On December 29th President Joe Biden signed a $1.7 trillion Omnibus Federal Budget for fiscal year 2023. The measure includes $858 billion in spending for the Department of Defense (DOD). With $45 billion more than requested by the administration in February, it is a 12% increase over FY2022 and represents over half of all Federal discretionary spending. It is also a reflection of the ongoing war in Ukraine and the looming threat posed by China.
The budget was finally concluded with wide bipartisan support, but it does raise questions for the future and how to fulfill strategic needs with rising economic and political pressures.
The Numbers.
The overall size of the defense budget is stunning. The United States will not only lead the world in defense spending, but its expenditures will exceed the next nine countries combined — five of those countries are American allies. It is estimated China will spend an estimated $252 billion and Russia $61.7 billion.
The FY2023 budget continued a general trend of rising American defense spending since 2016. Defense spending has grown in real terms, accounting for inflation, in seven of the past eight years. But the dramatic growth in inflation remains a significant issue. The FY 2023 Defense Budget proposal submitted by the Biden Administration sought an inflation increase of 2.7% for 2023 and estimated inflation would remain at that rate thru 2027. But inflation for the year was roughly 8%. Despite the additional funds provided by Congress, there may be an effort to vote for a Supplemental Budget later this year if high inflation persists.
The defense budget is divided between the “Big Four” pots: (1) Military Personnel; (2) Operations and Maintenance; (3) Research, Development, Testing and Evaluation (RDT&E); and (4) Procurement.
Military Personnel costs include salary and benefits for active duty, reserve, and national guard forces as well as DOD civilians. It is about 23% of the latest budget and includes the largest pay raise for service members in 20 years to hopefully reverse lagging recruiting and retention.
Operations and Maintenance costs include the training of military forces and deployment of U.S. forces abroad. It stands at 41% of the defense budget.
Procurement of new equipment is 19%, and RDT&E is 17%. A sizable portion of these funds is devoted to multi-year acquisitions. The overall procurement budget was $162 billion which was $17.2 billion more than the administration requested.
These included many add-ons requested by congressional members for the purchase of new military hardware. The Navy received nearly $33 billion as part of ongoing efforts to grow the fleet, and the Air Force received additional funding for more F35As, refueling aircraft, and production of the new B21 bomber.
Other issues.
The Omnibus spending bill also included $44 billion for Ukraine, which many conservative Republicans loudly opposed during the mid-term elections. Half of these funds provide increased military assistance, and the remainder replenishes U.S. weapon stocks, provides refugee assistance, shores up the Ukrainian economy, and addresses energy shortages due to the ongoing Russian assault on Ukraine’s power grid.
Recent polls show that 48% of registered Republicans believe the U.S. is doing too much to assist Ukraine. This is up from 6% at the onset of the conflict. Future military assistance will face strong opposition in a Republican-controlled Congress, with a small majority.
The FY2023 Budget Proposal clearly acknowledges China as “our key strategic competitor and pacing challenge,” while it describes Russia as an “acute threat to interests of the U.S. and its allies.” The budget authorized up to $10 billion of military assistance over the next five years for Taiwan, and China launched a record number of aircraft toward Taiwan as the president signed the bill.
New challenges and nagging problems.
With respect to Asia, most experts argue it is time to align our words with action. Since the Obama administration, the U.S. has sought to “pivot to the Pacific”, but war in the Middle East got in the way. Now war in Europe requires hard choices if a long-term strategy focused on Asia is to be realized.
New domains of warfare in cyber and outer space enjoyed significant budget increases but will require more in the future. This will be critical to achieving the nation’s stated goals of integrated deterrence across domains, theaters, and spectrums of conflict.
In 1940 President Franklin Roosevelt argued the U.S. must become “The Arsenal of Democracy” to confront the growing challenge of Nazi Germany and Imperial Japan. This is true once again. There is dramatic need for supply chain resilience and expansion in light of the “industrial warfare” that is occurring in Ukraine.
Since the 1990s, the defense sector has consolidated substantially, “transitioning from 51 to 5 aerospace and defense prime contractors. Over the last 30 years, the number of suppliers for things such as tactical missiles, fixed-wing aircraft, and satellites has all declined dramatically. For instance, 90% of missiles now come from just three sources.
The war in Ukraine has left U.S. defense stockpiles significantly depleted. Current inventories do not undergird a national security strategy that both supports Ukraine while also assisting Taiwan in the event of a Chinese attack. For example, Raytheon Technologies has said it will take years before it can build new Stinger air defense weapons, which have become key for Ukraine’s defense, due to the dwindling supply of parts.
