Trump's FY27 Budget: $1.5 Trillion for the Pentagon, $33Bn for the State Department. Peace Through Missiles?

Since my planned birdwatching trip to western New South Wales was cancelled due the current fuel crisis temporary supply uncertainties caused by unpatriotic Australians panic buying and I didn’t want to spend Easter solely doomscrolling conducting deep research into the war collective defence exercise in the Middle East, I thought I would see what I could learn from a quick stroll through President Trump’s FY27 budget request.

Note that unless stated otherwise, dollar figures refer to U.S. dollars. If you are OK at mental arithmetic, divide by two and multiply by three to get to a rough Aussie equivalent.

Note: for those preferring podcasts, the latest Grumpy Strategists episode covered key issues discussed here.

What we have so far is the ‘skinny budget’, that is, just the top level without much underpinning detail but there’s more than enough there to support some statements about the broad direction of the overall budget and the defence program in particular.

There will inevitably be haggling in House and Senate committees, but the Republicans in Congress have shown little willingness to date to push back on Mr Trump’s demands, so we can probably assume he’ll get what he wants this time round as well. 

The first big picture observation is that the cloud cuckoo land approach to managing money that has been a feature of U.S. budgets continues and indeed worsens in this one.

Last year in FY26, U.S. government revenue represented 17.5% of GDP according to the Congressional Budget Office (CBO), while spending was much larger at 23.3% of GDP. That means the annual deficit is $1.9 trillion, an amount roughly equivalent to Australia’s GDP, which around the fourteenth largest in the world. Of course that annual deficit increases the U.S.’s national debt, which hit 100.6% of GDP last year. As the debt rises, the cost of servicing the interest on that debt is rising and reached 3.3% of GDP last year.

Here in Australia, opposition parties accuse governments of failing to achieve budget surpluses, which may be true, but at least a surplus is something we still imagine is achievable. In the U.S., even the concept of a balanced budget has gone the way of the dinosaur, and the Trump budget will only accelerate the trajectory of growing debt.

We don’t yet have deficit figures for FY27—the Administration has only put out its spending plan, and we don’t have revenue predictions. But the CBO predicted at the start of this year that the President’s huge tax cuts mean that revenue will stay flat (even including tariff revenue). Moreover his planned spending is growing even faster than the CBO had predicted last year, so the deficit and debt will be significantly larger this year.  The negative economic effects of the Iran War will add to this problem.

We’ll focus on defense spending, but it’s useful to first understand how that compares to the rest of the budget.

There are two main elements to U.S. federal spending: mandatory outlays and discretionary outlays. The former includes social security (i.e., the old age pension) and health coverage such as Medicare and Medicaid. It’s extremely hard to adjust mandatory programs—Elon Musk’s Department of Government Efficiency essentially got nowhere with mandatory programs.

The discretionary outlays include everything else, from defence to education to international engagement and so on. Over time, mandatory outlays have grown significantly so that they are now over twice as big as discretionary ones. That makes it hard for any president to adjust spending since two-thirds of the federal budget is effectively off limits (unless they want to pick the mother of all fights in Congress to try to reduce pensions).

During the Cold War defence spending outstripped the rest of the discretionary outlays, however the result of the post-Cold War peace dividend was that the two areas of spending became, broadly speaking, equal. Trump’s FY27 budget blows that balance out of the water. The big news this year is a massive, proposed increase to defence spending. Last year saw the first trillion-dollar defence budget; Trump’s proposed budget seeks a $442 billion (44%) increase, raising the defence budget to $1.5 trillion.

Simultaneously the rest of the discretionary budget is taking a significant cut of 10%, down to $660 billion. What that means is that the balance in the discretionary budget has moved away from the post-Cold War era’s 50:50 split to 70:30. Since the decrease to non-defence spending of $73 billion doesn’t come close to covering the $442 billion increase to defence spending, the overall discretionary budget is growing by 20.8% in one year. Since Mr Trump is also handing out big tax cuts as a result of his One Big Beautiful Bill, this will further increase the deficit.

