The Four Horsemen: Global Conflict, Supply Chains, Spending Uncertainty & U.S Elections

Marcus Weisgerber:
We can never imagine a day when Republicans would be against increasing defense spending. That seemed to be the number one thing on the list when you get sworn in, is you need to favor increasing defense spending.
Roman Schweizer:
From DoD to Congress and from the White House to Wall Street, the NatSec Need to Know Podcast, an unrehearsed podcast presenting insightful discussion and forecast of the major national security and defense news of the day. On this episode, we've got a reporters' round table featuring Marjorie Censer of Defense News, Aaron Mehta of Breaking Defense and Marcus Weisgerber of Defense One. Then we'll turn to a focus discussion on the fiscal '24 budget and its various scenarios and outcomes with Major General Arnold Punaro from The Punaro Group. Joining me is a murderer's row of experienced Washington editors and reporters. They've each covered Washington and the Pentagon for years and are as well-sourced as anyone. Thank you all for joining. Let's get after it.
All right, issue one. We've had a short slowdown in the headlines for Thanksgiving and a busy few weeks with fighting in Ukraine and Gaza, legislative purgatory in Congress and a swirl of other defense policy issue. Issue one, what's the biggest issue everyone is talking about right now? Marjorie, why don't you lead off?
Marjorie Censer:
Well, to me, it's what you just led with, this fighting, it almost feels like everywhere, conflicts cropping up. I think the administration has spent years trying to get everyone to focus on China, and that just continues to be really challenging, given what's happening around the globe. So I think what people are talking about is these ongoing conflicts and what that's going to mean for the U.S. now and over time.
Roman Schweizer:
Do you think the administration has enough bandwidth to handle all of this?
Marjorie Censer:
Well, I'm not in the business of giving my opinion, but it certainly looks very challenging. I think that Ukraine, the pace there has probably exceeded what almost anyone would think they could go through in terms of equipment. So to think of managing that and that not even being the number one focus is pretty daunting.
Roman Schweizer:
So Jake Sullivan, Tony Blinken, Sleepless in Washington. Got it.
Marjorie Censer:
It wouldn't probably be their ideal scenario, I'd say that.
Roman Schweizer:
Okay. Aaron, what do you got?
Aaron Mehta:
Yeah, it ties into a little bit of what Marjorie said, which is the Israel and Ukraine situations means supply chain and production issues are going to remain a big focus here. Our big focus will remain a big focus. Look, this is the type of thing that Marcus, Marjorie and I and certainly, Roman, you've written about and talked about incessantly over the course of our careers. But it's also the type of thing that usually we're talking to a fairly small number of people who actually care. So things like production levels of shells and are there enough workers to build things up and is the industrial base healthy or not? These were not issues that you really heard top-level officials talking about, certainly not outside the U.S. In Europe, it was something you'd almost never hear people talk about unless they were specifically an acquisition official.
Now you go to any major defense conference anywhere in the world and it's, "We got to get production up, we got to get the defense industry to do this. How do we make them build more? Why can't we get more ammunition?" These are now the frontline issues. It's because of Israel and Ukraine. To Marjorie's point, the fact that now Israel is a whole new front that's opened up in the terms of global conflicts that the U.S. is taking, has at least once diverted shells meant for Ukraine to Israel, that just means that this is going to remain a pretty big issue and it's astounding, frankly, to see it become this level of focus from high-level leaders. If you go back to the Munich Security Forum earlier this year, it was something that was a major pic that was covered. You'd never hear discussions of production levels at Munich before this year. It's just a totally different paradigm.
Roman Schweizer:
No, that's fair point. I wonder, though, if the administration actually has a big enough sense of urgency just given how long this stuff takes? Not to be critical, industry is waiting for the demand signal, which usually means cash on a contract to get moving, and they don't really want to put much at risk until they see that further demand signal. Also, that it's not just that the tap's going to turn off in two years or something like that. The major issue is these longer term multi-years to do a big restock.
The amazing thing is if you think about the Inflation Reduction Act and Build Back Better and all the defense spending and the supplementals, we're in this American manufacturing renaissance and there's nobody to build this stuff anyway. It's supply chain, it's labor, it's everything.
Aaron Mehta:
No, that's a fair point. I think what you'd hear government's counter and officials counter is, "We want to get things on contract, but we move slowly. We can't seem to move very fast." And if industry wants to see us give them a big cash win flow here, they want to see industry put forth some more stuff. And there's certainly things industry could do, and we've heard officials talk about this. It's a balancing act. And part of the thing here is that this is the perfect storm. To your point, you had Covid supply issues and that also hit the workforce. There's been an aging workforce issue for a while. Then you suddenly open up the Ukraine conflict and now you open up another conflict to Israel, which is going to draw from some of the same systems.
Ultimately, it's like this once in a certainly generation, perhaps in a century, situation where industry was at a certain point and the demands at a certain point and government's at a certain point with its bureaucracy and can't get everyone to line up. I think certainly the administration has made it a focus and it's trying to do stuff, but I think, I don't know, if it takes 15 to [inaudible 00:05:45] or what's going on here, but it's just a lot of moving parts and the fact that there's no budget also doesn't help. So they can't get some of the stuff going that they hope to get going in October.
