Defense Forecast

January 2008

Bigger Budgets Disguise Larger Fiscal Dilemmas

By Sandra I. Erwin

Defense Secretary Robert Gates recently quipped that he stopped trying to predict the future when he left the CIA almost 15 years ago.

Gates’ wry observation followed a question about whether he thought the Pentagon would meet its production goals for blast-resistant armored vehicles. But it could easily apply to any number of budgetary dilemmas and spending quandaries that the Defense Department currently confronts.

Nowhere is the financial outlook for the Defense Department more uncertain than in the procurement budget.

The Pentagon has seen its weapon-acquisition dollars more than double during the past six years. They escalated from $60 billion in 2001 to an estimated $150 billion projected for 2008 — once Congress approves a $189 billion war-funding request.

Despite this bonanza, questions are emerging about whether procurement funds are truly modernizing the military or just satisfying immediate hardware needs. While traditionally the Pentagon categorizes its procurement and technology accounts as “investments,” much of the current funding is paying for pressing war requisitions — including nearly $12 billion for mine-resistant armored vehicles — and to supply basic gear for an expanding Army and Marine Corps, which are expected to add 92,000 troops in the coming years.

Another point of consideration, contend advocates of military modernization, is that in the overall context of defense spending, the share allocated to “investments” keeps shrinking.

The Defense Department’s financial resources are “out of balance,” said Rep. Roscoe G. Bartlett, R-Md.
In the 1980s, the Pentagon divvied up spending roughly 55 percent to operations and weapons maintenance, and 45 percent to modernization. That split is now 70/30, complained Bartlett.
Underpinning this debate is also the question of whether procurement funds are helping equip the military for tomorrow’s impossible-to-predict wars.

“Resources are needed not only to recoup from the losses of war, but to make up for the shortfalls of the past and to invest in the capabilities of the future,” Gates said in a speech to the Association of the U.S. Army.

Among the services, the Army faces the most perplexing budget issues. Its share of the defense procurement pie has grown from 15 percent to 25 percent, if one includes war emergency appropriations. Flipping through the 2008 appropriations bill for the Defense Department, however, it is revealing that most of the increases in procurement spending pay for “grow the force” initiatives — to equip a much larger Army and Marine Corps — and for essential combat gear for troops in Iraq and Afghanistan.
The “next generation” technologies are not scheduled to arrive until at least 2015, when the Army expects to field the first unit of its Future Combat Systems family of vehicles. Most of the Army’s current vehicles and weapons will still be around in 2030, officials have said.

But there is a more fundamental question that budget planners must resolve, Gates said. That is how the Army should better prepare for the future so it is not caught off guard as it was when Iraq’s insurgency began a few months after the 2003 invasion.

After the Vietnam War, the Army “relegated unconventional war to the margins of training, doctrine, and budget priorities,” Gates said.

Those decisions may have seemed validated by the end of the Cold War and the success of Desert Storm, he said. “But it left the service unprepared to deal with the operations that followed: Somalia, Haiti, the Balkans, and more recently Afghanistan and Iraq — the consequences and costs of which we are still struggling with today.”

The non-emergency procurement budget of the Army, not unlike the other branches of the military, continues to predominantly fund conventional weapons systems that, critics contend, were designed to fight yesterday’s wars.

Army officials defend the current budget strategy, and insist that the service’s procurement dollars are still backfilling shortfalls that began after the end of the Cold War, when defense spending dropped.
In the mid-1990s, the Army was “basking in the glow of the Gulf War” and not really planning ahead for another conflict, said Gen. George Casey, chief of staff of the Army, at a recent congressional hearing. Even though budgets have soared since the 9/11 attacks, Casey said, “It will take a decade to fix this.”
Back in those peacetime days, the Army was so unconcerned about the prospect of a major war that it had a “99-year procurement strategy for body armor,” said Lt. Gen. Stephen M. Speakes, deputy chief of staff of the Army for programs and resources.

Speakes said it would be unwise for the Army to shift too many resources to unconventional warfare and in the process remain unprepared for other types of conflict. The Army wants to be a “full spectrum force,” he said in an interview.

Senior leaders, however, continue to debate the “prudent strategy for the Army’s base budget,” Speakes said. The Army today is far too dependent on war-emergency funds, he added. “We have to rebalance supplemental and base budget funding. Our current budget of $200 billion is not sustainable.” By comparison, the Army’s budget in 2001 was $70 billion. If those supplemental funds were to end, the Army would be $52 billion short of what it needs to modernize the force and to meet its commitment to refurbish obsolete equipment for the National Guard and Reserves, Speakes said. “The Army has to make a number of hard decisions” in the next five-year budget plan that is being sent to Congress next month, he said. Of the Army’s $52 billion worth of quipment needs, $32 billion is for the Guard and Reserves.

When the conflict in Iraq ends and Congress ceases to appropriate war funds, the service’s base budget will not increase by $52 billion, analysts project. Planners have yet to figure out how the Army will continue to equip and modernize the force without supplemental funding.

