What to Watch – the Federal Budget and Beyond

1. Freeze on discretionary spending – Announced in the State of the Union

• National Security / DoD exempt and thus defense spending will not be impacted, for now….
• Other agencies were part of the freeze…sounded good in the speech, but the reality is 10 of 15 cabinet departments saw their budgets increase in the FY2011 budget

2. Move to ban “earmarks” in the federal budget

• Much advertized effort by the House of Representatives…not supported in the Senate
• The status quo on adding budget line items used by members of Congress will not change

3. The DoD budget did not see a cut for FY2011, but many predict major challenges in FY2012 and certainly the FY2013 budget

• $548.9 billion in the base budget
• $159.3 billon for Iraq / Afghanistan
• $17 billon for nuclear programs (primarily Department of Energy)
• 3.4% increase over FY2010 budget, but only 1.8% when adjusted for inflation; 4.7% of GDP
• Implications of the Quadrennial Defense Review (QDR) on the budget: not really noticeable since most items had already been factored in over the last year; major issue will be the QDR’s general theme calling for a “do it all” military (more emphasis on non-traditional defense missions and tasks)
• Three main spending areas remain:

  Cyber; some points to ponder:

• Are we moving into a Cyber Cold War – with multiple, non-state players? Is it cyber crime or cyber war? Who protects what?
• Stand-up of Cyber Command slowed by debate on roles and missions….no commander confirmed yet (hearing scheduled for April 15^th)

  ISR

• Anything to do with Unmanned Aerial Systems, UAS (and new phrase Remotely Piloted Aircraft, RPA) will continue to be a growth area

  Global Supply Chain / Logistics

4.  New Obama Administration priorities in 2010 and beyond:

• FY2011 – First real Obama budget, but fiscal realities have yet to sink it with the Administration
• Post Scott Brown election and healthcare passage – where and how much domestic spending on priorities and which priorities?  The American public is increasingly becoming concerned with Federal spending leading to huge debt.

5.  The national debt is, right now, the biggest threat to national security, and our way of life

• How do we handle China in the future?  Buyers of debt, beholden to China, do we change national security policy / declarations to assuage them?
• With the threat of interest rate increases, inflation, and a stagnating world economy, how do we pay for this debt and who pays?
• February 2010 – record monthly debt; some predict the debt will be 100% of GDP by 2019….that is not very far off

6.  Green / Alternative Energy and Innovation

• Comparative advantage leadership necessary in both the private and public sector
• Do not become hostage to energy costs and/or lack of resources
• Hydrogen and fuel cell technologies are promising

Three issues to keep in mind related to the DoD budget:

1. Right after the Cold War was over, we took a procurement holiday on recapitalizing and buying new defense equipment; we are still in a holiday paying for the current conflicts

2. The current fiscal situation is not going to get any better with a $1.3 trillion debt and baby boomers entering the peak years for retirement; personnel and health costs will continue to squeeze the procurement dollars out of the budget

3. We are having the wrong debate on security – terrorism is not the only and maybe not the major security threat, but we have allowed the nation to think of security in that myopic, narrow way