ARTICLE

May 2004

DEFENSE WATCH: Fiscal Storm on the Horizon

by Sandra I. Erwin

One of the Washington clichés du jour in 1999 was “defense budget train wreck.” It described what was then viewed as a dicey situation facing the Defense Department: its budget was estimated to be too small to pay for the services’ ambitious weapon replacement programs and to fund worldwide military operations.

“A DOD train wreck could occur sometime during fiscal years 2002-2007,” predicted a study by the influential Center for Strategic and International Studies. Analysts at the time estimated the defense budget was short by about $100 billion.

Five years later, defense spending has grown by more than $100 billion—not by design but by the necessities of war. All the while, a new chorus of alarming forecasts reverberate in Washington, predicting yet another “train wreck.” This time, however, the problem is not that the administration is under-funding defense, but that the nation’s soaring budget deficits will leave future administrations—whether they are Republican or Democrat—no choice but to cut defense.

Another popular catch phrase, not surprisingly, has come along to illustrate the looming crisis: a “perfect storm.” At the epicenter of this perfect storm is a clash of unsustainable military spending, ballooning deficits, and expected shortfalls in Social Security and Medicare accounts. The proverbial storm will leave behind what one lawmaker called a “fiscal morass.”

CSIS Senior Fellow Pierre A. Chao has warned executives in recent months that defense industry may soon find itself “in the eye of a perfect storm.” The undercurrents feeding the storm are forceful: Iraqi war costs, the price tag for the replacement of aging weapon systems, yearly U.S. federal deficits expected in the $400-billion range and $17 trillion in estimated retirement costs for the baby boomers.

No one with certainty can predict how long the defense buildup can be sustained before the national debt reaches unacceptable heights. But an emerging consensus among experts is that defense is heading for a downturn. According to a congressional estimate, defense and war-related spending alone will generate $885 billion in deficits during the next decade. A lawmaker recently groused that U.S. military spending is likely to be financed by Chinese investors, who are buying up our debt faster than any other country. “If foreign countries start dumping our securities, the economy will implode,” he bemoaned.

But if defense spending in fact is to become a target on Capitol Hill, lawmakers should reassess priorities, cautions Dov Zakheim, the recently departed Defense Department comptroller. During an industry conference shortly before retiring from the government, Zakheim said there are some obvious ways to cut defense spending that Congress just chooses to ignore. He cited unneeded military bases and Army ammunition plants as examples of wasteful spending that could be eliminated, on the basis of efficiency. “They scream about the debt, but they legislate efficiency,” Zakheim complains. He points out that keeping unwanted bases also drives up security expenses. “Force protection costs are eating us alive.”

Congress also is making life more difficult for Pentagon bean counters by mandating new health care entitlement programs for retirees and reservists. Those programs, although necessary, take a $27 billion-a-year bite out of the defense budget, according to Zakheim. He believes Congress should take that money from defense coffers and move it to federal entitlement accounts. “We have lots of other programs that are not defense related,” he says.

In the near term, with presidential and congressional elections approaching, defense spending is likely to remain untouched. But speculation is running rampant on what may happen after the elections. The conventional wisdom inside the beltway is that defense is more likely to get cut under a second Bush administration, because Democrats will suffer politically more than Republicans if they cut defense. But others see a steady budget stream ahead. “No matter who wins the White House, you’ll see $5 trillion for defense over the next 10 years,” says one congressman.

A former assistant director of the Congressional Budget Office, Robert F. Hale, foresees relatively untouchable defense budgets, as long as threats to national security remain high. Following historical trends, he concluded that when deficits are the highest, defense spending still grows. Other factors—such as threats to national security, the state of the economy and public support for defense spending—exert more influence on military spending trends than the amount of the federal deficit.

As long as the nation remains at war, it also is likely that Congress will take “slices” out of the defense budget to pay for some domestic programs, with the expectation that the Defense Department will make up the cuts in subsequent supplemental requests for war expenses. Hale calculated that, since 2001, the Defense Department has sought approximately $150 billion in supplemental appropriations.

While a “train wreck” may not be imminent, sharp cuts will, indeed, hit the Pentagon. A consideration for policy makers is how rationally the cuts will be applied.

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