Roman Schweizer:
Sure. Nope. Fair enough. Marcus, what do you got?
Marcus Weisgerber:
Well, to build on what my two esteemed colleagues have said, there's no easy button for any of this, and particularly to build on what Aaron was talking about with the inflation supply chain and workforce have been the big issues since before Ukraine, since before now this latest conflict of Israel. It's amazing how we were hearing so much from folks on the Hill, especially about Taiwan and now with the Israel Hamas war that's popped up. Taiwan now has slid into this third place, so it seems that, oh, by the way, we're still getting messages out of the Pentagon every week or a couple of weeks about some sort of action taken in Syria or a Iraq against Isis, which still continues to permeate.
But I think like what you were saying earlier, where's this demand signal? It's been two years almost, since Ukraine began, and every time I'm talking to executives, it's the same issues that still persist. It's getting stuff on contract and then what's the long-term production run? Or you're not going to go build a factory to build 150 missiles or who knows what. You need to know what the long-term answer is. It'll be really interesting to see. I think we're going on close to a year of stuff like this, a joint production acceleration sell, that build a plant in the Pentagon acquisition shop set up, we're getting about a year, like I said, I think it was around March last year, March 23 when this was announced, what has that told you? What has it yielded?
And other thing is just supply chain and whether or not the Pentagon is going to be willing to spend more to have backup suppliers for things. We constantly hear if one mom and pop shop, three years ago, it was if somebody got Covid and the shop shut down, then what? Now it's can they get workers? Period. Can they get the raw materials that they need? So what's going to be the end game there? And I know Aaron touched on it at the very end, but the budget now, it's like that's all going to come to a head. And none of us have talked about, I guess the train wreck that is Congress and whether or not they're going to be able to pass anything and how lasting is that, whatever they pass? As in, are we going to get a budget for, by the time they pass it, if they pass it by January? So we have a budget for eight months, then what?
Roman Schweizer:
Right. No, I think that's a great point. And from my perspective, the other issue is a lot of time from a Wall Street perspective, it's what the top line revenue growth is for companies. But even if the defense budget went up 100 billion dollars, what could they actually build and deliver? Can you build more F-35s? Can you build more Virginia class? Everybody's maxed out, so it doesn't really matter what the budget is because they can only grow at three to 4% anyway. They can't absorb all this. And I think that maybe there's alternative production facilities or bringing in new shipyards or looking for other suppliers or using Defense Production Act.
But I would say from a criticism that I hear and something that I believe is for an administration that has a lot of flashpoints all around the world, there's not that sense of urgency that we really need to be in that over-correcting environment that we really need to get very serious, very fast because munitions stockpiles are getting lower and you're facing, and really I think Ukraine and Russia has shown that warfare is different. Nation state warfare against two industrialized opponents is a hell of a lot different than people have thought about over the last three or four decades.
Marjorie Censer:
I was just going to say the urgency is a challenging thing for contractors and for government. That's just not what they're built to do. The government is built to check the boxes in a procurement. If you look back over years, you think about MRAP vehicles, one of the fastest procurements of all time. That was something where they let there be five designs. They were doing things really differently. And that's not really going to work in the scenario that we're in terms of what needs to be produced. So there are some real challenges and it's choices that were made over years that led us to this point in terms of shrinking the defense industry and trying not to pay for capacity that they didn't think was needed. So I don't want to necessarily be the defender here of the administration, but I guess what I would say is that it's not easy to reverse that. It's very challenging whether you feel that sense of urgency or not.
Roman Schweizer:
Yeah, no, and I think that's fair. And if you look historically, we probably had this Vietnam, maybe Korea, yeah, World War II for sure, but zero to 60 spike in demand over a short period of time. And it was really an all-hands effort to do that.
Marjorie Censer:
You know what a commercial company would do is go out towards it to somebody overseas. Obviously we're not going to say, Hey, here's the specs for the ammo that we need random Chinese company. Do you want to build this for us? As you said, the capacity is what it is in the US and to Marcus's point, we're learning about facilities that I didn't even really know existed. And some of these are really, it's not just industry, it's government-owned facilities like Watervliet in New York. We sent a reporter there, we had an interesting story come out of it. But some of these are really older facilities that we just haven't had the capacity and the options are limited in terms of comparison to what Wall Street might expect from a commercial tech company.
Roman Schweizer:
Marcus, you're up.
Marcus Weisgerber:
One of the things I think that's hurt the defense industry actually coming into this is that they're doing a great job right now telling the stories of the people in Camden, Arkansas who are making Javelins and elsewhere around the country. But for the past, I would argue, especially during the ISIS campaign, they were very shy about all of these factories, where they were, they pulled a lot of the data, and I can point to specific companies, that they pulled a lot of the fact sheets about the factories that did this off their websites because they were afraid of people at the factories being targeted. And I'm not going to dispute that and say it was the wrong thing to do, but they did it nonetheless.
And then now all of a sudden it's a complete reversal. We need to talk about these people. We need to talk about how we need people to backfill folks and expand production so we can ramp up things and have two, three shifts of building things like Javelins.
