November 25, 2024
By Elena McGovern, co-head of Capstone’s National Security Team, Michael Wang, National Security analyst, and Hunter Hammond, Macro Policy analyst
Capstone believes that the greatest near-term impact of the Department of Government Efficiency (DOGE) will be to use its platform to call out examples of wasteful, fraudulent, or unnecessary spending, with defense spending as a key target. However, large and enduring spending cuts, including proposed mechanisms like “impoundment” and Schedule F, will ultimately require Congressional action or be settled through the courts.
- President-elect Donald Trump has named Elon Musk and former GOP presidential candidate Vivek Ramaswamy to head the Department of Government Efficiency (DOGE), a non-governmental entity that will propose cuts to government spending, cost savings, regulatory cuts, and headcount reductions. Musk previously promised to cut $2 trillion from the $6.75 trillion federal budget, and a recent op-ed in the Wall Street Journal by Musk and Ramaswamy targeted $500 billion in funds not authorized by Congress.
- Because DOGE lacks statutory authority, it will focus on publicizing examples of what it perceives to be government waste, fraud, abuse, and inefficiency. However, over time, Capstone expects DOGE to collaborate closely with the Trump Administration’s Office of Management and Budget (OMB), the nerve center for government spending in the executive branch, and propose reforms that are structural in nature.
- We believe DOGE will devote some of its biggest efforts to scrutinizing the Department of Defense (DoD). The DoD represents nearly half of all federal discretionary spending, and it is a target-rich environment with large, underperforming programs. While it is too early to identify specific winners and losers, we see incumbents overseeing large, costly programs, such as Lockheed Martin Corp.’s (LMT) F-35 program, as likely to face pressure from DOGE. Newer, more agile defense tech entrants, such as Palantir Technologies Inc. (PLTR) and Anduril Industries may benefit.
- Capstone expects DOGE will promote the use of artificial intelligence (AI) and other tools to identify fraud and improve efficiency, representing a tailwind for companies offer these services. Palantir could benefit from these efforts. Other government services firms could benefit as well, such as Booz Allen Hamilton Holding Corp. (BAH).
- We believe DOGE lacks the power to deliver on proposals to eliminate multiple agencies and departments. Promises to make big cuts to entitlement programs and eliminate core overnment functions will require Congress and are poised to be political flashpoints, even for Republicans. If significant structural reforms occur, it will be because of Congress, not Musk and Ramaswamy.
Authority, Process, and Execution
As a non-governmental entity, the Department of Governmental Efficiency (DOGE) will operate like a commission or advisory board. That means it will have no authority to directly implement any of the recommendations that it develops. Its mandate will be similar to previous commissions that focused on reducing costs and waste in the federal government, such as the Grace Commission during the Reagan administration or the Simpson-Bowles Commission during the Obama administration, although it will have a much longer leash, given President-elect Trump’s stated desire to challenge established laws and precedent during his second term.
Trump acknowledged this when he announced the creation of DOGE, making it clear that Elon Musk and Vivek Ramaswamy would work from outside the government hand in hand with the Office of Management and Budget (OMB) to rein in spending. Trump’s nominee for Director of OMB, Russ Vought, is a fierce defender of Trump’s ability to make deep cuts to the federal government and will be a critical nexus for efforts to translate DOGE’s intent into action. For their part, Musk and Ramaswamy promise to coordinate closely with federal agencies, seemingly to direct the implementation of their recommendations as opposed to earlier commissions, which they criticized in their recent Wall Street Journalop-ed as having only written reports and cut ribbons.
In terms of major reforms to government spending, we would have expected Republican control of both the Senate and the House to reinvigorate efforts to cut key areas of government spending with or without DOGE, particularly with entitlement reform and other mandatory spending. Within Congress, policy debates will manifest in multiple ways, from individual pieces of legislation to the tax legislation required in 2025 with the expiration of key provisions in Trump’s signature first-term achievement, the Tax Cuts and Jobs Act. As a result, we view Musk and Ramasawmy as less likely to focus on major legislative proposals and reforms and focus more on the executive branch, including making tactical recommendations with a goal of reducing government overreach, waste, inefficiency, and fraud.
Musk and Ramaswamy say that DOGE is going to focus on cutting government regulations, which will facilitate “reductions in force.” Such cuts, they claim, are not prevented by federal statute. While it is too soon to speculate on which specific regulations they will recommend eliminating, the process of eliminating them can be complex. It will take time to execute the rulemakings necessary to achieve these goals.
