The New Administration and the Defense Budget

Either of the candidates currently running for office, John McCain or Barack Obama, will face challenges when it comes to Federal spending. The downturn in the economy as well as the various promises they have made will require more funding. If there is a heavily Democratic Congress that also will put pressure on how the money is spent. The New York Times reports on preparations already under way in the Pentagon about this issue. It is interesting, though, that one of Obama’s promises is to “rebuild the Army” which will certainly require funding. In the past one history of America reductions in defense spending have been seen as a way get more funds for other programs. Defense now dominates the discretionary part of the budget, although Social Security and Medicare make up the highest percentage. With the winding down of the activities in Iraq and the end of supplemental spending there will have to be less defense money. This will have a negative effect on the defense industry as a whole. Large weapon systems,while not as important as they once had been, will fight among themselves for the available funds. Companies like Boeing, Northrop Grumman and Lockheed who make these systems will see some downturn in revenue. The areas of services and support which do make up a large part of the contract dollars will also be reduced. There will be a winnowing out of companies, like in the 90’s, with mergers and acquisitions happening quite frequently. One effect counteracting all of this will be the desire of Congressman to keep the programs in their district alive. These include procurement and support efforts. Earmarks will be used to keep some things afloat that may not really be desired by the services.

Anyway you look at it whomever is the new Secretary of Defense and the Head of OMB will have their work cut out for them as they navigate this downturn in funding.