Aaron Mehta:
Just to Marjorie's point about we're not going to go ahead and build these things in China as much as that would probably be delightful for Beijing, but we could go ahead and build these things in the UK, in Belgium, in any sorts of NATO countries, in Australia. And that's something that I think you're starting to hear industry talking more about. I really noticed this at the Paris Air Show when you talk to execs from munitions firms, Raytheon comes to mind, where they were very openly saying, "Yeah, we're looking at co-production. We think that's going to be the way that we can expand." And that one, helps us get into some other markets potentially, right? If something's built in your home backyard, you're more likely to buy it. But also to the point, there's no workforce in the US for this. There just isn't.
And this has been an issue that you can go back five, 10 years and the Pentagon reports are saying, we're concerned about aging workforce. If you want to speed these things up, even if industry was willing to go ahead and build brand new facilities rapidly over the next year, they wouldn't have the people necessarily to actually build these things up. So I think that's something you're going to see a lot of going forward is the co-production and working internationally. I don't know, Marcus if you agree with that or not? But it's something that, like I said at Paris, I certainly heard a lot about.
Marcus Weisgerber:
No, 100%. I totally agree with you. I was going to actually mention that earlier, in that you're starting to see the companies make these arrangements to co-produce. Lockheed just had one a few months ago in Poland, and I'm blanking on what it was for, if it was for maybe Javelin. But whether or not these things actually come to fruition, is Lockheed going to let MBDA build Hellfires? Probably not. But it depends. Will they be incentivized to do something like this and if it hits the fan, are they going to be forced to do something like this?
Roman Schweizer:
All right, great. Let's change gears. Issue two. So we're into the year-end sprint. We've got, as Marcus alluded to, funding nonsense. [inaudible 00:14:44] to tackle. We've got the NDAA, we've got emergency supplemental, we've got big programs out there. What in your opinion is the next big thing on everybody's mind, what's going to be the news flow over the next couple of weeks? We'll go with Aaron to lead off this time.
Aaron Mehta:
So for me, it's broadly the election is going to take over 2024, and I think in our world a big issue is going to be the question of retrenchment from the world. Biden's support for Ukraine is incredibly unpopular on the right. We've seen them having trouble getting any money through Congress right now for Ukraine. His support for Israel's broadly unpopular with the left, we're seeing that tanking his poll numbers among Democrats. And Trump out notes this, he'll quit alliances and he doesn't see the point of being the world's policeman and being involved in foreign affairs.
So if 2024 is going to be a year where everything is dominated by the presidential election, which it will because it always is, this is going to be, I think the biggest question that is going to be dealt with in our industry. Because to the point we're just talking about, if the US is backing off international engagement, that's going to hurt production levels of its equipment, potentially, potentially could see the defense budget cut. That seems crazy with the Republican administration, but it seems also entirely possible. And I think that you're going to see then a push maybe from some European countries as they come to grips of the fact that Trump may be coming back to power, that they're going to have to figure out ways to increase domestically their spends or getting back to Marjorie's first point, just cut back its support for Ukraine and some of the other conflicts, and that'll obviously have a major geopolitical impact as well.
So to me, this is just the biggest question for defense security topics over the next year, is going to be what happens after we see the outcome of the election come November?
Roman Schweizer:
Marcus, you want to keep rolling with that?
Marcus Weisgerber:
I wholly agree with what Aaron said. I'll point out a couple of other things that obviously the budget stuff that I mentioned earlier I think will continue to be one of the dominating things. I think it'll be also interesting to see who in the administration leaves over the next, between now and the election, usually Thanksgiving of the year before is the time when everyone has to submit their resignations or you're saying I'm riding it out till the end. We've had this issue of confirmations and particularly with the generals and admirals getting promoted. Is that a factor in people staying, political staying? I don't know.
What Aaron said about Ukraine. I 100% agree with, what ends up happening? Does the money run out and what kind of message does that send? That then will all be debated in real time within the presidential election.
I think we'll get a good barometer of where Republicans stand in the near future at the Reagan National Defense Forum that's coming up. That's typically a place where folks, you get the NatSec elite, if you will, and you get a bipartisan group. That bipartisan group though, tends to have very similar views on defense spending and increasing it or at least keeping it rising with the rates of inflation and whatnot. This increasing national sentiment that's going against funding for Ukraine and whether or not you're going to continue it, I think we'll probably hear something soon when leaders meet there in the coming days.
Roman Schweizer:
Marjorie?
Marjorie Censer:
Yeah, I'm going to sound like I just am adding on to what they said, but I swear I had it written down on my sheet that the presidential election is what people should be talking about. The ramifications, I think I don't need to add too much to what Aaron and Marcus have said, but they're really significant for Ukraine, for Israel, I agree, for the defense budget. I think there's a growing wing of the Republican Party in Congress, and I think you hear it some in the primaries that just has a lot of skepticism about how defense spending is being used. I think that if former President Trump were to come back, I think he would have a different perspective. What he's talking about now is different than how he handled the defense department when he was president. So yeah, I think that it would be just a wildly different approach than we're seeing right now.