Before we look at what the increased defence budget is being spent on, we’ll briefly look at the impact of the 10% cut to the rest of the discretionary budget, focusing on international programs which are part of the Department of State. Broadly speaking, the Trump Administration is ‘militarising’ the U.S.’s engagement with the world. We’ll use FY25 as our baseline since that was the last ‘pre-Trump’ budget.

The proposed State Department budget is $33.6 billion, down from $46.6 billion in FY25, a 27.9% decrease. There are two halves to the State Department budget. The first is Diplomatic Engagement, i.e., core diplomatic activities. That’s down from $16.5 billion to $12.7 billion, a 25.2% decrease. That reduced amount still includes $4.1 billion for security protection for U.S. diplomats, which perhaps as much as anything reveals America’s standing in the world today.

While funding for core diplomatic activity is largely unchanged, contributions to international organisations have been decimated, down from $1.5 billion in FY25 to $292 million. Contributions to international peacekeeping, which were $1.2 billion in FY25, have been abolished completely due to ‘due to ongoing mission failures and the disproportionately high level of assessments to the United States.’ A wide range of other programs have been eliminated.

The second half of the State Department budget is Foreign Operations, which covers international aid and assistance. That’s losing $10.7 billion, down from $33.5 billion to $22.8 billion (a 32.1% decrease). That’s not surprising in light of the Trump Administration’s elimination of the U.S. Agency for International Development last year. Again, a broad range of international aid and assistance programs have been cut or abolished.

International Security Assistance is being cut but not to the same degree, from $8.5 billion down to $7.3 billion (13.8%). As part of this, Israel will get $3.3 billion in military aid—or put another way, nearly 10% of the U.S. entire State Department budget is military aid to Israel.

The cuts also affect other agencies, including those which have contributed America’s scientific and technical leadership in the world such as the Department of Health and Human Services, the National Science Foundation and NASA. It’s hard to read this as anything other than a conscious decision to cede global leadership in non-military science and technology to China.

Research, Development, Test and Evaluation (RDT&E)

With a 44% increase to the proposed defence budget, it’s not surprising that funding is increasing across the board, but it’s by no means even (we’ll use FY26 as our baseline in this section). Military personnel spending would only increase by 4%, despite Donald Trump’s promise of big pay increases for the warfighters. Operations and Maintenance—the money used to use and sustain the force—would increase by 21.3%. This no doubt recognises maintenance backlogs and ageing fleets across the U.S. Navy and the U.S. Air Force.

But we’ll focus here on the two big areas of increase: Research, Development, Test and Evaluation (RDT&E) and Procurement.

The U.S. Department of Defense takes technological innovation seriously and has traditionally spent massively more on R&D than the Australian Department of Defence as a percentage of its total budget. This budget would further exacerbate that difference. The RDT&E budget would enjoy a massive 63.3% increase, from $210 billion to $344 billion. The skinny budget simply lists hundreds of programs with titles made up from a smorgasbord of buzz words like innovation, rapid prototyping, hypersonic, lasers and advanced this and that but with no description. There’s $58.7 billion worth of ‘classified programs’ that don’t even get a name.

Development of ‘traditional’ core programs continues, like the F-47 future fighter and the replacement ground-based ICBM. But amongst the hundreds of lines there are three that stand out. The first is Golden Dome for America, President Trump’s personal commitment to deliver homeland missile defence before the end of his second term. It’s meant to get $17.5 billion, which is actually a decrease from FY26’s $21.1 billion, but that’s still serious money, particularly when we consider there are billions of dollars of other RDT&E lines focusing on missile defence. However, it is still an RDT&E activity, not a procurement program.

The second is Industrial Base Analysis and Sustainment Support. The IBAS program has been around for some time with the goal of addressing weaknesses in the U.S.’s defence industrial base and supply chain vulnerabilities. But its budget is now on steroids; it was less than $1 billion in FY25 but grew to $11.3 billion in FY26 and its proposed budget for FY27 is a massive $41.8 billion.