Quick Wins
We expect Musk and Ramaswamy will look to score some quick wins. The fastest way to do this is to “name and shame” perceived instances of frivolous spending. There are examples of President Trump personally involving himself in particular programs already. During his first term, he took note of underperforming DoD programs and ordered defense contractors to make changes to contract terms. While this approach has a mixed record of success, DOGE could leverage Trump’s tendency draw attention to programs he does not like by casting public shame on examples of poor management to generate some quick wins for the Trump administration.
In addition to recommending specific regulations to cut and highlighting examples of overspending, waste, fraud, and abuse, we expect DOGE and the broader Trump administration to talk about two key mechanisms for cutting the government: Schedule F and “impoundment.” Scheule F is part of a plan to reduce the federal civil workforce. “Impoundment” is the term for a decision by the President not to spend money that has been allocated for a particular purpose in a budget approved by Congress. For Trump to impound funds approved by Congress, it would require challenging a 1974 law and directing executive branch agencies not to spend money that has been specifically allocated by the legislature. We expect the incoming Trump administration will test whether it can impound funds, and that this will likely lead to a legal battle that will eventually come before the Supreme Court, leaving it to the court to determine whether “impoundment” is constitutional. Capstone will address Schedule F and workforce issues in a separate note.
Understanding the Federal Budget
Categories of Federal Money: Mandatory vs Discretionary
The federal government will spend approximately $6.75 trillion in FY2024. That sum is split roughly 61% to 26% between mandatory and discretionary, respectively. (See Exhibit 1.) (The remaining 13% is net interest on the government’s debt). While the President submits an annual budget request to the legislature, all spending must be appropriated by Congress. Roughly half of discretionary spending goes to national defense, with the remainder divided into all nondefense accounts. (See Exhibit 2.)
Exhibit 1: Mandatory Spending Breakdown in FY23, $M
| 2022 | 2023 | 2024 (est) | |
|---|---|---|---|
| Social Security | 1,212,487 | 1,347,961 | 1,451,541 |
| Medicare | 747,195 | 839,114 | 838,777 |
| Health | 772,584 | 788,700 | 757,399 |
| Education, training, employment, and social services | 543,151 | (126,398) | 180,615 |
| Income Security | 773,190 | 674,146 | 659,102 |
| Veterans Benefits | 161,181 | 170,278 | 202,965 |
| Other | (76,966) | 64,472 | 76,880 |
| Net Interest on Debt | 475,887 | 658,267 | 888,597 |
| Total Mandatory Outlays | 4,608,709 | 4,416,540 | 5,055,876 |
Source: OMB
Exhibit 2: Discretionary Spending Breakdown in FY23, $M
| 2022 | 2023 | 2024 (est) | |
|---|---|---|---|
| Total National Defense | 752,128 | 806,191 | 884,133 |
| Total Nondefense | 912,422 | 911,941 | 1,000,895 |
| Veterans Benefits | 113,223 | 131,322 | 143,367 |
| Transportation | 112,216 | 114,979 | 138,546 |
| Education, training, employment, and social services | 134,154 | 124,209 | 111,592 |
| Income Security | 92,907 | 100,509 | 101,405 |
| Health | 141,497 | 99,855 | 100,614 |
| Other | 318,425 | 341,067 | 405,371 |
| Total Discretionary Outlays | 1,664,550 | 1,718,132 | 1,885,028 |
Source: OMB
Political Dynamics of Cutting Federal Spending
There is a longstanding debate about how to make structural spending cuts to the federal government. The debate usually produces frustration because it is difficult to making significant cuts to mandatory spending, such as entitlement programs. It’s long been a truism in Washington that entitlement reform is the “third rail of politics.” Voters, particularly older voters who consistently have high electoral turnout, are extremely sensitive about politicians cutting their benefits, while powerful lobbying interests that advocate for specific spending programs are capable of scuttering major cuts to their preferred programs. Considering the narrow majorites held by Republicans in both chambers of Congress and political sensitivities, just a couple of defections, which would be likely in any entitlements fight, would make such a move impossible.
As it stands, a significant portion of federal spending goes directly to supporting state and local governments and individual citizens through various types of financial assistance. Several analyses show that many of the states that receive more money from the federal government than they contribute have been rural states typically governed by Republicans. The risk that spending cuts by Trump and a Republican administration would impact Republican constituencies will complicate efforts to cut federal spending in meaningful ways. This is also true in the context of Musk and Ramaswamy’s talk of cutting entire government agencies. This poses obvious political risks that the Trump transition team has not yet begun to wrestle with publicly.
Defense as a Case Study
We expect DOGE to place the greatest emphasis on specific program inefficiencies, procurement reform, and other cost-cutting efforts, as these efforts do not require approval from Congress and could provide quick wins for Musk, Ramaswamy, and the Trump administration. As a result, we will first focus on where that impact could be felt most significantly: the DoD.