Even if the Army continues to receive war supplemental funds in the near term, its procurement accounts will be squeezed. The addition of 65,000 troops by 2011, soaring recruitment and health care costs, quipment maintenance and repairs all will compete for the same pool of dollars.

Only when the administration and Congress agree to end emergency war funding and include all expenses in the base budget will the Army have to make tough choices, analysts said. Modernization programs more than likely will take a back seat to more pressing personnel, health care and recruiting costs.

Analysts from the Government Electronic Industries Association forecast that even if U.S. troops begin a gradual drawdown in Iraq, the Defense Department will continue to receive supplemental funds for several more years. According to GEIA, the base defense budget will increase slightly during the next 10 years from $483 billion in fiscal 2008 to $491 billion in 2018, with a projected peak of $500 billion in 2009. War supplementals will drop to $70 billion by fiscal year 2011 and will see steady declines, falling to $44 billion by 2018.

GEIA projects a 29 percent drop in defense procurement, research and development during the coming decade. From 2008 to 2018, these investment accounts will dip from $228 billion this year to $162 billion in 2018.

Such a precipitous drop in spending, however, is not going to materialize in the near future, other analysts warn. “I don’t see a decline that drastic occurring,” said Shaun McDougall, military budget analyst at Forecast International in Newtown, Conn.

Funding will remain “stable” during the next five years, he said. Even if a Democratic administration comes into power, it is not going to cut military budgets at least until U.S. troops are out of Iraq.
In the immediate future, the war will remain the budget’s 800-pound gorilla. Although the Iraq campaign is being financed largely outside the main defense budget, “as a practical matter the costs are coming back to haunt defense planners,” McDougall said.

A war that administration officials estimated in 2003 would cost under $50 billion is now running 12 times that amount and the expenses continue to rise. The Congressional Budget Office calculated that $563 billion had been appropriated for operations in Iraq and Afghanistan since 2001, with about 85 percent of that amount going toward Iraq.

In 2007, the monthly cost of the war crept up to $11 billion, $3 billion more than in 2006.

The same issues that dominated the fiscal 2008 budget a year ago will return next month once the Bush administration hands in its proposed 2009 budget to Congress, said McDougall.

In spite of soaring levels of defense spending, the military finds itself in a rather precarious financial position, said McDougall.

The Pentagon is faced with a “near impossible” task of increasing the size of ground forces and funding expensive procurement programs, all while the conflicts in Iraq and Afghanistan continue to eat up equipment, strain soldiers and their families, and wreak havoc on readiness levels across the board, McDougall noted in a report on military spending.

Against this uncertainty, however, McDougall does not foresee major procurement programs being scaled back. “Congress has been either unwilling or unable to tighten its reigns, and so even some of the Defense Department’s most troubled programs continue to somehow push forward.”

Many analysts last year began to predict flattening or dipping levels of defense spending, but those projections have not yet materialized. Nonetheless, it is difficult to envision Congress allowing the defense budget to continue its staggering upward trend, McDougall said. If and when the Pentagon’s budget begins to plateau, the military services will be left to battle it out for their share of the pie.

The ballooning personnel and equipment costs forecast for the Army and the Marine Corps don’t bode well for Air Force and Navy procurement accounts, McDougall said.

The Air Force has indicated a shortfall of $20 billion per year in its modernization plan. And the Navy faces its own dilemma in the form of costly and unstable shipbuilding, said McDougall. “The service is struggling to justify the expense of its blue water fleet when it has no real conventional threat to face,” he added. “The Navy’s shipbuilding plan is in serious jeopardy, and unless changes are made, future ships will have to be sacrificed to accommodate ever-increasing costs and delays.”

The deliberations over the budget will come to a head in the coming years as the Pentagon reassesses its strategic posture in the wake of an insurgent war it was ill-prepared to fight, McDougall noted. The United States will find itself working to improve its ability to wage an asymmetric war while retaining the assets and force strength to counter a conventional threat, he said. “This challenge may pose too high a hurdle in today’s fiscal environment, leaving the Pentagon and Congress with some monumentally difficult choices ahead.”

Although there is strong, bipartisan public support for defense spending, there is an ongoing disagreement over what types of war the United States must be prepared to fight in the future.
“The response from the Pentagon has been to announce the desire to prepare the military to handle all potential threats,” said McDougall. “There does not seem to be enough money in the budget to give the military all that it declares it needs.”

Analysts had predicted possible cuts to both the 2007 and 2008 defense budgets, but the anticipated bloodletting did not happen, McDougall said. “Instead, difficult decisions on major programs were put off for yet another year.”

So far, “Congress has shown little appetite for a showdown with the armed services,” McDougall said. “While the Democrats stand against the war, they are not about to risk letting the already strained military fall apart.”

Please email your comments to SErwin@ndia.org

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