How Does the U.S. Defense Budget Work?

By Adam Patti, Chief Executive Officer, VistaShares | Published November 13, 2026

The U.S. defense budget is the annual funding Congress provides for the military and related national security programs, and for fiscal year 2027 the administration requested about $1.5 trillion, made up of a $1.15 trillion base request and about $350 billion to be provided through a separate reconciliation bill. A budget request is a proposal: Congress sets actual funding through authorization and appropriations bills, and the reconciliation portion requires its own legislation. For investors, the procurement and research accounts are the parts that most directly become contracts for defense companies.

How is the defense budget organized?

National defense (budget function 050) covers the Department of Defense, nuclear weapons programs at the Department of Energy, and some other defense-related activities. It is the broadest measure.

The Department of Defense budget (subfunction 051) is the biggest piece. It is divided into appropriation titles:

Military personnel covers pay and benefits for service members. Operation and maintenance covers training, fuel, repairs, civilian salaries and day-to-day operations. Procurement pays for ships, aircraft, vehicles, missiles, munitions and satellites. Research, development, test and evaluation (RDT&E) funds the development and testing of new systems. Military construction and family housing pays for bases and facilities.

Procurement and RDT&E are often called investment accounts. For FY2027, Pentagon officials described a base procurement request of just under $260 billion and a base RDT&E request of just under $220 billion.¹ Including reconciliation, about $760 billion would go to buying and developing weapons.²

How does the budget become law?

The request. The president submits a budget request, usually in the first months of the year. The FY2027 request was released on April 3, 2026.¹

Authorization. Congress passes the National Defense Authorization Act (NDAA), which sets policy and authorizes programs and funding levels.

Appropriations. Separate defense appropriations legislation actually provides the money. When appropriations are not completed by October 1, Congress often passes a continuing resolution that funds the government at prior-year levels and generally prevents new programs from starting.

Reconciliation. Some recent defense funding has moved through budget reconciliation, a process that can pass with a simple majority in the Senate. The FY2027 request relies on reconciliation for about $350 billion.²

How large is the FY2027 request?

The Pentagon described the $1.5 trillion total as the biggest year-over-year increase in defense spending since World War II.³ One analysis put the increase at about $445 billion, or 44%, over the prior year’s funding level.⁴ For comparison, the prior year’s request was $892.6 billion, later supplemented by $150 billion through reconciliation, which pushed the total above $1 trillion for the first time.³

The request highlights several priorities, including the Golden Dome homeland missile defense program, drones and counter-drone systems, space, artificial intelligence and the defense industrial base. The budget documents cite more than $74 billion for drone and counter-drone technologies, more than $75 billion for space capabilities and more than $100 billion in defense industrial base investments, among other items.¹⁵

How does the budget compare over time?

Measured in dollars, U.S. defense spending has risen in most years since the late 1990s, with peaks during the wars in Iraq and Afghanistan and a sharp increase in the mid-2020s. Measured as a share of the economy, it has generally declined from Cold War levels of 5% to 6% of GDP to a little above 3% in recent years. Comparisons depend on whether figures are adjusted for inflation, whether they include supplemental and reconciliation funding, and which budget function is used, so investors should check which measure a source cites before comparing totals.

Where does procurement money go?

Procurement funding becomes contracts for shipbuilders, aircraft makers, missile producers, munitions plants, satellite manufacturers and their suppliers. Spending often continues for years after appropriation, because large programs are paid as work progresses. Procurement funds for many items remain available for three years, and shipbuilding funds for longer, so a given year’s budget can shape contractor revenue well into the future. Multiyear procurement contracts, which commit to several years of purchases, can lower unit costs and encourage suppliers to invest in capacity. Our article on munitions production capacity shows how these contracts are being used.

What are the uncertainties?

Congressional action. Congress may add, cut or shift funding, and the reconciliation portion depends on separate legislation.

Continuing resolutions. Delays in appropriations can slow new programs and contract awards.

Fiscal pressure. Rising federal deficits and interest costs may affect future budgets.

Execution. Funding alone does not ensure timely delivery; industrial capacity, workforce and supply chains affect how quickly money turns into equipment.

Policy shifts. Priorities can change with administrations, threats and conflicts.

What does this mean for investors?

The defense budget links thematic investing to prime contractors, component and subsystem suppliers, shipbuilders, munitions makers, space companies and software firms. Exposure depends on which accounts and programs a company serves. Our articles on the defense supply chain and NATO spending targets cover related topics.

Frequently asked questions

What is the difference between national defense and the Pentagon budget?

National defense, budget function 050, is the broadest category and includes the Department of Defense plus defense-related nuclear programs at the Department of Energy and certain other activities. The Pentagon budget, subfunction 051, covers only the Department of Defense. News reports sometimes mix the two, so totals can differ depending on which measure is cited.

What is reconciliation, and why does it matter for defense?

Budget reconciliation is a congressional procedure that allows certain spending and tax legislation to pass the Senate with a simple majority rather than 60 votes. In 2025, Congress used reconciliation to add about $150 billion for defense. The FY2027 request proposes about $350 billion through a new reconciliation bill, which means that portion depends on Congress passing separate legislation.

What is a continuing resolution?

A continuing resolution is temporary legislation that funds the government, usually at the prior year’s levels, when Congress has not passed regular appropriations by the start of the fiscal year on October 1. For defense, continuing resolutions generally prevent new programs from starting and production rates from increasing without specific exceptions, which can delay contracts.

How much of the defense budget goes to buying weapons?

Procurement and RDT&E together make up the investment portion. For FY2027, Pentagon officials described base requests of just under $260 billion for procurement and just under $220 billion for RDT&E, with reconciliation adding more. Including both, about $760 billion of the request would go toward buying and developing weapons, according to Breaking Defense.

Does a bigger budget request mean defense companies earn more?

Not automatically. Congress may change the request, and appropriated money flows to contractors over several years as work is completed. Contract terms, competition, cost overruns, supply chain constraints and labor availability affect revenue and margins. Some programs receive large increases while others are reduced, so effects vary by company and program.

How do thematic ETFs track defense spending?

Defense and aerospace ETFs hold companies that sell to the Department of Defense and allied governments, including prime contractors and suppliers. Some funds include space, cybersecurity or drone companies. Methodologies differ in how they define defense revenue and weight holdings. Reviewing holdings and revenue exposure helps show how closely a fund follows budget priorities.

Cite this page: Adam Patti, "How Does the U.S. Defense Budget Work?," VistaShares, updated November 13, 2026, https://www.vistashares.com/us-defense-budget-explained/. Plain-text version.

This material is provided for educational purposes only. It is not investment, legal or tax advice, and it is not a recommendation or an offer to buy or sell any security. Information is drawn from sources believed to be reliable as of the date of publication, is not guaranteed as to accuracy or completeness, and may change without notice. Figures attributed to third parties are their estimates. Projections and forecasts are not guarantees of future results. Investors should consult their own financial, legal and tax professionals before making investment decisions. Investments involve risk, including possible loss of principal. Companies in a single industry or theme may be affected by common economic, regulatory or technological developments and may be more volatile than the broad market. References to companies, governments or programs are for illustration only.