Defense spending, which accounts for roughly 47% of discretionary expenditures, makes up the biggest share of such outlays and will be subject to rigorous scrutiny in a belt-tightening budgetary environment. It will also demonstrate the difficulty of substantially shrinking government spending, let alone reaching the $2 trillion figure that Musk has floated. (See Exhibit 3.)
In recent years, the DoD has been criticized for its insufficient stewardship of taxpayer dollars as it manages a multitude of underperforming and over-budget programs. Given Musk’s personal interest in defense through his work with SpaceX, which contracts with DoD, and in artificial intelligence, this is an area where his efforts to disrupt the status quo are likely to be particularly aggressive. This will be especially so with regards to major program acquisitions and share of the procurement pie that flows to incumbent defense contractors.
Exhibit 3: Defense Spending by Account Type in FY23, $M
| 2022 | 2023 | 2024 | 2025 | % of 2025 Spending | |
|---|---|---|---|---|---|
| Military Personnel | 167,525 | 174,210 | 173,019 | 181,881 | 21.5% |
| Operations & Maintenance | 319,177 | 339,638 | 320,072 | 337,921 | 39.8% |
| Procurement | 153,216 | 176,845 | 163,862 | 167,546 | 19.7% |
| Research, Development, Testing & Evaluation | 119,081 | 139,820 | 139,658 | 143,157 | 16.8% |
| Other | 17,634 | 21,194 | 20,709 | 19,266 | 2.2% |
| Total | 776,632 | 851,706 | 817,321 | 849,770 |
Source: DoD FY25 Green Book
Note: Figures show Discretionary Budget Authority, not outlays or appropriations. FY24 and FY25 numbers do not include Ukraine/Israel supplementals. Numbers are rounded and may not add up to the total sum.
Looking at the DoD’s budget accounts, most spending falls under personnel costs and operations & maintenance (O&M). Absent a major cut in the end strength of the military, which most Republican lawmakers would not support, personnel costs are largely fixed and are likely to go up as Trump promised during the 2024 campaign to increase pay for junior enlisted soldiers. O&M costs include all the costs accrued from military operations and the maintenance of existing equipment. As force reductions are unlikely, it is hard to envision a scenario where there will be less need for maintenance; ultimately, efficiency improvements will only save so much. In FY24, those two accounts total roughly 62% of defense spending. In a hypothetical scenario where the military buys no new equipment in FY25 and cancels all R&D, the DoD would save roughly $330 billion dollars, or around 17% of Musk’s goal of cutting $2 trillion from government spending. However, this would come at the cost of significant damage to the US military and national security interests against the setting of an increasingly dangerous geopolitical landscape.
Any efforts by DOGE to rapidly reshape DoD will meet stiff resistance in Congress, which has historically supported defense spending on a bipartisan basis. Any efficiencies that DOGE identifies will likely be welcomed, at least at the political level within the Pentagon. However, a real reduction in overall defense spending in the current geopolitical environment will be difficult to achieve. One internal departmental initiative that would complement these efforts would be a renewed emphasis on improved program performance by defense contractors. However, while important for taxpayers, efficiency improvements alone will not generate a substantial change in the overall spending profile of the DoD. Substantive savings will come from a reexamination of the Department’s mission, and that does not seem likely to change under Trump.
In this new environment, defense firms will be wary of attracting Trump and Musk’s ire. And in many ways, they are likely ready for it. In Trump’s first term, for example, there were multiple instances where Trump intervened at a program-level—something that previous presidents had never done. Trump uses his renegotiation with Boeing Co. (BA) of the contract for Air Force One during his first term as an example of holding contractors accountable. However, the contract Boeing and the US government renegotiated became a worst-of-both-worlds situation, as Boeing was subsequently fined over $2 billion for the delivery of just two aircraft, and the actual delivery to the US Air Force was pushed back by three to four years, delaying the rollout of a critical capability. This serves as a cautionary tale that shows finding “efficiency” and squeezing suppliers on performance and margins can have significant unintended consequences, particularly in the national security context.
Other examples of Trump’s personal interference in defense contracts includes the Ford-class aircraft carrier, where he insisted that the Navy return to a steam-based catapult system which would have required a total rebuild of the $13 billion ship. Another was a desire to shift the supply chain of the F-35 fighter jet to make it entirely domestically sourced, despite being an international program designed from inception to leverage the production facilities of multiple countries. While Trump didn’t always get his way with these programs, this type of attention often put defense contractors in difficult positions with significant financial risks to major programs.
