Follow the Bouncing Ball of Defense, Federal Budgets: Disoriented Yet?

In the nation’s fiscal outlook, instability is the order of the day.

Just last May, Defense Secretary Robert Gates announced his budget initiatives with major program adjustments and a set of efficiency measures that are designed to set defense on an affordable ramp and move approximately $100 billion from overhead to acquisition accounts.  

At the federal level, the U.S. economy is emerging slowly from the recession with anemic job recovery and massive budget deficits as far as the eye can see. As recently as August, the 2011 deficit was projected to be around $1.3 trillion with corresponding projected levels of spending and debt.

So where are we on those projections?

In the defense arena, Gates announced in January that the services were able to deliver on the $100 billion of overhead efficiencies, but $28 billion of that must now be used to pay for fact-of-life bills that had not been contemplated when he unveiled the $100-billion reinvestment strategy in May. This reduces the amount of efficiencies to be added to acquisition accounts. In addition, Defense must trim $78 billion from the top line over the next five years. This will require some major program adjustments such as the cancellation of the Marine Corps’ Expeditionary Fighting Vehicle and a two-year slip in the F-35 Joint Strike Fighter.

Complicating the budget picture is the turmoil caused by Congress delaying passage of a defense budget for fiscal year 2011, which began in October. The Pentagon has been operating under a “continuing resolution.” Such resolutions are highly detrimental to defense programs, as they fuel uncertainty and create costly disruptions.

The inevitable conclusion is that the defense budget is, at this point, structurally unstable.

Government-wide projections are rather bleak. The Peter G. Peterson Institute noted that, since August 2010, the Congressional Budget Office (CBO) has forecast a slower-than-predicted economic recovery; a $1.5 trillion deficit for 2011; cumulative deficits from 2011 to 2020 to increase by $1.4 trillion to $3 trillion; permanent cash flow deficits for Social Security; a doubling of healthcare costs; and, soaring interest payments on the national debt.

Under worst-case scenarios, the deficit is projected to average 5 to 6 percent of Gross Domestic Product — compared to a 40-year average of minus 2.4 percent — and total debt rises to 90 percent of GDP by 2021. CBO also projects unemployment will decline slowly, only reaching 5.3 percent by 2016, at best.  

Another drain on revenues concerns intra-governmental debt — or trust funds. For example, the unified budget implemented during the Johnson administration used excess Social Security and Medicare contributions to supplement general revenue, lowering the budget deficit and replacing these revenues with intra-governmental IOUs (trust funds). As Social Security is now running a deficit, general revenues are called upon to make up the difference until the trust funds expire, at which time, major changes to the Social Security program must be undertaken. General revenues make a similar contribution to reimburse other trust funds which, like Medicare, are projected to exhaust around 2020.

The important thing to note is that future deficits will no longer be offset by surpluses in these programs. And as these surpluses turn negative, the U.S. government must increase its public debt to make up for budget deficits.

What to make of all this?  

It is clear that we are on an unsustainable path. Major adjustments to federal programs, policy and law are likely forthcoming. The only question is when. As of today, no one knows. The Bowles-Simpson deficit commission report recognized the urgency expressed here, but it received scant attention, and no real endorsement by major political leaders. One would have guessed that it was a timely and welcome report, given the extreme financial condition of this country.

If reform is not undertaken in 2011, it becomes a major issue for the 2012 presidential election. All bets are then off. Policy makers may be hoping for a rapid recovery from the recession to lessen the impact of adjustments. But as CBO indicated, this won’t happen.

Turning to the defense budget, the path forward is a bit clearer. Efficiencies are being pursued; redundancies are being intensely scrutinized; and, expensive, poorly performing programs have a short lifeline. Must-pay personnel and military healthcare bills will continue to pull resources from acquisition. War contingency funding will begin to disappear, critical items in emergency accounts are in danger, and baseline budgets will head down.

Across the entire spectrum of military programs, affordability has become a predominant theme. As one senior official said, “It is no longer readiness at any cost, it is readiness at best value.” Requirements will increasingly be articulated as what can we do, as opposed to what do we want to do.

Financials at all levels are dire. The tendency is to view them with alarm. But seeing the crisis as an opportunity is an alternative worth considering.

Topics: Defense Department, DOD Budget