A key Defense Department figure thought to be a candidate to be Hillary Clinton Hillary Diane Rodham ClintonJoe Biden looks to expand election battleground into Trump country Biden leads Trump by 12 points among Catholic voters: poll The Hill's Campaign Report: Biden goes on offense MORE's secretary of Defense is calling for caps on the defense budget to be lifted early in the next administration

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Under Secretary of Defense for Policy Michele Flournoy on Wednesday said raising the caps is "a national security issue."

"We have to get out from under [Budget Control Act] caps," she added, speaking at an Institute for the Study of War conference in Washington.

The 2011 Budget Control Act enacted caps on the Pentagon's budget that slashed its budget by $500 billion over 10 years, when lawmakers failed to reach a deal on how to close a $1 trillion budget deficit.

Those cuts were on top of an already-planned cut of $487 billion during that time.

Flournoy, who served in the Defense Department in Bill Clinton William (Bill) Jefferson ClintonGOP brushes back charges of hypocrisy in Supreme Court fight Battle lines drawn on precedent in Supreme Court fight Sunday shows - Ruth Bader Ginsburg's death dominates MORE's administration, is an ally of Democratic presidential nominee Hillary Clinton. It's believed that Hillary Clinton favors appointing Flournoy to head the Pentagon if she's elected president.

Flournoy also analyzed some of the major defense challenges for the next administration.

She said Russian President Vladimir Putin was "clearly trying to establish a sphere of influence."

"I think we need to spend a lot of time making sure he understands what we're willing to defend," she said.

Flournoy said while "the jury's out on China," the U.S. needed to "show resolve and invest in deterrence" and "shape China's behavior."

China wants to "maintain a certain degree of economic growth," she said. "We need to play on that interest and use it to constrain their behavior."

On Iran, she said the U.S. needed to do "much more to counter" Iranian support for terrorism.

On cyber threats, Flournoy said, "We got to get a handle on cyber."

Flournoy, the president and co-founder of the Center for a New American Security, said the U.S. needs to play a leading role in the world.

"When we do not lead, vacuums do develop, and others do take advantage of the vacuum — almost always to the detriment of our interests," she said.

But Flournoy added that the U.S. needs to restore global confidence in its ability to lead the world.

"We have a very dysfunctional domestic situation," she said. "We need to rebuild a bipartisan consensus around that vision."

Specifically, she said she would recommend fully resourcing the State Department and "domestic instruments" of power.

For the military, she recommended fully funding military readiness, investing in innovation, and getting Congress on board with Pentagon reforms such as closing unneeded defense bases.

"There's a lot to be done," she said. "We have a lot of work to do at home."

- Updated at 10:29 a.m.