For context, that’s nearly as much as Australia’s entire defence budget. That kind of money could potentially be transformative for the U.S. defence industrial if spent well, or it could be a massive boondoggle for special interests.

The third line is the Defense Autonomous Warfare Group. This is a very big DAWG, which has come almost out of nowhere, to receive a massive $54.6 billion bone. According to media reporting, the DAWG took over from the Biden Administration’s Replicator program that aimed at rapidly producing larger numbers of low-cost, attritable drones. It received $225.9 million in FY26 but the FY27 budget proposes $54.6 billion; that is definitely bigger than the entire Australian defence budget.

That scale of funding has the potential to fundamentally transform the U.S. military’s use of drones. But of course making and using drones successfully is not just about the money; Ukraine is planning on acquiring 4,000,000 drones this year for a fraction of the DAWG’s new budget. If the U.S. wants cheap, mass produceable systems quickly it will need a different approach to how it procures ships and aircraft, something a lot more ‘Ukrainian.’ Beyond the essential contracts, success for a military in the drone era also requires markedly different mindsets and behaviours in militaries and in the bureaucracies that wrap around them—like those in the Pentagon or, closer to home, up at Russell HQ in Canberra.

We should note that all three lines are part of the proposed budget’s $350 billion in ‘mandatory resources through reconciliation for critical Administration priorities such as increasing access to critical munitions and further expansion of the defense industrial base.’ So the Administration should be able to get them through Congress. Incidentally the DAWG and IBAS are run out of the office of the Secretary of Defense, which may bring greater attention and political capital to them.

Whether these programs can pump that amount of money through the pipeline in a single year remains to be seen. But the ambition to mobilise the defence industrial base and to produce autonomous systems is at least remarkable in its scale and speed.

The contrast with Australia could not be starker. Here ministers congratulate themselves on their services innovation and sovereign industry development when they award a few hundred thousand dollars to an Aussie company to prototype a drone.  And Defence officials give each other awards for managing to give three companies $2.2 million contracts to produce counter drone systems.

Procurement – Missiles: the dollars are huge but the maths is shaky

Procurement would receive a huge boost in the proposed budget, increasing by a massive 84.6% from $223.8 billion to $413.1 billion. That would put it just behind Operations and Maintenance as the second largest chunk of the Pentagon’s budget. As with the other parts of the defence budget, we only have program lines with very succinct titles. Nevertheless, we can get a reasonable idea of where the money is going and from that some insight into the Administration’s priorities.

As with RDT&E, there’s no fundamental change in direction for current programs. The big ticket programs such as the F-35 Joint Strike Fighter and B-21 stealth bomber are continuing.

But the big thing that jumps out from a cursory review is that the Administration wants missiles, lots of missile. Numerous analysts have remarked on the U.S. and its partners’ burn rate of munitions in the current conflict, which comes closely in the wake of the U.S.’s Red Sea campaign against the Houthis that also consumed huge numbers of guided weapons. After only a few weeks of the current war, the U.S. and its Gulf state partners had used up years’ worth of production. Now five weeks in, some weapons are getting critically low. This leaves the U.S. woefully unprepared for any potential conflict with China.

The FY27 budget seeks to replace these expended weapons and grow weapons stocks. The desired ramp up in production required to achieve this is staggering. Perhaps the most striking increase is in the U.S. Army’s missile programs. The Army’s overall procurement budget increase is almost $30 billion. Nearly all of that will go on missiles, for which the Administration is seeking $36.6 billion, up from $8.0 billion in FY26. Among the most heavily used missiles in the Iran War have been THAAD, an anti-ballistic-missile missile, and the Patriot PAC-3, generally employed against cruise and other missiles. The U.S. does not appear to have procured any THAAD missiles over the past two years, however this budget seeks 857 THAAD missiles at a cost of $11.4 billion. After procuring 214 PAC-3 missiles in FY25 and 233 in FY26, this budget seeks 2,798 missile at a cost of $12.2 billion, more than a ten-fold annual increase in one year.

