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DoD Spending Forecast: Flat And Cloudy

The question on the minds of many in the defense world is what will happen to Pentagon spending after the dramatic buildup of the past eight years that resulted in the highest defense budget since the end of World War II? It’s a timely question because we’ll soon have a new administration in town, but even more so because it’s becoming ever more apparent that the Iraqi people have grown tired of the American presence in their country and will soon show us the door.

While no agreement on a withdrawal date has yet been inked between the government of Nuri al-Maliki and the Bush administration, from all reporting it appears most, if not all, U.S. troops will be on their way south to Kuwait by the end of 2010. That is a fairly aggressive timetable to get 140,000 some odd troops and their equipment out of Iraq. Expect an orderly, yet continual, move to the exits over the next two years.

The winding down of the American presence in Iraq will directly impact the overall defense budget. While the Bush administration came into officer determined to increase defense spending after the “procurement holiday” of the 1990s, much of the 62 percent increase in defense spending from 2000 to 2009 was in some way related to the war in Iraq. Since 2001, Congress has given DoD about $870 billion to cover war costs in Iraq and Afghanistan.

While direct war costs have been funded in emergency supplementals, the Pentagon’s books are such a muddled mess it’s often impossible to determine where war related costs end and “normal” defense spending begins. This is particularly true of Army and Marine Corps investment accounts. And while few believe supplemental spending is going away, since an Iraq drawdown will likely be followed by a mini-surge in Afghanistan, emergency war funding will drop as troops leave Iraq. How big a drop is difficult to estimate.

Adding some analytical rigor to questions surrounding future defense spending is Steven Kosiak, the numbers crunching guru over at the Center for Strategic and Budgetary Assessments. Speaking to a group of defense experts in Washington, DC, he provided a forward looking assessment based on an analysis of historical cases studies, CSBA’s stock in trade. Kosiak said looking at the duration of past buildups, the current one is likely to end soon. It has already gone on for seven years, longer than either the Korean War or Reagan-era buildups. Further downward pressure on defense spending is coming in the form of costs associated with the retirement of the baby boomer generation and the attendant increase in mandatory entitlement spending.

The most likely scenario for what’s coming, again, based on history, is a “sustained period of, at best, modest growth in DoD’s base budget and, possibly, significant decline.” What’s the bottom line? Kosiak said the most sensible estimate is that the DoD base budget will remain at roughly $518 billion a year over the next two decades. While that sounds like a healthy defense budget, there is a serious problem. To carry out the Pentagon’s force structure and procurement plan, that is, the planned increase in the size of the ground forces and buying all the new weapons systems currently in the development pipeline, would require annual budgets of around $575 billion.

That funding gap of around $55 billion, which Kosiak says is a likely understatement of the pending mismatch, is where things could get ugly. With such a yawning gap between the plan and actual resources it’s hard not to see how some big ticket programs are seriously trimmed if not cut altogether. As Kosiak said, DoD faces some “difficult choices.” He sees three options as most likely:

One, reduce the size of the military. Accepting a quantity for quality trade off and reducing total troop numbers, even modestly, would go far to eliminating DoD’s plans-funding mismatch, Kosiak said. The reason: personnel costs including pay, healthcare and housing account for nearly 60 percent of DoD’s base budget, and are rising rapidly. Two, roll out new weapons systems less frequently. Faced with past budget crunches, DoD has accepted fewer, but more highly capable, new weapons systems. Three, keep older systems in the inventory for longer periods.

For those who find any of these approaches unpalatable, Kosiak said, the only alternative is to substantially increase defense spending over the next two decades. The effort by some in the DoD leadership and various defense think tanks to gin up support for setting a funding floor of 4 percent of total GDP for defense is largely stillborn. Kosiak said little to no political support exists on the Hill for that approach. Looking at the numbers, it’s really hard to see how the “procurement holiday” doesn’t become the new norm in terms of Pentagon buying.

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