What Defense Cuts Will Mean to the U.S.

A leaner military is in the cards, but the force will remain dominant.

Even if automatic budget cuts are delayed or avoided, the U.S. military will be leaner in 10 years than it is now, part of an intentional shrinking of the Defense Department as Washington tries to downsize the federal deficit.

How much leaner? At least $500 billion by 2022. If the automatic cuts spelled out in last year’s budget deal kick in on January 2, 2013, another $500 billion in cuts will come from the Pentagon.

But both political parties are having second thoughts about such deep cuts, so don’t be surprised if Congress agrees to reduce the portion of the automatic cuts or defer them until sometime next year or beyond.

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The half-trillion dollars in cuts that will take place will be noticed, but won’t carve too deep into muscle. The U.S. will still boast the world’s largest military. And the Pentagon will still have a bigger war chest than it did in 2006, at the height of the war with Iraq.

Here’s what to expect:

More use of drones. This will save a lot of money by reducing the need for new and expensive fighter jets and by limiting wear and tear on the existing fleet. In just a few years, unmanned aircraft will make up more than half of Uncle Sam’s air arsenal.

Fewer ships for the Navy, and fewer overseas bases. Plus, some facilities will be shifted from Europe to southern Asia to help the U.S. counter China. More and more, Europe will be left to fend for itself except in times of deep crisis. There will still be a U.S. presence in western Europe, but much smaller than now.

Declining troop levels. Expect a reduction of about 150,000 men and women, mostly from the Army and Marines, plus benefit reductions for those who remain, including scaled-back health care coverage and pension changes. One change: requiring more years of service to qualify for full retirement.

Cutbacks in procurement, slicing about $30 billion from an annual $120 billion. But any pinch felt by defense contractors will be offset, to some degree, by bigger orders from allied countries. Saudi Arabia and India will be among the biggest customers, but others will reach for their wallets, too. Contractors will tighten their belts, but don’t look for big mergers.

Despite industry chatter, the cuts won’t make a big dent in the U.S. economy. Defense makes up 4.2% of GDP now, but that share is likely to fall to about 3.1% in 2015. That’s about where Pentagon spending was for a few years before the 2001 terrorist attacks. But the hit will be felt disproportionately. Parts of the U.S. that are near large military bases and defense companies that can’t shift sales to other countries will take a bigger hit. But elsewhere, the spending of fewer dollars on the military will be easily absorbed.

The story will be different if the automatic cuts aren’t delayed and if 50% of the roughly $1 trillion in cuts is required to come from Defense. At the moment, the smart money is on delaying the cuts and on shrinking the military share. But any action is likely to come after the Nov. 6 election, during Congress’ lame-duck session.

Richard Sammon
Senior Associate Editor, The Kiplinger Letter