The overall Federal budget is facing pressure in that social programs as well as the debt service will take more of available revenue. The total deficit to date in 2009 is now over $1.2 trillion or roughly twice the defense budget. This has been enormously effected by the TARP and "stimulus" spending but in future years the cost of health insurance reform will be added to the budget.
There has already been discussion of cutting money out of operations and maintenance pieces of the budget. This could be done as fighting winds down in Iraq and Afghanistan although all signs point to more troops and operations in that country. It may mean whole sale reductions in the fighting forces, parts and overall training and other operations to save money. This will have a significant effect on military capability.
The non-partisan Center for Strategic and Budgetary Assessments (CSBA) released some reports yesterday looking at different aspects of defense spending in the future. These illustrate that the U.S. military will face higher costs for their troops, operations and things like retirement and military health care. If the budget remains flat that money will have to come out of investment programs or operations. In the past it has usually meant investment in R&D and new weapon systems. As the report says the future shows that the ability to cut around the edges is over.
The Congressional Budget Office (CBO) also released a biennial study showing the effect of different budget choices for Congress. The report highlights different ways revenue can be raised and spending cut so that choices can be made for the future budgets. The report does not endorse any of these but is just for information only. Since large defense programs make up a big chunk of discretionary spending the report highlights canceling or restructuring several of these. These include cutting back on plans to grow the Army's strength, ending programs like the Future Combat System (FCS) or the future Maritime Prepositioning Ships (MPS).
It has been clear since the election of a Democratic Congress and President that there would be cuts in defense spending. Just holding it steady as has been proposed amounts to the same thing as inflation eats away at available dollars. Some of Obama's proposed cuts had been opposed by Congress but ones like for the Missile Defense Agency (MDA) were not. This shows that in areas that there is agreement there will be reductions. The Federal Government cannot afford to keep spending $600 billion or more a year on defense while increasing social spending as well as keeping up benefit program such as Medicare, Medicaid and Social Security.
The effect of this on the defense industry is hard to calculate at the moment. There will still be some defense spending and some of it will have to be invested in weapons development and procurement. It may mean a winnowing out of the current contractors. They may have to turn overseas to other countries for business. The problem they face is that most of the rest of the world are having fiscal issues as well. This will limit the availability of other markets to make up for the any cuts in the U.S. business. The current prognosis in general is not good and there may be a significant loss of revenue and profits for the next several years.