Potential Impacts on Businesses in the Defense Space
A tension in the Trump world will be reconciling the traditional Republican establishment views on national security, represented by figures such as incoming National Security Advisor Representative Mike Waltz (R-FL) and Secretary of State nominee Senator Marco Rubio (R-FL), with relative newcomers that are looking to disrupt the defense status quo. These include many people who come from the Peter Thiel orbit, such as Vice President -Elect Senator JD Vance (R-OH), Steve Case (who has been involved in defense investing), Anduril cofounders Palmer Luckey and Trae Stephens, and Musk himself. There is an underlying view among these individuals that the DoD is an anemic organization that is overly reliant on outdated systems and that adopting advanced technology can unlock greater capabilities and cost savings. For example, Musk declared the end of manned fighter aircraft in 2020 at a US Air Force conference. DOGE could try to achieve meaningful savings by taking a close look at many legacy DoD programs, which would have the secondary benefit of supporting his and other likeminded defense entrants. This includes Palantir and Anduril.
Defense Primes
DOGE is likely to scrutinize major defense acquisition programs that epitomize the traditional, wasteful procurement processes that Musk likely knows is ripe for disruption. The F-35 program will likely be under fire again as the program costs have ballooned to over $2 trillion over the life of the program. Indeed, reducing the F-35 program of record would impact Lockheed Martin’s bottom line. With Trump signaling his intent to end the war between Russia and Ukraine and reduce the US’s commitment to defending Europe, DOGE and Trump’s DoD officials might question the importance of maintaining a large standing ground force when the most likely theater of future conflict is dominated by the air and sea. Companies with large exposure to ground systems, such as General Dynamics Corp. (GD) could face pressure as a result. And given the work Musk and SpaceX do on programs related to space, there could be pressure to favor systems that utilize orbits which have dual use applications, particularly low-earth orbit (LEO), which is used by Starlink. This could impact many of the DoD communications satellites built by Boeing, although the company does also own a subsidiary that specializes in small satellites.
Government Services
Government services is an area that could also be significantly impacted by DOGE scrutiny. Companies like Amentum Holdings Inc. (AMTM), Booz Allen, Science Applications International Corp. (SAIC), and CACI International Inc. (CACI) derive a significant portion of their business from providing services to defense customers. A rollback in defense spending would have an impact on these firms. The shares of all four companies declined this month after Trump’s election. However, there is a case that some of these companies are actually well-positioned to capture business related to DOGE’s efficiency efforts. Upgrading legacy systems and increasing use of AI and automation—a particular focus of Booz Allen—to reduce the defense workforce and improve efficiency will require private sector partners to implement.
While some of these big incumbents may be looked upon skeptically by Musk and Ramaswamy, the realities of working with DoD systems necessitate clearances and other security requirements that make it very hard for the broader commercial supplier base to provide. Additionally, should DOGE succeed in cutting the civil service, more and more functions might be farmed out to contractors, providing another potential tailwind to government services firms. Musk himself has already observed via X (formerly Twitter) the significant age of major government systems, indicating further that this as an area he would be inclined to target.
Big Tech
The incumbency benefit of some of these large, established government services firms is not absolute, however. There is also a possibility that Musk and other figures in the Trump ecosystem would prefer to partner with larger commercial tech giants like Alphabet Inc. (GOOGL), Amazon.com Inc. (AMZN), Oracle Corp. (ORCL) , and Microsoft Corp. (MSFT), given the innovation edge that they are likely able to offer and their increased focus on federal government markets. For example, these four companies currently split a $9 billion contract to build a cloud computing network for the DoD. If the government were to expand its digital footprint and infrastructure with the approval of DOGE and based on the promises of cost savings and efficiency gains, these could all see opportunities grow within their government services offerings.
Additionally, we could see more opportunities to convert commercial technology to defense if the DoD leans into tech solutions. For example, Microsoft has offered a retooled version of its HoloLens as a product to DoD known as the Integrated Visual Augmentation System (IVAS).
What’s Next
Capstone is monitoring the nominations of key officials who will have a role in executing DOGE’s recommendations, as well as broader Trump administration mandates that dovetail with those proposals, such as eliminating diversity, equity, and inclusion (DEI) programs from the government. Sample positions include the Deputy Secretary of Defense and the Undersecretary of Defense for Acquisition and Sustainment.
So far, Republican leaders in Congress have expressed support for DOGE, but how they respond to real cuts will offer insight into how successful DOGE will be. Right now, the conversation in Washington and in the media is dominated by a fascination with the process of how DOGE would cut the federal government, but these efforts are deeply political. Serious policymakers and experts have worked for a long time on these efforts. They are hard problems that will have a real impact on American citizens in myriad ways.
Read more from Capstone’s National Security Team:
What the Democratic Convention Means for Harris’ National Security Posture
US Defense and Foreign Policy in a Harris Admin
Emerging National Security Opportunities, Policy Shifts, and Chinese Consensus