Roman Schweizer:
So the one thing I would say and you all subtly danced around the issue, or maybe not so subtly, the idea that a President Trump and a Republican Congress, because in my scenario book, if he gets a Republican Congress to go with it, the House expand its margin, the Senate flips. You can use reconciliation to do all kinds of monkey business, but that Ukraine spending would go down. You could actually have a net year-over-year reduction in defense spending and you want to cut overall discretionary spending. So if you're going to cut non-defense or happy to sacrifice defense. Trump already rebuilt the military generals. These generals and admirals are some of the dumbest people he is ever met. He wants woke Milley thrown into jail. He's definitely not the pro-military guy with Mad Dog Matiss he was six or seven years ago.
I'll say you that you guys don't have to agree. I will say that the one issue that I think the next big topic, and I'll just throw this out there and there's a bunch, you've guys have all made great points, but I want to see the fiscal '25 budget. And what I mean by that is all of these services are talking about new war fighting strategies. I'll use the transformation word just because it's lazy, but all these shifting priorities and how does that all shake out? To me, and obviously from a company investor perspective, does that thematically continue to play out?
And the one thing that I've seen is that tracking the budget year over year is pretty boring, right? It's like just you don't see a lot of big changes, but when you take a fit up from beginning to end, year one versus year five, that's where you see big changes. How much is space going to change? The revolution in both strategic and tactical use of unmanned commercial drones that we've seen in Ukraine, all those things. I think the fiscal '25 budget, it'll be interesting to see how this administration puts its stamp on that. I'll draw on my sleeper on retirements we'll see. I think it's unlikely, but there's a shot, SecDef retires, Kath Hicks nominated, confirmed first female Secretary of Defense in the final year. You're shaking your head, Marcus. Aaron's got the floor and then we'll go to you. Go.
Aaron Mehta:
Yeah, I'll jump Marcus a little bit here. I see zero chance that anybody's getting confirmed in the next year on the political side, even if they break Tuberville's blockade there, it's going to be just for the uniform folks. The politicals are going nowhere, especially as SecDef in an election year. I don't think you're wrong that if there is a second Biden administration, you might see Austin retire and Hicks take over, or at least be nominated to do so. But I just don't see that happening next year. I'll just throw a couple of quick other just small ones out there, playing off what you said, Roman.
In the budget AI, and whether there's actual investment for the Pentagon or it's just another buzzword. The same way that you heard a lot of talk about the Metaverse last year. Marcus is shaking his hand at me because I stole his stuff, which the problem with having three of us on is you're going to get a lot of similar thoughts.
Roman Schweizer:
Wait a minute, wait a minute. Did you say you just threw out metaverse? Were you trying to get an Aaron Metaverse in there? Is that so [inaudible 00:22:24] to do name-drop or what?
Aaron Mehta:
Fun fact is that apparently my managing editor at Breaking Defense had secretly purchased a website called the Mehtaverse, spelled like my last name and was planning a whole troll of me with it, but then forgot about it and it lapsed and he doesn't feel like paying to re-op it. So this is the hard work you get from the defense press corps Washington. Sorry, Marjorie actually works. Marcus and I mostly just swoon around.
Just one of the things on Congress. Again, we do dance around it. Actually, I'm going to stop because Marcus is going to throw something to the camera. Marcus, you want to talk about Congress?
Marcus Weisgerber:
No, I want to talk about commercial technology.
Roman Schweizer:
I'll tell you, Aaron, anything else you wanted to add on that before you defer to him?
Aaron Mehta:
Yeah, I would say, so just on Congress, we're dancing around it a little bit, but the question of whether Congress can function at all in the next year I think is a very real one. We're not just talking about the Tuberville situation, but in an election year, as I said earlier, everything gets about the election and that means everyone in Congress is going to be using Congress as tools to try to either hurt Biden or hurt the other candidates. And I think that means, look, Roman, you mentioned the '25 budget. Are we going to get a budget that matters or is there going to be just a CR for the rest of the year because you can't get everyone to agree on anything?
I'm just very skeptical that we're going to get really anything of substance out of Congress, including frankly funding at this point. They kicked the can to February 2nd, I believe it is. And at that point they're going to have to come back and figure out what to do and you know what's the easiest thing is to say, all right, we're going to do a CR for another three months and figure it out down the road. And then you're into May and you're already through most of the primaries, you're not going to come together and say, "Okay, now we're going to work together to get proper appropriations passed." At that point you're just going to kick it until the next, after the election, honestly. So we always hear from analysts and people in the Pentagon how dangerous a full year CR would be. We might get to actually find out.
Roman Schweizer:
Marjorie?
Marjorie Censer:
Yeah, I put down for what will they be talking about is congressional dysfunction, possibility of a shutdown. I think it goes hand in hand with an election year I suppose, although not always, but we shouldn't be surprised. And I think Aaron's right, it's just the easiest option and becomes not an unlikely one. I still don't think that a shutdown is impossible. I think that there's a lot of wild cards here and hasn't been that long since we've seen it. They've seem to be becoming more common. So I think that just as Aaron said, DoD says it's very damaging and the longer it goes on, the more damaging it is and I think there's certainly a chance that it could go on for quite some time. And I think we come back to the Wall Street perspective, my perspective, that's just a lot of uncertainty and it's a lot of wait and see and don't know exactly what it's going to look like.
