What to Watch for in 2016

President Obama will submit his final budget request to Congress in little more than a week. Although the Defense Department spent much of last year held hostage to budget politics, the surprise two-year budget agreement at year’s end raised hopes for a defense turnaround. Will 2016 follow 2015 as a year filled with challenges, surprises, and opportunities for defense? Or will it be largely a transitional year, with the next opportunity for major change coming after a new administration takes office in 2017? Here’s what you need to know from last year and what to expect in this one.

What Happened in 2015?

The ISIS threat remained center stage in 2015, expanding beyond Iraq and Syria to affect Afghanistan, Libya, Egypt, and Europe. Also notable were the Iran nuclear deal, Russian opportunism in Syria and Ukraine, the halting progress of counterterrorism efforts in Afghanistan, and Chinese actions in the maritime and cyber domains. The most notable budget action by far was the unexpected bipartisan agreement to increase both the defense and non-defense budget caps by $25 billion in fiscal 2016 and $15 billion in fiscal 2017. The deal also increased Overseas Contingency Operations (OCO) funding in 2016 by $8 billion over the president’s budget request and set a floor of $59 billion for OCO funding in 2017.

In 2015, Congress also prohibited the Pentagon from retiring or deactivating a number of existing platforms, most notably the A-10 close air support aircraft and the Ticonderoga-class cruisers. Congress generally accepted planned military personnel drawdowns, of which the active Army’s reduction from 490,000 to 475,000 was the largest. Finally, Congress expressed its discontent with the size of DoD’s overhead, requiring the department to trim $10 billion over the next five years from headquarters and other funds.

The past year also likely marked the end of a major downturn in contract obligations, which had declined 31 percent over the past five years. In response, industry started to engage in mergers to prepare for the next phase in the cycle. The past year also provided an inflection point in acquisition reform, with the focus of reform efforts shifting from productivity and efficiency toward innovation. The 2016 National Defense Authorization Act made the largest changes to the defense acquisition system in 20 years; they mostly aimed to accelerate the pace of acquisition, and return some authority and accountability to the military services.

And Here's What to Keep An Eye On

Barring a cataclysmic event, 2016—the eighth and final year of the Obama Administration—is unlikely to bring about a new defense strategy or much change in the budget trajectory. The international environment and the administration’s policies will, however, affect the choices available to the next president. Defense reform is an important topic to watch in 2016, with a continued focus on acquisition reform and discussion of potential changes to the organizational structure put in place 30 years ago by Goldwater-Nichols. Momentum for change appears strong in the Senate Armed Services Committee, where Chairman John McCain appears intent on including reforms in the 2017 NDAA. However, with no consensus emerging from last fall’s Senate hearings on defense reform, the exact nature of potential changes is not yet clear. Also unclear is how the House Armed Services Committee and the Pentagon will respond to the Senate’s efforts and how their responses might affect the ultimate direction of reform.

Given that the budget topline for 2017 is already set under the budget deal, other issues are likely to dominate the budget debate in 2016. In recent years, the president’s budget request has increasingly relied on assumed savings from proposed efficiency reforms. However, many of these efficiency assumptions have not materialized due to the politically charged nature of reforming military health care, closing domestic bases, and retiring existing platforms, leading to a budget that is already highly leveraged on assumed savings. If economic and efficiency assumptions included in the president’s 2017 budget are too aggressive, cuts may be required in other parts of the defense budget.

Another important issue to watch in the 2017 budget request is the balance the Department strikes between capability and capacity. Secretary Ash Carter signaled his position in this debate by ordering the Navy to cut 12 littoral combat ships, which would have helped boost ship numbers and the overall capacity of the fleet, and instead invest in a smaller number of more capable destroyers and upgraded Virginia-class subs.

How the capability-versus-capacity debate will play out in the Air Force and Army budgets remains to be seen. The Air Force has the largest modernization bow wave of any of the services, with major programs ramping up to procure more capable fighters, bombers, and tankers, to name a few. Senior Army officials and members of Congress have indicated that the planned drawdown of the active Army to 450,000 soldiers may be too low to meet operational requirements, although discussions about the structure of the Army will likely be dominated by the results of the Commission on the Future of the Army, which reports out this week.

For defense acquisition in 2016, the pace of recovery for contract obligations is likely to be much slower than the recovery of the budget as a whole. Industry’s assessment of growth opportunities in this new, slow growth environment will guide corporate leaders on their approach to industry consolidation, with Pentagon leadership keeping a close watch. Also worth watching are DoD’s efforts to increase access to innovation from traditional and non-traditional defense suppliers, one of Secretary Carter’s top priorities.

Despite being the last year of an outgoing administration, 2016 is likely to be an important transitional year for many defense issues. To keep track of defense developments throughout 2016 and beyond, CSIS has launched a new series of reports known as Defense Outlook. This annual series of reports will examine the intersection of strategy, budget, forces, and acquisition to help track where the policy and budget debates are going and what curves lie ahead. Hang on, because it may be a bumpy ride.