As fiscal year 2010 draws to a close and the economy struggles to recover from the deepest recession since the Great Depression, the federal government faces a number of fiscal challenges. The budget deficit is projected to exceed $1.4 trillion due in part to increased spending on fiscal stimulus programs and a sharp reduction in tax revenues due to the recession. But underlying the current fiscal situation is a structural deficit that the economic downturn only exacerbated. As Congress and the administration focus more attention on reducing the deficit,all areas of the budget, including defense, have come under increased scrutiny.
The Obama Administration’s FY 2011 budget request includes a total of $712 billion for the Department of Defense (DoD). The base budget for the Department includes $549 billion in discretionary funding and $4 billion in mandatory funding. An additional $159 billion is requested for the wars in Afghanistan and Iraq. The budget also requests $19 billion for defense-related atomic energy programs, $8 billion for defense-related activities in other agencies, and $122 billion for veterans. Together these expenses total $861 billion, or 22 percent of the total federal budget.
The defense budget, in many respects, is a microcosm of the rest of the federal budget, and the challenges facing DoD in pay, pensions, health care, infrastructure, contracting, and education, to name a few, are also issues in other areas of the budget. My testimony provides an overview of trends and issues in the defense budget and their potential impact on future defense spending and capabilities. I begin by providing an overview of defense spending from an historical perspective and explaining how the share of the defense budget devoted to acquisition and operations and support has varied over time. I then explore in more detail trends in military personnel costs, acquisition costs, classified funding, and war funding. While the issues I identify are not new, what makes these issues of more concern now is that in a constrained budget environment we no longer have the luxury of simply spending our way out of difficult decisions
The total national defense budget request for FY 2011, adjusted for inflation,is at the highest dollar amount since World War II and is higher than total defense spending at any point in the Vietnam or Korean Wars, even if the cost of the wars in Iraq and Afghanistan are excluded. However, defense spending as a percent of GDP is 4.8 percent in the FY 2011 budget request, below the post-World War II average of 6.5 percent. The apparent discrepancy between defense spending being at a peak level in inflation-adjusted dollars but not as percent of GDP is due to the different rates of growth in the defense budget and national economic output. From the previous peak in defense spending in FY 1985 to the FY 2011 budget request, defense spending grew by 37 percent in real terms compared to 102 percent real growth in GDP over the same period. As a result, the total defense budget as a percent of GDP has fallen from 7.1 to 4.8 percent over that time period because the denominator (GDP) has grown much faster than the numerator (defense spending).
Looking at the defense spending over time, two trends become apparent. The first is that defense spending rises and falls in irregular cycles, which are primarily driven by external events. In the early 1950s, the budget increased sharply for the Korean War. During the Vietnam War, defense spending steadily increased for six years before it peaked in FY 1968 and then declined for the next seven years. The Cold War buildup of the 1980s saw the budget increase for six years until it peaked in FY 1985 and declined for the next ten years. The current cycle, however, is different in several respects: the budget may not have peaked yet, depending on how the war in Afghanistan progresses; and the global economic outlook and federal deficit are worse than in previous cycles. Moreover, the current buildup in defense spending has been a “hollow” buildup in many respects because the military’s end strength has remained nearly constant at 1.5 million in the active force, and the equipment inventory has gotten smaller and older in many areas.