Budget Trends and the Future of AI in U.S. Defense 

Earlier this year, the Deputy Assistant Secretary of Defense Michael C. Horowitz revealed that the Department of Defense (DoD) had launched several new artificial intelligence (AI) initiatives and investments. Central to this effort was the creation of the Chief Digital and Artificial Intelligence Office (CDAO), an organization established to oversee AI adoption within the DoD, in addition to aligning AI adoption with broader defense strategy, and DoD investments in AI research, development, testing, and evaluation (RDT&E).

This push for AI innovation aligns with the DoD’s 2024 strategy, which prioritizes advanced AI capabilities to ensure that U.S. forces maintain decision superiority on the battlefield. As AI becomes integrated in militaries across the world, the Pentagon is overseeing more than 685 AI-related projects, several of which are tied to major weapons systems. These efforts demonstrate the growing emphasis on AI as a critical component of U.S. defense strategy. However, funding trends reveal that while the Pentagon has significantly increased its AI investments over the past few years, fiscal constraints and shifting priorities have begun to impact growth.

AI Investment Trends in the U.S. Defense Budget 

A review of Forecast International’s U.S. Defense Budget Forecast tool provides insight into how AI development has been funded over the past five years.

The top-line RDT&E budgets show an overall upward trend in requested funding, particularly from fiscal years (FY) 2022 to 2024. Between 2022 and 2023, the DoD’s requested funding for AI RDT&E increased by 26.4%. While requested funds have grown significantly, actual appropriations vary from year to year.

The disparity between requested and appropriated funds highlights broader budget constraints and potentially shifting defense priorities. While AI is recognized as a critical technology,  it still competes for funding against other major defense initiatives such as nuclear modernization, hypersonic weapons development, and cybersecurity enhancements. The sharp decline in appropriations between FY2024 and FY2025 reflects the impact of the Fiscal Responsibility Act, which imposed caps on discretionary spending. This suggests that despite its importance, AI funding is still subject to broader fiscal policy decisions and is not treated as a fully protected budgetary item.

The transition from the Joint Artificial Intelligence Center to the CDAO has also played a role in AI funding. When the CDAO took over AI oversight in 2022, appropriations jumped dramatically from $10.3 million in FY2022 to $320.4 million in FY2023, signaling that consolidation efforts may have improved funding allocation. However, the subsequent drop in FY2025 appropriations suggests that the restructuring phase has ended, and focus has shifted to stabilizing AI investments rather than expanding them.

Despite fiscal challenges, AI remains a core component of the DoD’s long-term strategy. The increase in private-sector AI contracts awarded by the Pentagon may indicate that while direct government funding is constrained, AI development is increasingly being outsourced to private companies.

Growth Factors 

Several factors continue to drive the DoD’s commitment to AI. First, decision advantage remains a major consideration. The ability of AI to enhance military decision-making by rapidly processing vast amounts of data, identifying patterns, and determining best courses of action would provide a strategic advantage to the U.S. military. These capabilities could prove critical for predictive capabilities, such as target identification and tracking enemy movements, which help develop proactive defense strategies. AI also plays a vital role in improving situational awareness by integrating data from multiple platforms, allowing for a more comprehensive battlefield intelligence picture.

Strategic competition with China is another driver of the U.S.’ AI investments. The race to integrate AI into defense operations is intensifying, as China makes significant strides in efficiency and AI development. While DeepSeek did not outperform OpenAI, it achieved comparable performance at a lower budget, demonstrating China’s ability to advance AI capabilities with fewer resources. In response, the U.S. has implemented semiconductor export restrictions aimed at preventing China from accessing the most advanced AI chips, further underscoring the geopolitical significance of AI development. AI funding in the United States will be influenced by this continuing competition.

The Future of AI Research

Looking ahead, the future of AI research within the DoD remains dynamic despite recent funding stagnation. While direct appropriations have seen a decline, the Pentagon continues to expand its use of private-sector AI contracts, suggesting a shift in how AI research is being funded. The recent executive order removing barriers to AI development could also accelerate private-sector innovation, leading to new AI advancements that the DoD can integrate into its operations. However, the long-term impact of tariffs on AI-related hardware remains uncertain. These trade policies could create challenges for AI firms, particularly smaller businesses that play a crucial role in defense AI development. Since the U.S. military relies on small businesses to foster competition and drive innovation in AI research, tariffs that push these companies out of the market could have unintended consequences.

Despite these challenges, AI remains firmly embedded in the DoD’s strategic vision. While funding trends indicate a mix of growth, constraints, and restructuring, AI’s role in U.S. defense will continue to evolve in response to budgetary realities, technological advancements, and global competition. Moving forward, the Pentagon will likely rely on a combination of public-private partnerships and targeted funding allocations to ensure continued AI innovation within the constraints of the broader defense budget.

Other Sources:

• https://time.com/6961317/ai-artificial-intelligence-us-military-spending/
• https://aiindex.stanford.edu/wp-content/uploads/2023/04/HAI_AI-Index-Report-2023_CHAPTER_6.pdf
• https://defensescoop.com/2023/03/13/pentagon-requesting-more-than-3b-for-ai-jadc2/
• https://www.defense.gov/News/Releases/Release/Article/3703410/department-of-defense-releases-the-presidents-fiscal-year-2025-defense-budget/#:~:text=The%20FY%202025%20budget%20request%20of%20$143.2,and%20technology;%20$1.8%20billion%20in%20artificial%20intelligence;