The Pentagon is also seeking to accelerate arms sales to Asian allies in order to better deter China, and European allies are looking to replace weapon systems transferred to Ukraine or meet their targets for increases in defense spending.
Nuclear force modernization is roughly $34 billion for FY2023. This is complemented by additional funds for ballistic missile defense that will have greater urgency based on the dramatic use of ballistic and cruise missiles by Russia in its war with Ukraine.
This modernization is due in part to the continued buildup of the Chinese nuclear arsenal. China plans to increase its stockpile of 400 nuclear warheads to 1,500 by 2035. There is also the real possibility of the collapse of the New START strategic arms control agreement with Russia which could ignite a nuclear arms race.
Conclusion.
Grasping the larger strategic context and applying scarce resources in a disciplined manner is what separates good and bad strategies. Historically, Washington has been guilty of focusing on today’s crisis rather than sticking to a disciplined strategy that balances ends with means.
American national security strategy in the future must focus on deterring threats and responding to emerging strategic challenges. More than 500 U.S. government officials, foreign policy experts, and academics contributed to a recent study focused on 30 contingencies deemed both plausible in 2023 and potentially harmful to American interests, including a crisis in the Taiwan straits, Ukraine war escalation, Russian instability, nuclear weapons development by Iran and North Korea, a cyberattack on critical U.S. infrastructure among a long list of other challenges.
The FY2023 Federal budget also added $1.3 trillion to the national debt which is now over $30 trillion. Estimates are that an additional $14 trillion will be added to the national debt over the next decade. Many experts have warned that the national debt has become the country’s most serious national security threat.
House Republicans agree and won a pledge from Speaker McCarthy that the top-line budget figure for domestic discretionary spending in FY2024 won’t exceed what it was in FY2022. That includes defense spending, which would have to fall by roughly $75 billion to meet that requirement.
With this budget reality, Mike Rogers, the new Republican Chairman of the House Armed Services Committee, could struggle to fulfill his recent pledge to provide “our warfighters with the resources and weapons they need to deter and, if necessary, defeat any adversary anywhere in the world.”
Balancing ends and means will remain difficult.
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THE DYNAMICS OF DEFENSE SPENDING
Please join our industrials and macro policy teams this Thursday, January 19 at 10:00 am as we host a call with guest speakers Tom Davis of the National Defense Industrial Association (NDIA) and our geopolitical advisor Col. Jeffrey McCausland to discuss the state of play of defense spending given the new dynamic in Congress, geopolitical factors as well as new developments in the war in Ukraine - and the resulting implications for the defense industry.
THURSDAY, JANUARY 19 AT 10:00AM
CLICK HERE to access the event.
About Tom Davis
Tom Davis, a Senior Fellow in Residence at the National Defense Industrial Association (NDIA), was commissioned a Lieutenant in the Field Artillery upon graduation from the United States Military Academy in 1972. After numerous troop assignments in Germany and Korea, he earned a Master’s Degree in International Relations and Economics at Harvard University, and joined the faculty of the Military Academy teaching International Relations, Economics, and Government in the Department of Social Sciences. In 1985, Mr. Davis graduated from the Marine Command and Staff College where he won the prestigious Clifton B. Cates Award for individual research, then joined the Office of the Army Chief of Staff as the Fire Support and Classified Program Analyst. Tom later joined the Northrop Grumman Corporation as Senior Defense Analyst advising the corporate leadership on emerging strategic, technological and budgetary trends in the American defense program and General Dynamics Corporation as a Director of Strategic Planning.
About Dr. Jeffrey McCausland
Dr. McCausland is a retired U.S. Army Colonel who formally served as the Dean of Academics at the U.S. Army War College. During his time in the military, he commanded a battalion in combat during the Gulf War in 1990 and 1991. He also served on the National Security Council staff in the White House during the Kosovo crisis. He currently serves as a national security consultant for CBS radio and television. He routinely does analysis for CBS on issues such as Iraq, European security, arms control, or related questions of national security policy. He is currently involved in a project for the National Nuclear Security Administration focused on nuclear weapons in South Asia and the proliferation of weapons of mass destruction. Dr. McCausland is also the founder and CEO of Diamond6 Leadership and Strategy, LLC. Diamond6 conducts executive leadership workshops for corporate, public, and non-profit leadership teams across the United States. He recently published a new book, Battle Tested! Gettysburg Leadership Lessons for 21st Century Leaders.