There arere also orders for offensive missiles. The Army is seeking 12 Conventional Prompt Strike missiles for $750 million. These are designed to hit anywhere in the world within an hour. That may seem like a lot for a conventionally tipped missile, but the current war appears to have normalised assassination as a formal tool of U.S. foreign policy, so the thinking maybe that $60+ million is worth it to take out an ayatollah or Supreme Leader without even Special Forces’ boots on the ground.

It’s remarkable that the U.S. Army’s missile budget alone is bigger than the entire State Department budget that encompasses both diplomacy and foreign assistance. And of course the U.S. Navy and USAF have their own missile programs in addition to the Army’s. According to media reporting the U.S. Navy expended 850 Tomahawk Land-attack Missiles in the first month of the Iran War; it only procured 58 in FY26 at cost of $257.6 million. This budget increases the U.S. Navy’s Tomahawk procurement to 785 missiles at a cost of $3 billion (which wouldn’t cover the number expended, particuarly when we add in another 80 fired at the Houthis last year).

One can rightly question whether these production increases can be achieved in the course of one year. Guided weapons are complex machines that require many inputs such as rare raw materials, some of which come from China or indeed the Gulf where the war is currently disrupting production and export. And the big defence primes that will suck in this cash rely on large numbers of much smaller suppliers to make a components of each missile.  These small outfits can’t just get bigger fast—as we’ve seen with the shipbuilding and submarine building supply chains. But presumably one of the goals of the $41.8 billion IBAS program is to help boost production despite these constraints.

The other question is whether this is the right path to addressing the missile maths challenge, i.e., whether it is viable to continue to shoot down cheap threats with multi-million dollar missiles. Based on the numbers above, each THAAD costs $13.3 million and each PAC-3 $4.7 million. While the numbers of missiles the Administration is seeking to acquire might be sufficient against a regional adversary like Iran, how many would be needed to defend against the threat posed by China’s thousands of ballistic and cruise missiles, let alone the hundreds of thousands of drones China can churn out? The almost certain answer is many more than even this heroic cash splash seeks to buy.

Presumably that is the point of the $54.6 billion DAWG—to develop solutions to the missile maths problem that can be produced quickly and much more affordably than the traditional missile approach. The Administration seems to be taking an everything, everywhere all at once by pursuing multiple paths to solve the equation.  

The result looks like an all you can eat buffet both for the big traditional defence primes like Lockheed, RTX (Raytheon) and Northrop Grumman and for the national security ‘tech bros’ like Palantir and Anduril.

Procurement – Shipbuilding: lots more cash, not many warships

Interestingly, one area that is not experiencing a boost in orders is warships. The approach to shipbuilding presented in the skinny budget is a little perplexing. Certainly there is a huge increase in funding, from $29.4 billion in FY25 to $45.1 billion in FY26 and $65.8 billion in the proposed FY27 budget. That’s more than a doubling in the space of two years. Granted the FY27 budget seeks to procure a significant number of ships, but the bulk of the are auxiliaries, not warships. Certainly there is a need for auxiliaries like replenishment ships, and the acquisition of two new submarine tenders makes sense—if you can’t produce more submarines, then tenders can help get more use out of the submarines you do have.

But the number of actual warships the budget seeks to procure continues the pace of recent decades that has resulted in a U.S. Navy that is stagnating or even shrinking in size. All up there are only seven: one Columbia-class ballistic missile submarine (SSBN), two Virginia-class nuclear-powered attack class submarine (SSNs), one Arleigh Burke destroyer, one FF(X) frigate and two large amphibious ships are the only true warships. There is an even $1 billion going into the BBG(X), aka the Trump-class battleship, but the design isn’t mature enough to procure yet. Even the one frigate is based on a Coast Guard cutter that is minimally armed. There’s no new aircraft carrier. $65.8 billion doesn’t add much to the tip of the spear.