Roman Schweizer:
Marcus, do you want to follow up those comments on commercial tech? We got you.
Marcus Weisgerber:
I think if Trump does get elected, again, I think the one thing that's permeated and gone from administration to administration is this need for the defense department and the military to adopt commercial tech and whether or not it seems like that is at the point of getting institutionalized, if you will. Either be through DIU or just companies as a whole these days making their partnerships with commercial tech, and actually what that yields. Do all these 5G partnerships if you will, do they all go somewhere?
For me, one of the things is still seeing who's going to be the next and or SpaceX or Palantir, is it Anduril? What happens with a lot of these very high profile startups, Hermeus, [inaudible 00:26:14], Saronic, they're all doing really neat and from what the military folks tell us, stuff that they're very interested in, does any of that get any traction? And to tie it all together to everything we spoke about earlier, you have a lot of these firms, they start up doing things that actually really would be applicable to Ukraine or to China. Does the rubber finally meet the road there with them regardless of who gets elected? So we'll see.
Roman Schweizer:
Great. All right, we're going to move into our last round issue three. What's your sleeper issue or something that people should be talking about that they aren't right now? I will lead off, I'm going to go with the Second Thomas Shoal in the South China Sea with the Philippines, this China-Philippines standoff that has seen US Japanese carrier battle group operating near a Chinese carrier battle group, a manufactured crisis while everything else is going on in the world, coming on the heels of an APEC feel-good session. That really didn't change much in my mind in the bilateral relationship. And that if China really wanted to twist things going into the election and you're thinking about who do you have better luck with over the next four years, would you rather see Biden elected or Xi elected? How do you put pressure on?
I think that's the other thing that bothers me, is I think globally we've got Europe, the Middle East going bonkers right now and I think there's serious stuff going on in Asia that we just don't pay attention to because it's not on the news unless they want it on the news. So not to be conspiratorial, but I think there is some bigger stuff going on in that US China head to head. All right, who's up next? What should people be thinking about?
Marjorie Censer:
Well, I jumped the gun and shared that I think it's congressional dysfunction. I think that the national security experts want it to just be about national security, but politics are part of it and especially when we're heading into an election year and we've got a deeply divided Congress and I think Marcus or I guess Aaron touched on the maybe surprise that a Republican administration potentially with a Republican congress could lead to defense budget cuts. It's not maybe the GNP that we think of from the '90s or something. This is a very different approach and I think that the US standing in the world and our national security standing would be very different if the election goes a certain way and if Congress gets completely stalled out for the rest of the year from now, essentially.
Roman Schweizer:
Sure, Aaron?
Aaron Mehta:
So Marcus mentioned, we're recording this a couple of days before the Reagan National Defense Forum, and one of the things they do every year at the Reagan is they release this national survey that they do on defense issues pull on the American public. One of the things that they always pull on is views of the American military. And what was the one rule of American political society for certainly our entire lifetimes and decades going back? It's that no matter what, the military is viewed positively, right? Everyone loves the military. The forum's polling the last couple of years has seen that's changing. It's directly tied to some of the ways that the Trump administration tied itself to the military politically and that started to impact views and certainly it's continued on. We've seen a number of Republicans upset with then Chairman Mark Milley, for promises he's made.
There is a declining trust in the American military. That's going to have real impact, not just in terms of how the public views it, but that impacts recruitment, which the military has been sounding the alarm for the last couple of years that they're having real recruitment issues. Well, if people don't trust the military and view it as a nonpartisan, trusted organization, they're going to be less likely to recruit there. It potentially affects the ability to sell the American public or why it needs to spend almost $900 billion on defense if they don't feel they trust the Pentagon to spend that money fairly and wisely.
And it impacts also the elections. Again, come back to that, if you're going to see it, politicians who are trying to tie themselves to the military. We've seen some reporting this week about Trump's plans to expand the use of the military domestically if elected. That's also going to have an impact to all of this.
So the three of us tend to be as reporters. Our beats have traditionally been more on the strategy acquisition, technology business side of things. And in some regards we tend to separate out, for instance, to Marjorie's excellent colleagues at Military Times, some of the personnel recruitment issue, things like that. I don't think that we're going to be able to ignore that in 2024. I think that's going to be a real issue that's going to come up in a number of ways and I don't think we are prepared to understand exactly how the ramifications that are going to play out long term.
Roman Schweizer:
That's great. Marcus, what do you got?
Marcus Weisgerber:
Everything that both Marjorie and Aaron said I think are pretty spot on. I think things that could happen in the next year, we could see the war in Ukraine end. We could certainly see the Israel Hamas, the broader war that's going on now scale down and whatever you want to say, call it, which could then reshape a ton. If the war in Ukraine ends then do all these initiatives to do co-production, to increase manufacturing for things, how much, when you have, like we were saying, a Republican congress that doesn't, I think when the three of us started doing this, we can never imagine a day when the Republicans would be against increasing defense spending. That seemed to be number one thing on the list when you get sworn in, is you need to favor increasing defense spending. If those conflicts end, then what? Taiwan, you still have the Taiwan issue, but again, if they want to cut overall spending, then what? I think that the budget stuff still continues to, that'll forever I think, be an issue.
