The United States is facing a serious crisis of strategic insolvency in which the ends of its expansive strategy for building the liberal order outstrip the budgetary and military means at Washington’s disposal. Without hard choices by America’s political elite to spend more on defence or scale back the country’s global commitments, the Pentagon will continue to be left with insufficient resources to single-handedly maintain a favourable balance of power in the Indo-Pacific.

This is one of the headline judgements of our recent United States Studies Centre report, ^[1] Averting crisis: American strategy, military spending and collective defence in the Indo-Pacific. These concerns also lie behind the Trump administration’s 2018 national defence strategy ^[2], which sounded a clarion call for prioritising great-power competition and rebuilding America’s atrophying military edge.

The size of the US defence budget is a key factor in our analysis. At US$716 billion in 2019, America spends more ^[3] than the next seven nations combined, which makes arguments about the insufficiency of its defence budget hard to fathom. Were Washington to reduce its strategic horizons or convince allies to lift a greater share of the defence burden—particularly in the Middle East and Europe—its ability to uphold a favourable balance of power in a contested Indo-Pacific would be much less precarious.

But this is not currently the case. Many inside-the-beltway voices in Washington argue ^[4] for even higher defence spending. While exact numbers are hard to pin down, many agree with the congressionally mandated National Defence Strategy Commission’s assessment ^[5] that 3–5% annual growth above inflation is required to combat the risks posed by China, Russia, Iran, North Korea and global terrorism at acceptable levels.

This is an unrealistic objective. As we argue ^[6] in our report, Congress will struggle to provide sustained defence budgets at that level of growth for a combination of political and fiscal reasons.

Two reports released earlier this month by the Congressional Budget Office (CBO) support these conclusions and paint a similarly worrying picture of the funds available for future defence spending.

One is an update to the CBO’s 2019 budget and economic outlook ^[7], which forecasts that budget deficits will be more than US$800 billion higher over the next decade than it predicted earlier this year. The average annual deficit for the federal government between 2020 and 2029 is now projected to be US$1.2 trillion. That will push average deficits to 4.7% of GDP per year, well above the 50-year average of 2.9%.

Owing to recent increases in federal spending and lower-than-projected revenues as a result of tax cuts ^[8] passed by Congress in 2017, America’s national debt will balloon to levels not seen since the end of World War II. As the CBO argues, ‘To put debt on a sustainable path, lawmakers will have to make significant changes to tax and spending policies—increasing revenues more than they would under current law, reducing spending below projected amounts, or adopting some combination of those approaches.’

This is unlikely to occur, jeopardising prospective growth in defence spending.

Over the past decade, increasing political polarisation and ideological division within Congress ^[9] has made budget agreement difficult to achieve. Washington will face key milestones in the short to medium term that will make these political issues even harder to ignore. For instance, the Budget Control Act’s caps on discretionary spending expire in 2021, and interest payments on the national debt are projected to overtake ^[10] total defence spending by 2023. The combination of a deteriorating fiscal outlook and a likely return to deficit politics will constrain political opportunities for reaching a 3–5% real increase in defence spending.

The second CBO report ^[11] analyses the Pentagon’s 2020 Future Years Defense Program (FYDP)—a five-year projection of defence programs and costs—and underscores the growing mismatch between ambition and resources, as well as some worrying trends within the defence budget.

Crucially, the CBO estimates that the Pentagon expects its budget will decline by 4% between 2020 and 2024. That would significantly widen the gap between the national defence strategy’s goals and the Defense Department’s available resources. A 3–5% increase would entail defence budgets of between US$822 billion and US$958 billion by 2025, in constant 2020 dollars. After adjusting for inflation, however, the CBO calculates that America’s defence budget will only average US$700 billion in 2020 dollars over the next five years—a full 3% less than the Trump administration’s forecast in the 2019 budget request.

Many of the Pentagon’s own assumptions in its future years’ estimates are also too optimistic. For example, a number of accounts in the budget—such as military personnel, operations and acquisition—have been rising above inflation over the past several decades, something that the Pentagon doesn’t account for in its latest FYDP. While Defense has plans to keep the cost of these accounts constant, the CBO notes that in all cases ‘costs have historically grown more rapidly than they are projected to grow in the 2020 FYDP’.

Taken together, these accounts comprise about 81% of overall defence funding. Herein is the potential ‘death spiral ^[12]’ at the heart of the defence budget. Near continuous use of ageing capabilities over the past three decades—many of which were built in the 1980s—has resulted in a joint force that is increasingly expensive ^[13] to maintain and operate. As greater portions of the budget are devoted to maintaining an old and overworked force, less is left over to modernise the military for great-power competition.

These pressures present a considerable challenge for defence officials who are working hard to train, equip and posture the joint force for conventional deterrence in the Indo-Pacific. Novel efforts are underway to address these shortfalls, some of which involve new technologies or changes to US military posture in the region. For now, though, the defence budget is unlikely to meet the needs of America’s global strategy. Australia and other allies need to start contemplating the requirements of collective defence.