Five FY25 Defense Budget Expectations
Strategic investments and initiatives to strengthen national security.
The President will publish the FY25 budget request, including defense, following the State of the Union address on March 7th. We understand the DoD will release the J-Books budget details a few weeks later. While the law requires the President to deliver the budget request the first Monday in February, they are often late. This year it’s completely understandable given Congress still hasn’t passed the FY24 budget yet.
The following is what we would like to see in the FY25 defense budget request. Our focus is more on the strategic framework, initiatives, and broad capabilities instead of funding for specific programs.
1. A $1 Trillion Topline
We need a budget that reflects the national security realities.
Defense spending as a percentage of GDP is at the lowest point in the last 70 years. This is a major contributor to the fact that we have the smallest force operating the oldest and fewest numbers of aircraft and ships. While there’s broad agreement for increasing quantities of new weapon systems, the recent budget environment has driven the retirement of systems faster than the delivery of new systems. This is also why mission capability and readiness rates have atrophied over the last few decades.
Apart from not keeping pace with GDP, the defense budget has also suffered from the effects of compounding inflation which has diminished buying power substantially the last few years. Analysis from AEI concluded that this buying power reduction has resulted in an effective cut of ~17% to each Service’s FY24 budget.
The timing could not be worse as DoD is in a major transition from a Global War on Terror posture to a Great Power Competition. By one estimate, the U.S. military is half the size it needs to be given the national security concerns. The Army has 34 major modernization programs in the pipeline with the majority in the prototyping phase. It is attempting to accelerate many of them which will increase near-term budget needs. The Marine Corps Force Design transformation is likely to identify new needs (and new budget demands) as it progresses through further experimentation events. The need to increase amphibious ship readiness is still an unresolved issue that demands additional budget. The Air Force is optimizing for a new era while executing a series of expensive programs from KC-46, B-21, NGAD, CCA, and ABMS along with a plethora of new space capabilities and nuclear modernization. The budget pressures for the Air Force will continue for some time as it tries to reverse its status as the smallest and oldest Air Force in its history. The Navy is in a similar situation with just 272 deployable ships representing the smallest the U.S. Navy has been since 1917 and many large procurement programs in the pipeline.
The challenge is the federal budget is running with a $1.7 Trillion deficit this year and projected to go higher in FY25. Social Security, Medicaid, other mandatory healthcare programs, and non-defense budgets, are each higher than the defense budget. For the first time ever, interest payments on our debt are now higher than defense spending. The defense budget cap in the Fiscal Responsibility Act is $895B for FY25. While the financial situation has been hotly debated in Washington, it appears chaos will win over prudent fiscal management once again this year.
Given the national security threats across Europe, the Middle East, Asia, and North America, a trillion-dollar defense budget would be a surge of investments needed to address current conflicts and deter new ones from starting. It would replenish and stockpile needed inventories, accelerate and scale production of weapon systems, and fuel new services contracts from tooth to tail. Furthermore, the increased spending would fuel American businesses and jobs. It would help rebuild and expand the shrinking, aging defense industrial base to restart and heat up production lines and welcome new non-traditional companies with leading tech solutions for national security.
2. Larger Percentage to Procurement
We need production at scale.
Dr. LaPlante the Defense Acquisition Executive says so. INDOPACOM and the other Combatant Commanders say so (see their wish list). The defense acquisition system is good at promising eventual new capabilities, but RDT&E doesn’t translate on the battlefield. It requires production contracts that produce and deliver a capability the warfighter can use ASAP.
This is why scaling up munition production with a mix of high-end hypersonic (like PrSM) and advanced missiles (like LRASM and AMRAAM) combined with lots of lower cost ones (like MACE) is still needed. This is why we need to get the unmanned industrial base at full capacity which can only be accomplished with a steady stream of production contracts. This is why we need to deliver cost effective counter-UAS systems at scale to avoid having to execute cost-prohibitive defense strategies (see Red Sea situation). This is why we need to scale logistics capabilities to support sustained operations in a conflict (see issues with the vitally important sealift fleet).
DoD leaders bragged about having the largest RDT&E budget in history. Yet how much of that R&D will translate into fielded capabilities vs die in the Valley of Death? How much of that RDT&E will drag on over years and years to build the perfect exquisite system versus delivering a 60-80% solution that can be useful today and iterated on in conjunction with the development of new operational concepts? How long will we allow thirty-year-old legacy systems to eat up critical O&M funds to keep them running instead of transitioning to modern systems?
Scaling production allows DoD to comply with federal law that requires government agencies buy commercial to the maximum extent practicable. Tens of billions in new production contract opportunities will incentivize traditional defense industry and non-traditional defense contractors to invest their own capital on R&D and more easily attract the billions in private equity needed for manufacturing infrastructure. Instead of spending a decade for DoD to conduct endless analyses, hold year-long source selections, and micromanage contractors, the DoD can identify clear operational challenges and performance criteria for industry to pursue. Let many industry vendors compete to demonstrate prototypes, repurpose commercial solutions, and experiment with operators. DoD can then award production contracts to vendors whose systems perform best. This saves time, funding, and risk.
Scale can only be achieved with bold moves. Retiring those legacy systems to make way for new capabilities. Placing large quantity orders for various new cheaper systems. Adjusting requirements to allow the commercial sector to play. This is what will provide Combatant Commands with the capabilities they desperately require.
The fact is that over the last 45 years, the DoD averaged 62% Procurement, yet in recent years the DoD is closer to 52% Procurement. DoD must reevaluate its RDT&E portfolio and shift more funds to procurement accounts (at least +$40B in FY25). If they don’t (and it’s probably too late now), Congress should do it for them.
