The United States defense budget for the upcoming fiscal year (FY26) is in the midst of the most disjointed and delayed process in history, due to a complex series of unprecedented bureaucratic holdups and anomalies.  This year, the Department of Defense for the first time submitted a budget request split across two authorization mechanisms – the traditional National Defense Authorization Act, which forms the Department’s base budget, and a reconciliation bill, better known as President Trump’s “Big Beautiful Bill.” Under this “one budget, two bills” approach, the Pentagon has already gotten $150 billion authorized through reconciliation, and is awaiting its base budget even as the fiscal year begins October 1. Once the two houses of congress reconcile their differing versions and pass a final NDAA, the Department of Defense will be on track for a total budget of $961 billion, a 12% increase from the prior year.

A close look at this year’s complex budget process reveals that while some of the reasons for the increase are owing to bureaucratic anomalies – making up for caps on FY24 and FY25 spending, for example – the boost also reflects a broad-based consensus around a need to invest in emerging technologies and modernization to keep up with an evolving threat environment, particularly with regard to threats from China.

The disjointed approach reflects both political realities and strategic imperatives that have forced Congress and the Pentagon to navigate uncharted procedural waters. The bifurcation of the defense budget between the traditional NDAA and the reconciliation bill has created what Senate Armed Services Committee members describe as “unnecessary funding cliffs, misalignments, and uncertainties” that complicate long-term defense planning.

Currently, the Senate and House have developed their versions of the NDAA which will need to be reconciled before a final NDAA is finalized and the Pentagon receives a full funding authorization for the year. If prior years are any indicator, this will not happen until at least a late November or early December time frame – assuming a government shutdown does not delay the process further.

SASC-Proposed Increase

In a key step in the process in July, the SASC produced its version of the FY26 NDAA, including a proposed $878.7 billion for the Department of Defense.  The figure represented a $32.1 billion or 2.5% increase over the $848.3 billion that the Pentagon had asked for in the NDAA portion of its budget request.

While the Senate’s willingness to consider a higher budget than the Pentagon had requested surprised some observers, SASC members pointed in their budget report to a number of run-of-the-mill bureaucratic factors linked to this year’s unusual budget process that drove the increase, rather than a shift in Senate thinking about America’s place in the world.

One driver was a concern about under-resourcing following two years of funding caps. In FY24 and FY25, all national spending including defense spending was subject to caps set by the 2023 Fiscal Responsibility Act, a bipartisan agreement that suspended the national debt ceiling.  In FY25, because Congress failed to pass a budget and the U.S. government operated under a continuing resolution for the entire fiscal year, the Pentagon was not able to spend the full amount it had been authorized in the NDAA – an anomaly that “limited the Department’s ability to buy back valuable readiness and make investments in modernization,” the SASC report said.  For this reason, the SASC members concerned about under-resourced priorities were willing to consider a higher authorization to make up for these prior year gaps.

In addition, SASC members noted concern that Pentagon’s decision to split its budget request across two authorization mechanisms had created structural problems for long-term defense planning.  They worried that without adequate and long-term resourcing, the President’s new “bold objectives” for the Department risked short-changing other defense priorities.

In particular, a key concern about the reconciliation funding was that although it had provided a “down payment” for new capabilities, those investments would stall without sustained follow-on funding through integration in the Pentagon’s base budget under the NDAA. The committee’s response was to propose a larger NDAA authorization that would integrate new defense priorities into the Pentagon’s base budget, ensuring sustained funding rather than relying on short-term, fast-tracked legislation separate from standard NDAA review processes.

New Investments for an Evolving Threat Environment

Beyond the bureaucratic complexities, the proposed FY26 defense budget increases reflect consensus around a fundamental strategic reality: that the United States faces what House Armed Services Committee Chairman Mike Rogers characterized as the “most complex global threat environment since WWII.” This assessment drives broad-based congressional consensus for investments in emerging and innovative capabilities to counter growing threats, even as other aspects of the budget process remain highly partisan.

This consensus reflects recognition that the United States’s technological superiority, long taken for granted, now faces serious challenges from strategic competitors, particularly China, which has been the Department’s “pacing threat” for the last several years. The urgency surrounding emerging technology investment stems from the rapid pace of military innovation worldwide, where adversaries are rapidly developing capabilities in artificial intelligence, hypersonic weapons, directed energy systems, and autonomous platforms that are reshaping the character of warfare at an unprecedented rate.

Both House and Senate versions of the NDAA demonstrate remarkable bipartisan agreement on the priority of investing in these critical technology areas, and continuity with the prior year NDAA. The legislation prioritizes the adoption and integration of AI across military operations, logistics, and mission-critical applications, requiring the Pentagon to produce up to 12 generative AI tools to support areas such as damage assessment, cybersecurity, and mission analysis. Both versions also increase funding for hypersonics, autonomous systems, cyber capabilities, mobile micronuclear reactors, and high-energy lasers – technologies deemed essential to deterring China’s military modernization.

The legislation goes beyond simply funding these technologies by establishing comprehensive frameworks for their development and deployment. Both chambers emphasize workforce development through AI education and advanced manufacturing skills training, while the Senate version establishes experimental sandbox environments for testing and model development. The bills also create governance structures for responsible AI adoption, including standardized assessment frameworks, risk-based security measures, and supply-chain oversight to ensure technological advantages don’t create new vulnerabilities.

The Senate version of the NDAA explicitly raises concerns about “shortcomings of U.S. military capabilities, munitions inventories, technology innovation timelines, and industrial base capacity,” reflecting deep anxiety about the U.S. military’s ability to maintain its competitive edge. Both chambers emphasize enhancing readiness, modernizing the force, shoring up munitions stockpiles, revitalizing shipbuilding capacity, and fostering innovation in the industrial base to support these advanced capabilities.

Notably, while the Big Beautiful Bill included funding for highly partisan defense initiatives like the Golden Dome missile defense system and security of the southern U.S. border – both top priorities in the administration’s interim National Defense Strategy – these remain divisive along party lines. In contrast, investments in emerging and innovative military capabilities have garnered bipartisan support, with neither of the partisan initiatives reflected in the draft versions of the NDAA beyond limited language amendments about the missile shield system in the House version.  Still, as congress debates the two versions in the months ahead, stronger party-line differences in priorities for the authorization could emerge.

What to Watch for: Acquisition Reforms, Future Years Defense Program

Over the coming months until the NDAA is finalized, defense contractors in particular will be watching closely for how the two houses of Congress will reconcile differing approaches to acquisition reform in the bill.  In line with the Trump administration’s emphasis on slashing government waste and red tape, the House and Senate versions of the NDAA both propose significant reforms to the acquisition process, but take widely differing approaches.

The House version introduces changes to transaction authorities, alternative capability-based pricing, and acquisition thresholds that may be more appealing to traditional defense “primes,” the Senate version takes more aggressive, targeted approach that emphasizes streamlining access specifically for nontraditional defense contractors.

Budget watchers are also awaiting the Pentagon’s release of its Future Years Defense Program for FY26, which will outline spending projections and priorities for the next several years. Based on previous Congressional Budget Office analyses, the Pentagon can be expected to continue requesting increased resources, suggesting that the FY26 increases are part of a longer-term trajectory rather than a one-time adjustment.

As Congress works toward reconciling its competing visions and finalizing the FY26 defense budget this fall, the outcome will set the trajectory for defense spending and strategic priorities for years to come.