The problem of course is that U.S. naval shipyards are so backlogged that they can’t currently build more ships even if the Administration ordered them. That’s why SSN procurement was reduced to one vessel in FY25. Perhaps the $41.8 billion IBAS program aiming to boost naval production will help where years of industrial investment to date haven’t, but industry first has to absorb those funds in order to grow the capacity to deliver the order book.

For the foreseeable future China will continue to outbuild the U.S. in warships. Last year China commissioned a new aircraft carrier, two very large amphibious ships, two SSNs, and, depending on which source you use, as many as seven destroyers and four frigates. And a range of reporting indicates that the PLAN is ramping up SSN production, eating away at one key area where the USN continues to hold a numerical advantage. The USN is going to need all of those new missiles this budget is procuring, and it may well need them sooner than it is going to get them. And the DAWG better get busy and productive fast.

Takeaways for Australia: missile defence, AUKUS and dollars

What does this all mean for Australia? We’ll start with a couple of highly subjective comments. Whether you think a very robust U.S. defence budget is a good thing for Australia will depend on whether you think the U.S. today is force for stability and the preservation of international order or it is an agent of chaos that is undermining the last vestiges of international order.

Put another way, the size of the U.S. defence budget and capability of the military it delivers is irrelevant to Australia if the U.S. Administration is not willing to employ that military in ways that protect Australia’s interests. Opinions are greatly divided on this issue, both in Australia and in America, where the debate about the value and role of America’s allies is intensifying.

Second, this significantly increased U.S. defence budget is funded by accelerating deficit spending. Opinions will again be divided on whether this is evidence of enduring global leadership, of a great power doing what is necessary to preserve its leadership in a chaotic world, or whether this is evidence of an overstretched, fading hegemon where no amount of spending will address the underpinning limitations of U.S. power revealed by recent conflicts.  And where political change is both driving more conflict and resulting from the conflicts we are seeing in our world.

Beyond these macro-level musings, we can draw some more concrete conclusions. While we are all aware of the challenges presented by the ‘missile maths’ problem, it is indisputable that the presence or absence of effective air and missile defence is a key factor in the outcome of modern conflict. Without effective air and missile defence you assume the role of the Houthis, Hezbollah or Iran and get pounded. Even if you can stay in the fight, you endure massive losses.  Moreover, if, unlike Iran, Hezbollah or the Houthis, your military also lacks a reliable flow of offensive missiles and drones in a time of conflict, then you can’t fight back.

The FY27 budget confirms that the U.S. understands that even great powers cannot assume they will have a level of air supremacy that will completely protect them against adversaries’ missile and drone capabilities.

But it’s increasingly clear that effective air and missile defence requires a full-spectrum approach that ranges from the exquisitely expensive high-end system to defeat ballistic missiles to cheap systems that can be employed and replaced at scale to defeat the cheap threat systems that can also be employed at scale (not to mention the sensors and battle management systems that enable you to use the effectors).

In this budget it appears that the U.S. is adopting an everything, everywhere, all at once approach. Yes, it is spending many tens of billions on missile interceptors, but it is also investing heavily at the other end of the spectrum. Considering its recent experience in the Red Sea and now the Persian Gulf, it is likely it will seek to deploy low cost solutions as soon as possible.

In Australia, the situation is very different. The 2024 National Defence Strategy removed funding for air and missile defence from Defence’s integrated investment program and adopted a wait-and-see strategy, apparently expecting some perfect solution to appear down the track. But there are no perfect solutions in this space.  A capability built around high-end system like THAAD and Patriot that had sufficient scale to protect key locations in Australia would be eye-wateringly expensive and suffer from the magazine depth challenge other countries have experienced, so we likely can’t protect everything. But surely something is better than nothing.

Unfortunately if the forthcoming 2026 NDS says we are now going to acquire systems of that nature, we will have to go to the end of what is becoming an increasingly long queue. U.S. production lines will be stretched to meet priority U.S. orders over the next few years, meaning even ready cash won’t result in guaranteed interceptor deliveries for even the most motivated and valued U.S. partners. Already, countries that had orders in the queue are finding that they can be bumped from their place if the U.S. reassesses the priority of its customers.

