🔷 1% Chance

The 1% Chance

You may have noticed the Pentagon’s recently released $850 Billion FY2025 budget request was missing some noticeable items: fewer ships, fewer fighter jets, and less space. The request also delays a carrier build, slow-rolls the Navy’s 6th-gen fighter, and impacts a few other new weapons programs.

For many, it's puzzling that the world's largest defense budget somehow still falls short of covering the Pentagon's big-ticket items on their shopping list.

What

The reason for all of this is that it’s a “constrained” budget due to the Fiscal Responsibility Act of 2023 (FRA). ICYMI, this was a political deal made to avert a debt limit crisis last year, which raised the approved debt ceiling (i.e. keep the US government from defaulting) in exchange for placing spending caps on future government spending.

Well, that future is now.

Those spending caps limit the 2025 defense spending to 1% above the previous year’s budget, but when you factor inflation in, it's actually 1% less buying power. A 1% growth cap might not seem like a lot, but when the budget generally grows ~3-4% a year, and those are percentiles of ~$850B—it results in ~$10B less money in the annual budget.

So What

Turns out that the Pentagon’s budget is just like your budget—no matter what budget changes you make, you still have to deal with the must-pay bills. For the military, that’s things like military personnel ($182B) and the operations budget for things it already has ($340B). In fact, many are surprised to learn that only 20% of the Pentagon’s budget actually buys things.

So, when budget cuts come, procurement generally bears the brunt. This is why the political narrative of the Pentagon’s FY2025 budget is prioritizing readiness and people—must pay bills.

That’s not to say that those other pie slices are untouchable, though. The Army is trying to adjust end-strength (cutting soldiers) while the Air Force is running the same ole ‘divest to invest’ play (retiring 250 aircraft).

This pinch is also manifesting in comically large unfunded requirements, which are required by law to submit to Congress. Check out Indo-Pacific Command’s massive $11B wish list.

What?!?

You might think, “No biggie, Congress will just appropriate more money than the Pentagon requested like it’s routinely done before.”

Not really. Part of the deal written in law is a poison pill: if Congress appropriates funding above the limits in the FRA for the military, it triggers an automatic ~$50B budget cut (see page 4)—another sequestration. Ouch.

More Bad News

Once 2025 passes, there is yet another gauntlet of political turmoil waiting.

As part of the 2023 deal, discretionary spending for all US government is capped at 1% growth annually through 2029. That’s the bucket that includes defense and non-defense spending.

Where the line is drawn between defense and non-defense spending was purposefully left to politics to decide. Translation: the rest of the 2020s will be even more political and uncertain for national security spending. 

Hope?

Where there is a crisis, there is opportunity.

Some have called for splitting the Pentagon’s budget into 2 groups—one for capital expenses and one for operating activities. This is what many state governments already do.

The other big idea is stripping all the non-defense spending out of the Pentagon’s budget. There are tens of billions of dollars that arguably belong in other agencies’ budgets (EPA, Department of the Interior, etc.). This may also be the forcing function to fix a long-standing glitch: there is a whopping $45B of “non-blue” money crammed into the Air Force’s budget that it doesn’t even own, can’t touch, and passes through for things that are intelligence-related—not defense-related (we’ll tell you all about it in a few weeks).

Finally, the caps might finally nudge the Pentagon to answer growing calls to re-think its force structure—from expensive manned systems to cheaper unmanned intelligent ones that can provide affordable capable mass.

In That Number

$28.48 Billion

The Air Force plans to spend $28.48 Billion over the next 5 years to develop its NGAD 6^th-gen fighter and AI-powered Collaborative Combat Aircraft (CCA) drones.

TRIVIA

Which band is named after a term coined in WWII by American and British pilots to describe mysterious aerial phenomena?

A) The Beatles
B) The Who
C) Foo Fighters
D) The Lumineers
E) Imagine Dragons

On the Radar

The race to cool the F-35 is heating up. Honeywell recently demoed a digital twin of its solution to fix F-35 cooling issues, just weeks after competitor Collins Aerospace (RTX) revealed its proposed solution to improve the jet’s Power and Thermal Management System (PTMS).

• The Merge’s Take: Honeywell provides the current PTMS and has the inside lane for offering an upgrade, but Collins has the unique benefit of working more closely with engine provider Pratt & Whitney to ensure both the upgraded engine and new cooling system work well together—because they are both owned by RTX. 

Boeing’s T-7 jet trainer won’t be operational until 2028. Reminder: the contract was awarded in 2018, rolled out in 2022, and planned to be operational in 2024.

• The Merge’s Take: 10 years from contract to being deemed operational. For a trainer jet. We’re not saying it’s 100% the contractor’s fault, but we are saying this is not what right looks like.

The Army killed its Extended Range Cannon Artillery program. ERCA was an effort to use a 30-foot-long cannon on an M109 self-propelled howitzer chassis to shoot 155mm arty 40 miles.

• The Merge’s Take: The length alone would’ve made it difficult to move (the C-130 cargo bay is 41 ft), but it wouldn’t have been worth the squeeze—the range benefit is already close to being met with better artillery tech. Don’t forget this is the same Army that previously tried to do a 1000-mile version. Cannon cockers everywhere are mourning.

Congress finally did its job, passing the 2024 defense spending bill with an $825B appropriation.

• The Merge’s Take: 2 standout items: 1) the Replicator drone program finally has the money it originally said it didn’t need, and 2) the Defense Innovation Unit (DIU) got a massive $800m boost in bucks. Given the uproar about DIU’s lack of funding, expect BIG things—time to put up or shut up.

• The Merge’s Spicy Take: Don’t confuse this 2024 $$ with the 2025 $$ we discussed in the feature topic. Yeah, it’s that late. Good job, Congress. The fiscal year in which you appropriated the money is already halfway over. Those who know the budget cycle will appreciate this meme. 

They Said It
“The decision point, with lead time accounted for, to go past 100 is not until the mid to late ’30s.”

— Lt. Gen. Richard Moore, on when the Air Force will decide if it needs to buy more than 100 B-21 bombers. The comment was based on production, though, not requirements analysis.

Here’s a meme that compares this to how the same service talks about the F-35 program.

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Knowledge Bombs

• Shield AI was selected by the Navy to put autonomy on target drones

• Kratos reportedly has up to 5 variants of the XQ-58 Valkyrie drone underway

• Boom Supersonic’s XB-1 flew for the first time, the world’s first independently developed supersonic jet

• The F-22 Raptor was spotted flying with stealth fuel tanks and IRST sensor pods

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ANSWER
C. Foo Fighters