Despite a proposed $150 billion reconciliation package that could lead to $1 trillion in defense spending in 2026, what industry needs more is stability in the budget to build a surge capacity, the head of the top aerospace trade group said May 7.

The $150 billion through reconciliation is “a sugar high,” Aerospace Industries Association CEO Eric Fanning told a Mitre Corporation conference on defense acquisition.

“It’s not in the topline,” Fanning said, noting that the reconciliation bill isn’t part of regular budgeting process. It’s a point lawmakers in Congress have made in arguing that President Donald Trump’s 2026 defense budget proposal is not as big as it appears.

From an industry perspective, Fanning also said the proposed package doesn’t set a trend in defense spending which would justify company investments in greater production capacity. It’s also not a sure thing, he said—a nod to the contentious debate over the broader reconciliation bill in Congress.

“Reconciliation hasn’t happened yet. I’m a perpetually disappointed optimist, but I’m not optimistic about this reconciliation process,” Fanning said.

The chairmen of the House and Senate Armed Services Committees—Rep. Mike Rogers (R-Ala.) and Sen. Roger Wicker (R-Miss.), respectively—have called for a substantial increase to the regular budget. Fanning said such a move would mean “it becomes baseline for next year,” which would “send that clear signal to industry.”

Production capacity has become especially important given Russia’s war on Ukraine and the massive amount of weapons the U.S. has surged to the Ukrainians—and industry and Pentagon officials say that have learned lessons when it comes to signaling demand for that capacity.

“Everyone said, ‘Why can’t you surge overnight?’” Fanning said. “You can surge by, if you’ve got two shifts, [adding] a third shift, if you can line up your supply chain, but you’re not going to start building a new line, knowing historically what we do, which is, ‘OK, the war is over. Never mind. We don’t need that anymore.’ And industry is left with all this excess capacity.”

Rather, “the single most important thing you can do for the private sector, not just the defense side … is some stability and consistency they can plan around. There are always variables that come at you, of course, but the way that we invest as a government in our defense and our national security is erratic in a good year.”

While the Pentagon has labored to break down barriers to new industry entrants and has had some success in recent years, “It’s still very difficult for new entrants, particularly that are coming from outside the defense industrial base, to get access,” Fanning said, noting that the private sector “needs to see some reward on the other end.”

Even with prime contractors, he said, “all these companies are investing a lot up front; they’re making bets, and if none of these bets pay off that, they’ll stop making those investments. There are other places that that that money can go.”

Fanning served on the Planning, Programming, Budget, and Execution reform commission that wrapped up last year, and he said true reform needs to break down the “artificial” boundaries between procurement and requirements. Unless the requirements process is greatly accelerated, “you’re already behind the curve by the time you get to the acquisition process,” he warned.

To improve acquisition and increase capacity, Fanning said the Pentagon should “really make sure that you have as much competition and as … many parts of the ecosystem involved in what you’re trying to do.”

Next, he said it is important to “clear the brush” of acquisition rules that have popped up in response to rare but glaring problems.

“Something bad happens, and you add a process to prevent it happening again, and it layers and it layers and it layers and layers,” Fanning said. There’s no “normal process” to clear away those layers, even when they’re no longer relevant, he noted.

“All those [rules and oversight] were put in for good reasons, but the cumulative risk mitigation over years” becomes a greater impediment to speed and action “than all of the little risks that you were trying to mitigate,” Fanning said.

Though, when “you start taking away everything that’s not spelled out in law … you realize there’s a lot in there that we kind of like because it was put in there for a reason.”

The third major element of what the Pentagon needs to do is “really changing the incentive of the government workforce: empowering them, rewarding them for risk,” Fanning said.

“We talk about ‘rewarding failure’ or ‘failing early.’ I think we should change that to ‘learning early,’ because we’re not really good at rewarding, but if you look at really innovative companies, they learn something quickly” from mistakes  “but that’s not how we incentivize the government.”