF program itself was shaken up by the removal of the Program Manager as punishment for the continued slips to the test program. Lockheed Martin (LMT) the prime contractor for the program will not get off without some form of punishment as the budget proposes withholding over $600 million in fee to account for the missed schedule milestones.
Because of the operations in Iraq and Afghanistan the budget will contain a great deal of money for troops, their benefits and care, and the supplies they need to operate. The Army and Marine Corps will continue their expansion and receive large amounts of Operation & Maintenance (O&M) funding for the fighting. Part of this expansion is being caused by the Obama Administration's plan to increase the number of troops deployed to Afghanistan while slowly withdrawing them from Iraq. The budget will also increase programs like helicopter procurement and Unmanned Aerial Vehicles (UAV) as they are systems that have seen a lot of use in these "Overseas Contingency Operations".
Because the budget does not seek any serious cuts from last year except for the C-17 and JSF alternate engine it will probably receive a lot of support from Congress. The total defense budget is actually barely half of what the projected deficit will be and represents less then twenty percent of the total spending plan. The increase to overall spending is such that the less then $100 billion increase in defense spending is almost lost. Much of that defense increase is due to the expanded operations in Afghanistan.
As predicted the F-35 struggles to stay on schedule will add billions to the five year defense spending plan. The increased cost of development and the stretched out production run to make up for the loss of two years production will add $314 billion in spending. Total increase in the whole program is probably right now not available but any decrease in annual production buys will require either a great deal of money added to the back end of the program or a cut in total quantities bought. The JSF due to its structure and the contributions by the allied buying countries like Holland, Great Britain and Australia is very sensitive to these kind of changes.
The budget is in many ways a status quo budget in a time when the U.S. should perhaps be thinking long term in reducing spending overall. Unfortunately until the fighting ends across the globe and the necessary modernization is accomplished this will be hard to do. Congress also has a hard time cutting the budget overall especially when unemployment remains high as it contributes to the economic well being of their districts. These kind of pressures will keep the defense budget robust at least for the next several years.