The national defense budget is likely to see a significant reduction within the next two years, both as a long-term effect of the COVID-19 coronavirus and in response to the upcoming presidential election, analysts said April 28.
This year, with the presidency on the line in November, was already going to be a tough one to pass the defense authorization and appropriations on time. But the timeline and topline of the defense budget is also tied to how long it takes to develop a vaccine to the COVID-19 virus that has swept the globe, and how much money is spent to keep businesses afloat through the pandemic, said MacKenzie Eaglen, a resident fellow at the American Enterprise Institute during a Monday teleconference call hosted by the Center for Strategic and International Studies.
“It’s really rare in the middle of a national emergency to be talking about the bill payers, and yet people already are, and defense is always at the top of the list,” Eaglen said. “So that really causes me great concern.”
U.S. service leaders will likely begin to feel downward pressure on the budget to divest more legacy systems if they want to keep their coveted modernization programs on track, said Todd Harrison, director of defense budget analysis and the director of the Aerospace Security Project at CSIS.
“If we’re looking at an environment where the budget might be flat at the best case or trending down over time, something is going to have to give,” he said in the teleconference. “If DoD really wants to protect these key modernization programs, not only is it going to have to divest legacy systems, it’s going to have to divest them faster and it’s going to have to make some reductions in force structures.”
Harrison noted that these tough decisions may be incumbent upon who wins the presidential election in November. “If the presidency goes to a Democrat, then Republicans are going to get more serious about being fiscal conservatives again sooner,” he said, adding that budget cuts could be reflected as early as the fiscal year 2022 budget cycle in that case. Should President Trump win a second term and Republicans maintain largely in power, “We’d probably have another year or two reprieve from that,” he said.
Regardless of who wins the White House, it’s possible that the Pentagon will undergo a strategy review, and perhaps reassess the latest national defense strategy, released in 2018, Harrison added.
COVID-19 is likely to have a long-term effect on the defense industrial base’s structure, the analysts noted. Expect more mergers and acquisitions to come in the wake of the pandemic and “big shifts in industry” over the next decade, said Andrew Hunter, a senior fellow in the International Security Program and director of the Defense-Industrial Initiatives Group at CSIS. An “opening round” has already taken place, with the recent Raytheon [RTN] and United Technologies Corp. [UTX] merger, Northrop Grumman’s [NOC] acquisition of Orbital ATK in 2018 and the L3Harris [LHX] merger, he noted.
The increasing importance of software is driving companies to either grow such capability organically or acquire it through mergers and acquisitions, Hunter said. But the Defense Department’s embrace of other transaction authorities (OTAs) may also be playing a part. Eaglen noted during the teleconference that the department has begun to lift restrictions on the use of OTAs for the duration of the COVID-19 crisis.
That means the Pentagon is going to invest much of its technology development capital with non-traditional companies working through these OTAs, Hunter continued. “With these companies receiving the bulk of DoD’s technology development money, they’re going to become takeover targets from the big companies who don’t want to lose market share to these up and comers, or maybe they’ll break through and they will disrupt.”