The debate about guns or butter hotted up last week, with Rep. Barney Frank (D-Mass.) calling for an enormous decline in defense spending of 25 percent and the head of the House Appropriations defense subcommittee, Rep. John Murtha (D-Penn.) saying money for weapons will have to come from spending originally slated to fund substantial increases in Army personnel. Below defense consultant Robbin Laird weighs in on the likely impacts of the financial crisis on defense spending.
The impact of the global financial crisis on US defense spending will strike in two ways, directly and indirectly. The impact will be substantial in terms of the ripple effect of operations in Afghanistan and Iraq upon the recapitalization budget.
Why? Throughout the Bush years, defense recapitalization has been overtaken to a large extent by the cost of military operations, and the re-definition, in effect, of recapitalization in terms of reset of equipment being used directly in those operations. At the same time, the wear and tear of capital equipment upon a number of infrastructural support elements, ranging from Air Force tankers, Air Force lift, sealift and related equipment means growing pressure to modernize those forces as well.
The major direct impacts of the financial crisis on the budget are three-fold and all lead to an inevitable downturn in the top line for the capital budget.
First, the new administration will be elected to deal with the financial crisis, not to recapitalize defense forces. This means that public spending to support the financial institutions plus injections of public monies in a number of civil industries or infrastructure replacement will compete directly for defense capitalization dollars.
Second, the cost of money for the federal government will go up as various public sectors compete for money to borrow for re-capitalization. Given the dependence of the US public sector on overseas borrowing, and given the increased cost of that borrowing, the result will be significant pressure to reduce new equipment acquisition simply in terms of the unit costs going up in terms of the cost of capital.
Third, the perceived need for the new administration to borrow from the defense budget to pay for other public sectors will go up. Because the financial crisis is as much a political legitimization as an economic crisis, defense will not get a free political ride. It will lose its privileged position as an investment priority.
-- Colin Clark