But Australia is also doing very little at the other end of the spectrum. Despite the world leading capabilities of Australian companies in developing systems that employ ‘the small, the smart, and the many’, these cost effective systems are still the poor cousins of the major programs acquiring small numbers of crewed platforms in unacceptably slow timeframes. They get whatever small change has fallen down the back of the sofa (Exhibit A is the celebration of a tiny number of tiny contracts referred to earlier).

Certainly Australia can’t match the scale of the U.S.’s DAWG program, but if the U.S. with a $1.5 trillion defence budget has finally realised it can no longer rely solely on exquisite programs and is acting urgently to change this situation, then Australia too has to pursue low cost systems that can be produced at scale with urgency and real money.

Whichever way we go, in the light of recent conflict we no longer have the luxury of waiting for perfect solutions. The U.S. certainly isn’t.

The underwater world: AUKUS and numbers

The next takeaway is everybody’s favourite dinner party conversation topic: U.S. submarine production. The proposed FY27 budget procures two Viriginia-class SSNs. That number is consistent with the USN’s long-term plans that pre-date AUKUS, which see it gradually recovering from under 50 SSNs to its goal of 66 SSNs. Put another way, the U.S. is not yet at the point where it is able to order additional submarines to compensate for the ones that are to be transferred to the Royal Australian Navy from 2032 under AUKUS so-called ‘optimal pathway.’

The skinny budget doesn’t provide details around production schedule, but we know from FY 26 budget documentation that the USN itself anticipates that SSN build times will still be around eight years. So, even if the U.S. industrial base improves to the point that it can accommodate greater throughput, allowing the USN to order a third SSN in some years to compensate for transfers to Australia, we will not see any more submarines than were envisaged before AUKUS was announced until the late 2030s.

That doesn’t mean Australia won’t get its first Virginia in 2032. Ultimately AUKUS is a political construct, and the president of the day may be able to convince Congress that it is in the U.S.’s interests to transfer existing U.S. Navy submarines to Australia. That will of course depend on the then U.S. president’s view of the value of allies, which currently appears to be at an all time low. But it does mean that the alliance won’t have any more submarines in total than had been envisaged before AUKUS.

Burden sharing gets serious – and Australia’s not doing any heavy lifting

Finally, the skinny budget doesn’t give a figure for the U.S.’s FY27 defence spending as a percentage of GDP. However, the CBO put the FY26 defence budget at 2.8% of GDP. A 44% increase would push it up to around 4.0%. That’s well beyond the 3.5% that Mr Trump has been pushing U.S. allies and partners to spend. And it’s around twice as much as the 2.0-2.1% that the Albanese government is planning to spend over the next few years according to its budget documents. The government keeps saying publicly that maintaining the alliance is important to it but it’s not putting its money where its mouth is.

If the Australian government takes any of the intensifying debate and criticism in Washington about the defence capabilities and spending of America’s allies at all seriously—as it probably should—then maintaining a spend of less than 2.1% of GDP in the next budget is a signal to the U.S. that we’re immune to their demands. That would be an odd position, given the government’s current defence plan is to make our military even more dependent than it is now on American systems and supplies and consequently even more reliant on U.S. goodwill. 

Alternatively, if the Albanese Government and its defence mandarins privately calculate that the alliance is no longer reliable, then 2.0% of GDP won’t be sufficient to create a much more self-reliant Australian Defence Force able to act without automatic support and rapid resupply from the U.S.. 

Maybe we’ll get a clue to the Australian Government’s position on this from Deputy Prime Minister and Defence Minister Richard Marles MP when he releases Australia’s new, likely mildly updated, National Defence Strategy on 16 April in the lead up to Budget night here in Canberra.

Marcus Hellyer is Head of Research at Strategic Analysis Australia.

This article appeared originally at Strategic Analysis Australia.