And then maybe just because near and dear, because the three of us have doing this 20 ish years. But I think one of the other big things to keep an eye out for is AUKUS and what happens to AUKUS if there's a President Trump? It's just going to be so difficult to increase submarine production right now, just for the US. It's incredibly difficult to add more submarines in for an ally and it's amazing what they want to do. And it just doesn't seem like they're out of point yet where, they're not actually building submarines in Australia, they're not building parts, they're not doing anything. So it seems like it could be a very easy thing to keep or cut because there's no metal being bent in Australia yet, or even in the UK for Australia. So Aaron, go ahead. I see you with your hand up.
Aaron Mehta:
I just want to jump in because that's a great point about AUKUS and just the fact that to Roman, to your point about how we got to keep eyes in the Pacific, even though this is the umpteenth time US has announced it's pivoting the Pacific and then gotten dragged back into Europe or the Middle East. As saying goes, "It's a tradition unlike any other." But on AUKUS, Marcus is absolutely right with everything he's saying from the US perspective, if the US says, "Eh, this just isn't really worth it or we have to prioritize differently, we're going to scale back or stop AUKUS," the Australians. This is their single biggest industrial project ever, not defense, industrial. The only thing they compare it to is this giant dam building project they did in the '50s, which transformed the country.
So if US says, "oh, I don't know, we can't really do this anymore. We're going to scale back. We're only do a couple of submarines." That's going to have gigantic repercussions in Australia, this key ally that we're trying to build up. So nothing Marcus is saying is wrong, it's just there's going to be follow-on effects beyond just our, again, more US-centric defense focus. It's just, it's fascinating if something goes astray with AUKUS, what the impacts could be.
Roman Schweizer:
Fair enough. Very good point. And I think the point that everyone has made is that everyone, both in the US and abroad is going to be paying attention to those polls, the presidential polls and trying to game theory what that impact is going to be like and what the day after effect will be, depending on which administration or which guy wins the White House, assuming they are the nominees for their respective parties, which is still outside chance, we'll see. But that's for another time.
Well, that's great. Thank you everyone. We're out of time for our panel now. We're going to shift gears and go to our focus discussion on fiscal '24 budget scenarios. I'm joined by retired Marine Corps, Major General Arnold Punaro. Arnold is the CEO of the Punaro Group. He's also chairman of the Secretary of Defense's, Reserve Forces Policy Board and a member of the Defense Business Board. He's been an executive vice president at SAIC and has also served as the staff director of the Senate Armed Services Committee. Arnold, it's great to see you. Thank you for doing this. Let's try to get this mess sorted out. Issue one. Where are we at on the CR and what's the timeline look like for the next few weeks?
Major General Arnold Punaro:
Well, Roman, privileged to be with you. Congress is finally back in town, but obviously like you said, they've got a lot of messes to clean up. They've only got about 20 days before they have to leave for their Christmas break and they haven't worked out any of the control totals for the 12 appropriation bills. So they're going to try to make as much progress as they can on those during this short period before the Christmas break. Right now, the CR on the non-controversial appropriation bills runs till January 19th 2024. And then on the bigger ones, including defense, February 2nd 2024. But to even get started, the House and Senate have hardly passed any of the appropriation bills. So they've got to pass those, but they've got to understand what are the totals going to be for the various bills? Because there's big differences between the House allocations and the Senate allocations.
Roman Schweizer:
So do we think there's anything going on behind closed doors? How close, how far? Usually appropriators would sort all this out, but they're not driving the train, right?
Major General Arnold Punaro:
I would say that because of the Thanksgiving holidays and other activities, I don't think that's been a lot of behind the scenes going on. Now both sides are back in town. The speaker is giving very optimistic signals about getting things worked out, including on the supplemental for Ukraine, Israel, Taiwan and border security. So they're back in town, so they'll start talking turkey, they just had Turkey Day, they'll start talking turkey on these totals. But again, they're going to spend the next couple of weeks working out the mechanics, on the numbers, how they're going to pass the bills, the ones they can already go to conference. The speaker has made it very clear there aren't going to be any more continuing resolutions. So the pressure is on.
Roman Schweizer:
Now, I do want to just jump in. You've been in this town a while, even though you're a young man, laddered CR, did you have that on your bingo card?
Major General Arnold Punaro:
Never had that on our bingo card and obviously it's what the Congress decided to do. You and I have talked about this many times over the years. Congress can act as quickly or as slowly as they want to and they can do almost anything they want to do when they do it.
Roman Schweizer:
Sure enough, sure. All right, issue two. Where are we at on DoD spending levels? What's your base case? Obviously the fiscal Responsibility Act sets the level at the '24 budget request, but we've got this nasty issue of a negative one sequester hanging out after January 1 and then going into effect. That creates some churn here as to what that means for the department and potentially spend breeds. Right? How do we think about that?
