No More Big Defense Spending Hikes

Budget pressures will force the next president to take a hard look at big-ticket defense projects that are the top contractors' lifeline.

By Richard Sammon, Senior Associate Editor, The Kiplinger Letter

June 24, 2008

The U.S. defense budget will remain huge -- the largest part of the federal discretionary budget under either a John McCain or Barack Obama administration with some $500 billion in each of the next several years for manpower, equipment, installations, operations, research and everything else under the defense umbrella.

But the annual growth of the past few years will end. Expect a leveling-off in procurement, and several projects will be trimmed as the next president and Congress look to revise defense project priorities in light of cost and needs.

Annual weapons and other acquisitions will stay in $75 billion a year range, up 40% from 10 years ago, which are needed to restock munitions and equipment used in Iraq and to modernize the services.

While either McCain or Obama will look for savings, their priorities are different. The missile defense program would be trimmed if Obama wins, less so under McCain, although he, too, would give it more scrutiny than has been the case with the Bush administration. Roughly $8 billion is allocated each year for research and development. Initial construction and installation of antimissile silos and radars has started, but the project is rife with engineering complexities and also political considerations about where segments ultimately will be placed, especially in Europe. The missile defense budget will be a prime target for freeing up some funds for other purposes.

Also on the chopping block, although neither McCain nor Obama has gone into specifics, are nuclear subs, next-generation Navy surface ships, plus the F-22 and Joint Strike Fighter jet programs. They'll be trimmed in scope and multiyear acquisition levels. Another area that will come under review is research into potential space-based defense weapons, such as space-based lasers.

General Dynamics, Lockheed Martin, Northrop Grumman and others will all feel the pinch to some extent, but in no case are major programs expected to be eliminated altogether.

Elsewhere at the Pentagon, a top-to-bottom acquisition review ordered by the Joint Chiefs of Staff will steer procurement officials to tighten oversight and management of contracts that often go over budget. Nearly half of the Defense Department's major weapons projects come in 40% over budget, often after long delays.

The department will also lean more on contractors to absorb some of the added costs, especially if agency auditors and contracting officials determine that original cost estimates were low-balled in order to win a contract. Some contracts may include provisions allowing for a degree of cost overruns to be absorbed by the Pentagon before a trigger is met, at which contractors would absorb a portion of remaining costs.

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