3. Scale Replicator and Autonomy
DEPSECDEF’s legacy initiative Replicator is the right move. The initial tranche was a bold move to jumpstart the department, Congress, and industry. Due to timing and political winds, the DoD is reprogramming funds instead of asking for new funding from Congress in FY24. The initial tranche appears to be focused on existing systems that were already in the pipeline (which is fine) but the next rounds need to broaden the pool of participants.
In FY25, DoD needs to drastically ramp up investments in autonomous systems to include those within the Replicator initiative. DoD needs thousands of attritable systems with different sizes and form factors complemented by different suites of sensors and capabilities. These are vital to complement the major manned weapon systems which are currently too few and unable to scale near-term.
For comparison, the Navy spends >$10B annually to operate and sustain 10 carriers and 68 destroyers. If we were in a hot war with China, how many carriers and destroyers would operate deep within the Pacific island chains? Imagine what $10B of autonomous systems could provide INDOPACOM.
4. Scale Investments in AI and Data
AI/ML advancements over the last year have been amazing and are likely to reshape many industries and generate new ones in the coming years. AI functionality will transform the way that DoD conducts cybersecurity, decision support, command and control and autonomy to name a few. It will expand battlespace awareness, accelerate adaptive force planning, optimize kill chains, and drive efficiencies in business operations. AI will be influential in how we design systems, how we execute logistics, and how we build resilient communication networks. AI also represents a new threat that will require robust counter-AI solutions. Yet with such transformational tech, the DoD only requested $1.8B for AI in FY24. Conversely, most commercial companies are designating AI investments as their #1 investment priority despite budget cuts.
The need has been clearly demonstrated. Project Maven was the first major effort to apply AI to an operational problem. It has shown significant benefits for maritime domain awareness, target management and the ability to automatically search and detect objects of interest. Combatant Commands are demanding more from Maven as operations in different theaters heighten and threat dynamics shift.
CDAO initiated multiple efforts to get AI into the hands of warfighters through its AI and Data Acceleration (ADA) Initiative (in FY21) and Global Information Dominance Experiments (in FY22) demonstrating clear operational use cases to improve kill chains across vast theaters of operation. Task Force Lima was also stood up to investigate the implications and benefits of generative AI. At its first inquiry to the field, Lima received ~180 proposed use cases across many different categories and many different mission areas. Deputy Secretary Hicks even noted that AI tools could immediately add value by helping to debug and develop software faster, speeding analysis of battle damage assessments, and verifiably summarizing texts from open-source and classified datasets. Some units are already taking this challenge on for themselves with the limited funding they have in their coffers.
With the clear demand signal, the operational imperative and the significant potential that AI holds, DoD needs to significantly increase its investments. The cost of the infrastructure to support AI development is likely to grow. The demand for GPUs in the commercial sector is immense and growing. GPU capacity is most critical during the development phase (where DoD is at) and there is no sign that the GPU shortage we have today will abate in the near future. We need more funding to ensure that all who need compute functionality can get it.
DoD also needs to invest in a massive education and training program to get its workforce (acquisition, operations, executives, testers, certifiers, and many others) up to speed on the latest in AI. Program managers are still unclear how to navigate the AI risk hurdles or how to ensure adequate testing without taking 10 years to field something. The only way to accelerate this learning process and process refinement is to do more of it.
While DoD is still in the early stages of maturing a set of use cases for AI, the focus is on data. DoD’s data sucks. DoD requires significant investment to structure, cleanse, and synthesize data. We need massive amounts of targeting data and systems data to train the models. We need new business models and strategies for procuring synthetic data to support all of the high potential areas. An ecosystem is being formed around the provision of this type of data and DoD needs to have the resources to tap into that. It’s a win-win situation for the AI race against China since DoD has some of the hardest challenges.
The DoD published its Data, Analytics, and AI Adoption Strategy in November. Now it needs to make investments in FY25 to effectively execute that strategy.
5. Scale Funds and PPBE Reforms
APFIT continues to be a shining star among the various innovation funds as it is the only one focused on accelerating fielding of systems to the warfighters. It continues to scale each year fueling and accelerating dozens of programs produced by non-traditional small and mid-size companies. We recommend continuing to scale this valuable program to enable DoD leaders to play a few acceleration investment cards during the year of execution.
Similar to the bridge funds being a temporary solution until meaningful budget reforms are enacted, the HAC-D FY24 hedge portfolio fund was another brilliant effort. In FY24, the plan is to provide DIU and a non-traditional innovation fielding enterprise $1B to rapidly acquire a portfolio of many smart, affordable, modular, and sustainable systems (drones, satellites, munitions, agile comms) from non-traditional defense companies.
We believe this is a model for future funds to pursue a hedge strategy. This includes scaling munitions, autonomous systems, and Counter-UxS solutions to complement the large, exquisite major weapon systems in addressing the priority operational needs and threats.
The time is critical to finally make bold reforms in the 60-year-old PPBE process. We’ve published three major reports on PPBE reforms, along with the Atlantic Council Commission on Defense Innovation Adoption, and the PPBE Commission have laid out clear, actionable steps to modernize the defense budget structure and processes. This requires a clear commitment and partnership between OSD, the Services, OMB, and Congress to enact change.
We believe the first steps include modernizing the budget documents to focus on the key insights Congress needs and consolidating hundreds of the 1,700 separate budget accounts into related capability accounts. These enable the White House to publish and Congress to review and approve the budgets faster, reducing the risk of CRs.
We look forward to unpacking the FY25 defense budget request when released. Subscribers of this Substack will be able to read our detailed analysis and summary.
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