Since at least 1950 Australia’s defence policy has been predicated on US military strength. It behoves us, therefore, to keep a close eye on US defence policy.

In one sense, recent developments are encouraging. The US ‘pivot to Asia’ or ‘rebalancing’ has helped reassure Australia and other countries in the region concerned about China’s rise. At the same time, however, circumstances are conspiring to constrain US defence spending—and therefore military capacity—in the near and longer term.

The most immediate threat to US defence spending comes from the political machinations surrounding the US federal budget and debt ceiling (the best way to understand the debt ceiling is the borrowing limit on your credit card). Todd Harrison at the Washington-based Centre for Strategic and Budgetary Analysis has done a fine job of summarising the labyrinthine complexities of the situation. The essential features are as follows:

1. Since the start of FY2013 on 1 October 2012, the Pentagon has been operating under a ‘continuing resolution’ budget with its funding set at FY2012 levels. Unless an appropriation bill for FY2013 is passed, the ‘continuing resolution’ will be extended, resulting in a roughly 5% shortfall due to the $11.5 billion difference between FY2012 and planned FY2013 base funding for operating and maintenance. Among the consequences, all DoD civilian workers have been warned that they may be furloughed (put on leave without pay) for 22 days this fiscal year in the absence of a proper budget.


2. As a by-product of raising the debt ceiling in August 2011, legislation was passed to limit the growth of US government debt. Among the measures adopted was one requiring across-the-board spending reductions ('sequestrations') unless a bipartisan ‘super committee’ agreed $1.2 trillion in deficit reduction initiatives over the forthcoming decade prior to January 2013. The super committee failed, but last minute negotiations deferred sequestration until 1 March 2013.

Things will come to a head in March this year when the continuing resolution runs out and the sequestration deadline again rears its ugly head. To complicate matters further, US federal borrowing will again hit the debt ceiling around the same time. Amid what amounts to a near perfect fiscal storm, the risk of sequestration can't be discounted.

And it’s sequestration that's the real risk. While the continuing resolution is problematic, it's ultimately manageable. In contrast, sequestration would reduce annual baseline defence funding (i.e. exclusive of supplementation for operations) by around 10%, or $50 billion a year, relative to the funding levels sought in the FY2013 budget request—and would do so all the way out to 2021. These cuts would come on top of the roughly 5% or $25 billion reduction in baseline funding that already occurred between FY2010 and FY2013. The net result is that the baseline defence budget would be held roughly constant in real terms at a level 15% below FY2010 levels out to 2021.

Given the well-established historical trend for the cost of acquiring and operating military capability to grow in real terms at around 2-3% a year, sequestration would not only see a substantial one-off reduction in US military capacity but would also lead to a steady erosion of capability for the remainder of the decade. And even if sequestration is avoided, the absence of growth in the non-sequestrated budget will lead to similar erosion—albeit from a higher base.

But even if sequestration is averted there are still likely to be lean years ahead for the US military. To start with, any political deal to avoid sequestration is likely to involve further cuts to defence. More importantly, sequestration is but a symptom of a more serious and growing fiscal challenge for the United States in the years to come.

The problem has its roots in the post-war boom years and the accompanying growth in social welfare spending. As is the case in most western countries, the resulting so-called ‘entitlement programs’ are set to impose a growing fiscal impost as the baby-boomer generation retires and health costs continue to increase. This growing burden will build upon the legacy of the GFC, which saw US public debt grow from 48% of GDP in 2007 to 88% in 2013. As the US Government Accountability Office puts it; ‘absent policy changes, the federal government faces a rapid and unsustainable growth in debt’.

In absolute terms, the long-term US fiscal situation is entirely manageable with the timely application of sound policy. Compared with most of Europe and Japan, the United States has favourable demographics and good prospects for growth. The problem is that the US polity looks increasingly unable to do what is needed. Three factors are at play; the emergence of fractious and polarised domestic politics, a system of government that gives a veto to multiple players, and a political economy increasingly dictated by vested interests. Only time will tell whether the United States can work its way out of the present mess, but recent events in Washington surrounding the fiscal cliff give few reasons for optimism. In the meantime, we need to start thinking about what the consequences of declining US military capacity are for Australia.

Mark Thomson is senior analyst for defence economics at ASPI. Image courtesy of Flickr user JMazzolaa.