Major General Arnold Punaro:
Roman, we already need to understand we've been operated at a lower level since 1 October. We've been in a continued resolution for defense at fiscal '23 levels. DoD is losing about $2 billion a month in purchasing power, not covering inflation. And that's going to run through both December and January. So that total keeps going up. They also can't start any new programs. They can't increase rates. They can't do multi-years for the munitions they want for Ukraine and Israel. Some of the service secretaries have said very publicly there's billions of dollars in new starts that they can't get underway.
So the bottom line is defense is losing ground every day. If we went to the worst case for defense, which is, and by the way, the penalty will be assessed on 1 January, all 12 appropriation bills will not have passed on 1 January 2024. The 1% penalty will be assessed. It doesn't actually get implemented until April 30th. If that happened, DoD would be losing about thirty-six billion dollars. So these numbers are very grim in terms of what happens if it doesn't all get worked out. But again, DoD is losing ground every day.
Roman Schweizer:
Now you've talked about this before at our events and in some published stuff recently, but what does that mean also in terms of a sequester to Dod? Because you're going to protect the personnel accounts and you're going to probably want to protect the O&M. So does it fall disproportionately on investment or how does that play out?
Major General Arnold Punaro:
Roman, it does fall disproportionately on investment. It's not going to be like the FY13 sequester, which was a 10% cut in every program, project and activities. And as bad as that was, it was a peanut butter spread. With this one starting on one January, the office of management budget working with the Department of Defense is going to slow down what we call the apportionment because they don't know what the final number's going to be. They're not going to want to have to try to cut that huge amount of money from one May to one October. And so they're going to slow down obligations and outlays. They're going to protect military personnel. They've been burning O&M, operations and maintenance at the cyclical rate, and that's tied to readiness. So the cuts are going to all basically fall on the investment, R&D, procurement and military construction, which is primarily the accounts that our industry focuses on.
Roman Schweizer:
And so again, just to be clear on this, and I'm not sure whether this will affect other departments and agencies, right? Because the rest of the government has been running at a fiscal 23 CR rate. If they got sequestered down to negative one, they've already spent too much through the balance or through the-
Major General Arnold Punaro:
I mean, Roman, this is what's so silly about this deal that they cut, in that is the 1% penalty is only a 7 billion cut for every other government agency. So there's 30 or 40 of those. So that's $7 billion spread out over all of them. They won't even know they've been cut. Whereas defense, it's all in the Department of Defense, the 1% against FY23 is $9 billion. But because of the debt deal allowed the increase of twenty-six billion, that's how you come up with the loss of thirty-six billion. So it's much more devastating on defense than it is on the domestic federal civil agencies. They're not even going to feel the cut because $7 billion spread out over all those agencies is chump change.
Roman Schweizer:
Budget dust as they sometimes say.
Major General Arnold Punaro:
Correct.
Roman Schweizer:
All right, well, so we're working at props. It's going to be a soup sandwich for a couple of weeks, probably a couple of months. Issue three, we've got an emergency supplemental pending as well as NDAA, which is near and dear to your heart. What's the outlook for those and really, are they a bellwether for any spirit of bipartisanship deal making, maybe to see how well Speaker Johnson can navigate the swamp?
Major General Arnold Punaro:
Roman, I think both of them will be a bellwether. And I think both of them, I'm a lot more optimistic about the NDAA, the National Defense Authorization Act, the bipartisan leadership of both committees is very bullish about this. They're pretty much done. They'll probably have something to report out after they get back from the Reagan Forum in early December. It doesn't have any money in it. So it's not the knockdown drive-out debt deal thing. But I think you'll see NDAA at the FY24 requested level in the debt deal. It's an authorization and I know they are working out all what I call the poison pills that the administration would support and the Senate would support. So I'm very optimistic about the NDAA.
Also, I think they're going to move the supplemental and they're going to move the supplemental because there's a majority vote in the House and Senate bipartisan for more money for Ukraine, money for Israel, money for Taiwan. And the Republicans are going to demand in the Senate and I think they'll get something worked out, some very stringent provisions related to the border. You can't have national security if you don't protect your border. This will be some policy provisions. It'll be some resources. It might even include some things that people have been opposed to in the past, maybe building some of the border wall. But that's the price that the administration's going to have to pay to get the needed money for Ukraine and for Israel and Taiwan.
So I think both the NDAA, the NDAA will be a pretty smooth pass. The supplemental could be rocky, but I think at the final analysis it gets done. But it all is going to have to be on a bipartisan basis. Nothing's going to pass either now or next year, if it doesn't pass on a bipartisan basis.
Roman Schweizer:
Now I got to ask, let's dig in on each one of those real quick. You've got the NDAA has some abortion-related provisions in it, some diversity equity inclusion provisions that seem to be pretty important to the right, would seem to be in the speaker's wheelhouse. If you do write those out of the conference bill, is that going to jeopardize him with his right flank?
Major General Arnold Punaro:
Well, I would say it depends on the provision. I think everybody understood from day one the abortion bill would come out. And I had to deal with those when I was staff director, even back in those days. I think some of the other social issues, they're going to have to compromise. So I think both sides will not get 100%. So I think there will be, and the speaker was a former member of the House Armed Services Committee. He gets it. So again, I'm not really worried about the NDAA and I don't think the NDAA will put his speakership at risk. And again, on the supplemental, the administration's going to have to basically bite the bullet on some very onerous border provisions to get the other things that they want in Ukraine, Israel, and Taiwan.
