New Budget Spells More Uncertainty for DoD

President Barack Obama sent to Congress a proposed defense budget of $526.6 billion for fiscal year 2014. That top line, however, ignores the fact that it would be subject to a $52 billion sequester cut, as Congress mandated in the Budget Control Act of 2011.

Defense Secretary Chuck Hagel acknowledged this reality when he unveiled the budget proposal. “Unfortunately, fiscal year 2014 programs will be significantly and adversely affected by sequester budget cuts in fiscal year 2013. Training cutbacks, civilian furloughs, deferral of equipment and facility maintenance, reductions to energy conservation investments, contract inefficiencies and curtailed deployments will inevitably have rippling effects into fiscal year 2014.”

Obama’s recommendation to address this problem is a deficit reduction plan — a combination of tax code reforms and reductions in entitlement programs — to replace and repeal the sequester.

Whether sequester will be repealed in a “grand bargain” on taxes and spending remains to be seen. No one anticipated what happened in fiscal year 2013: a modified continuing resolution, with sequester. The legislation gave the Defense Department some flexibility to adjust account imbalances, but the sequester on a base budget of $518 billion tightened things right back down. Going in, the department was short about $10 billion in operations and maintenance accounts. Coming out, O&M is still insufficient. 

Civilian furloughs have been reduced from 22 to 14 days.  Pay is still flat for government civilians employees, and the military services are beginning to cut back training. As of this writing, the actual cuts to the various appropriations accounts and their impacts have not yet been disclosed, but it is expected that programs in the procurement accounts will be seriously affected. 

It goes like this. Less money means fewer “eaches,” with less capability per each. The price per item goes up. So for less money, defense gets much less capability at a higher cost per unit. Sequester is specific that all accounts, programs, projects and activities get equal hits, there is little flexibility to protect higher priority programs. All is far from well.

Where does this leave defense in terms of its posture to execute national tasking? On March 20 in Jakarta, Deputy Defense Secretary Ashton Carter said that the rebalance to the Pacific remains the Defense Department’s top priority, and that sequester will not have a long-term impact on the strategy or on the future of major military modernization efforts, including Navy attack submarines, the F-35 Joint Strike Fighter, the Air Force’s KC-46 tanker and long-range bomber, the Navy’s P-8 manned maritime surveillance aircraft and high-endurance unmanned aircraft, cybersecurity and space technologies. 

A March 15 memo from Hagel directed a “strategic choices and management review.” This review is designed to define the major strategic choices and institutional challenges affecting defense posture in the decade ahead. This review is to consider the 2012 defense strategic guidance as the point of departure. In other words, the Pentagon is in the process of changing the direction based on a modified strategy. The outcome of this review will frame the 2015 budget and the next Quadrennial Defense Review due in February 2014. The review is to conclude by May 31.

The budget uncertainty affects every service. Though it rebalances some accounts, flexibility is still lacking. The Army faces a $9.5 billion shortfall in war operations, which is yet unaddressed by the budget, and aircraft procurement is under growing pressure. The Navy does well with carrier procurement funding, but will take hits on its new trainer aircraft, DDG-51 destroyers, F-35 procurement, some training and carrier strike group stand-down. The Air force seeks expanded reprogramming authority to keep the KC-46, F-35 and long-range bomber on track at the expense of lower priority programs.

The president’s 2014 budget attempts to square the sequester circle by proposing a kind of “grand bargain” with new revenue — adjustments to the tax code — and some entitlement adjustments, like chained consumer-price index adjustments for Social Security. There are some poison pills in the new budget as well, like capping individual retirement accounts at $2 million. This and other “surprises” are sure to make the proposal contentious.

One only has to look at the divergence of the 2014 budget resolutions in the House and Senate.  They are very far apart.  If sequester moves into 2014, as seems likely given the late start on all this, the 2014 budget request will be $60 billion over target.  The extended debate on this budget will only postpone and mask eventual program deferrals and “kills.” 

Recall the talk leading up to where we are now. Everyone said that sequester would not happen, but no one knew how it would not happen. The failure to prepare for this worst-case scenario eventuality left the defense community scrambling, and programs are going to be seriously compromised. We will pay more for the lack of preparation. If Washington continues to debate until October and nothing except sequester happens again, there will be an even worse outcome. We don’t yet know just how programs will be affected by the 2013 budget.

It seems that Congress, words to the contrary, is comfortable right now with sequester, as it is the only way to make a small dent in budget deficits. Keep in mind, too, that the 2013 budget, the 2011 BCA and sequester do not actually reduce spending, they only slow down the increase.

A final thought: Historical defense budget decreases have contracted to lower levels than this particular drawdown. What has changed with this particular decrease, however, are the increased operational, personnel and healthcare costs. Projections of this trend to 2021 show that these costs consume the entire defense budget, which leaves little to no room for procurement and research. A report by the Center for Strategic and International Studies estimates that personnel will have to level out to the neighborhood of 600,000 troops to make head room for procurement.

We have a budget, but it is not a good one, and the 2014 submission holds scant promise to fix things.

Topics: Defense Department, DOD Budget