Roman Schweizer:
And to that side of it, the White House is probably being dragged a little willingly, right? Because immigration policy and in Democrat controlled cities and the states has been an issue and it's a risk for the Biden administration. And so the Republicans actually are probably forcing some stuff that takes it off the plate, takes it off the table for next year as an election issue.
Major General Arnold Punaro:
Yeah, they're going to be silently clapping behind their backs, including Democrats in tough red state races, to get this fixed. And again, it's needed. You can't have a strong national defense if your borders are not secure.
Roman Schweizer:
Right. Let me ask you this, just the one, the administration request is about 60 billion in change for Ukraine, but not all of that is military needs. Some of that is economic, humanitarian. Do you think that all goes as is? To me there is this push to maybe tweak it, downsize it a little bit, wouldn't affect the defense related provisions. But I think it's more the economic development. And maybe that's something that it sounds like the Republicans want to leave it up to the Europeans to do that.
Major General Arnold Punaro:
They're going to have to compromise on all the provisions, which is always the case. You never get, listen, administrations never get 100% of what they ask for. I don't care whether it's a Democratic administration, Republican administration. Congress has the power of the purse. They get to make the final decisions. That's the way the Constitution set it up. So there'll be some of the things, there'll be greater scrutiny, there'll be greater security of the funds and things of that nature. So there'll be some strings attached, frankly, on all four areas.
Roman Schweizer:
And I think the Republicans have asked, I'm pretty sure it's a provision in either the NDAA or the Approps Bill for a special inspector general for the Ukraine funds and things like that to audit.
Major General Arnold Punaro:
Well, look, you want good supervision and oversight of taxpayer funds.
Roman Schweizer:
Right, right, right. All right, well you've got me feeling optimistic a little bit, so let's best case this and worst case this. Let's go with your best case. What are we? We get everything on?
Major General Arnold Punaro:
The best case, and I've said facetiously, we don't know at Christmas, and we're going to get sugar, plums or coal in our stockings. And sugar plum case would be no shutdowns. They get all 12 Appropriation Bills passed by April 30th at the reasonable levels and we move forward. So that's the best case. Whether or not, I don't know that I'm that optimistic about the best case. The worst case obviously, would be a short shutdown followed by the penalty being assessed, the Appropriation Bills not passing, a year-long CR for defense, which is typically what we've argued over the years as one of our worst cases. And it could be something in between. So it could be the best case, the worst case, or something in between. I don't think we're really going to know that until early into next year.
Roman Schweizer:
Early, okay. And let's go to short derivative options. One is the Senate did actually have a little more money than the House, the Senate appropriators, right? I think it was 14 billion, if memory serves, eight for defense and six for non-defense. You think any of that money, is that dead? Was that posturing? The Senate went high, the House went low. So we're going to meet at the middle and we'll just take the FRA and run with it.
Major General Arnold Punaro:
Well, no, I think the problem is the domestic appropriation. So the Democrats aren't going to agree to higher levels for defense in the final analysis if they don't get what they need on the domestic side. So that's why these allocations are so important and they've got to sit down and work out what we, you and I know technically call the 602B allocation. So yes, we need more money for defense. We need to get more bang for the buck for the dollars we spend. But whether or not that's possible in this framework that we're talking about, again, the speaker is going to have to walk away from the Freedom Caucus. He's going to have to walk away from 50 to 60 Republican votes that are never going to vote for any deal. They're never going to vote. They want the domestic Appropriation Bills cut way back to the FY22 levels. If that means defense doesn't get what they want, they don't care.
So if the speaker is not willing to allow these four bills that we've talked about, NDAA, supplemental and appropriations to pass on a bipartisan basis, then we are going to be dealing with the worst case. That's just the bottom line.
Roman Schweizer:
But you're telling me there's a chance? But you're telling me there's a chance?
Major General Arnold Punaro:
Well, dumb and dumber, all worked out in the end. So I guess the thing was like, yeah, there's only one in a million. Well, you're telling me there's a chance.
Roman Schweizer:
Exactly. Exactly.
Major General Arnold Punaro:
Hope springs eternal. I think the world is in flames. We're in a very difficult, unpredictable situation. We're in an upcoming political battle. And I think both sides realize that they've got to show that they can govern and they can get the people's work done. So I think that will be an incentive. Again, though, there're going to be 50 to 60 Republican votes in the house that are never going to support any of this. If the speaker's not willing to walk away from that, we're going to be in a meltdown.
Roman Schweizer:
And look, this is the only stuff that needs to get done before the rest of this Congress, before they start campaigning for reelection next year, right? You want to get this done, the supplemental, you want to get the Appropriations Bills done. And that's really the must pass. And the NDAA.
Major General Arnold Punaro:
The other problem with the 1% is it carries through the fit up. And so that takes out a couple of hundred billion dollars out of defense at the penalty level. So it's a very devastating cut to defense.
Roman Schweizer:
Thank you very much, Arnold. That was great. We really appreciate your insights. That's going to do it for this time. Thank you everyone for tuning in. We look forward to talking with you again.

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