Military Looks Ahead to the Next Budget Deal

A persistent theme in the Pentagon’s budget narrative — that there is a mismatch between military obligations and the resources available to carry them out — figures prominently in anew report unveiled last week by the National Commission on the Future of the Army.

The panel of former Pentagon officials and retired generals was charged by Congress to examine the size and force mix of the Army, and how duties and resources should be divvied up between the active-duty and reserve components.

But the larger message of the report is that defense spending cuts have gone far enough and that the military needs to rebuild for a more dangerous world.

The commission’s verdict is likely to be seized by lawmakers, military leaders and advocates who argue that budget compromises in 2013 and 2015 — which bumped up Pentagon spending above the caps set by the 2011 Budget Control Act — helped to shore up the Defense Department’s finances but that a bigger and longer-term deal is needed. And they have high hopes that this could happen under a new administration during the next Congress.

“The defense budget is cyclical. We’re at the bottom of drawdown. I think in a new administration there’s a possibility of a broad budget deal that would provide added funding for defense,” said former Pentagon comptroller and commission member Robert F. Hale.

“It’s always darkest just before dawn,” Hale said of the budget picture.

The panel spent months poring over data related to the maintenance and modernization of the Army. It concluded that the cost of providing additional capabilities the force needs to keep up with new threats cannot realistically be offset by cutting other portions of the defense budget.

The Army needs more armor, more aircraft, more flying hours, improved antimissile defenses and other capabilities, Hale said during a meeting with reporters Jan. 29. “We costed some of those and offered general offsets, such as disestablishing two infantry brigade combat teams, and more use of efficiencies. But if you try to do all that, even with offsets, more funding would be needed.”

The commission believed it was “reasonable to suggest priorities even though they require added funding,” he said. “There are reasons to believe we’ll see higher defense budgets.” During the past year, “If we heard a broad theme is concern about threats overseas and in the homeland. We heard it from Congress, from the combatant commanders, from within the Pentagon.”

Retired Army Gen. Carter F. Ham, former chief of U.S. Africa Command and the panel’s chairman, said that unstable fiscal polices in Washington and partisan divides have created a climate where it is difficult to debate — let alone determine — how much money the military needs to fulfill its missions. “We were tasked to make our findings consistent with an anticipated level of resources. But none of us knew what that meant,” Ham said. “We stayed within ‘reasonable bounds’ of what we expect resources might be.”

The expectation, shared by many analysts and defense insiders, is that Congress will be ready to negotiate with a new president on a comprehensive budget plan that would undo the Budget Control Act. The argument is that the austerity-inspired BCA has been overtaken by global events.

“Congress has reduced the defense budget almost every year since 2010, with the exception of fiscal year 2015,” said Todd Harrison, director of defense budget analysis at the Center for Strategic and International Studies.

The Obama administration next week will submit its funding request for the federal government for fiscal year 2017. Per the two-year agreement reached in October — similar to the Ryan-Murray compromise in 2013 — defense got a baseline budget of $522 billion, $25 billion more than the BCA caps, and $8 billion in additional war funding for fiscal year 2016. The president's proposed budget top line for 2017 was $547 billion, and under the 2015 deal, the base budget would be $525 billion. That is less than the president wanted but higher than the BCA cap of $512 billion.

The deal still leaves the BCA spending limits in place for the final four years covered by the law, from 2018 to 2021.

The White House next week is likely to request funding for 2017 consistent with the top line already agreed upon, Harrison said during a Defense News webinar. “But some GOP hawks have indicated they don’t think the question is settled. They want defense spending levels above the deal.” That appears to be a long shot right now, said Harrison. “We’ll see.”

Military budgets are cyclical, which implies they are now poised to be headed upward after a seven-year down cycle. But the Pentagon faces fiscal troubles that go deeper than cyclical fluctuations. The cost of the all-volunteer force and the price of weapons systems are soaring faster than the rate of inflation, which means the Pentagon has to spend more just to keep the same-size force. “We may be spending at the level of the Reagan peak in the base budget, but we’re not getting that much for it, partly because of the higher cost of the force, and weapons systems are more expensive per unit,” said Harrison.

For the next administration, defense budget headaches could grow worse as the Pentagon copes with a double whammy of rising personnel costs and a so-called procurement “bow wave.” Harrison predicts this wave could hit hard in 2023 — when a confluence of major weapons programs scheduled to begin production at the same time will drain the Pentagon’s procurement accounts. The new president, he said, will have to “make sure the budget aligns with the strategy.”

Industry analysts see defense investors already positioning in anticipation of bigger military budgets.

Investors view the 2016 spending levels as a “sea change” and the beginning of an upturn, said Byron Callan, managing director of Capital Alpha Partners.

“There’s a lot less negativity out there on the defense front than there was a couple of years ago,” said Richard Aboulafia, vice president of The Teal Group.
The outcome of the 2016 presidential election looms large, however. “Politics have impact,” he said. “Nobody predicted the influence of the tea party.” The current presidential contest is leaving Washington scratching its head. “I don’t think we’ve ever seen times like these,” said Aboulafia.

Critics of military spending, meanwhile, continue to call out the Pentagon for failing to live within its means. Defense spending has indeed plummeted since the 9/11 attacks, driven by a combination of the U.S. withdrawal from Iraq and the Budget Control Act, said William Hartung, director of the arms and security project at the Center for International Policy. “But Congress and the president have raised the budget caps twice, and the Pentagon has used the war budget, which is not subject to caps, to pay for all manner of projects that have nothing to do with current conflicts,” he said.

The latest budget deal provides more money than the United States spent on defense at the height of the Reagan buildup of the 1980s, when it faced a superpower adversary, Hartung noted. “So the current Pentagon budget is relatively high by historical standards. It is ultimately up to the advocates of spending more on the Pentagon to explain why giving it more money now will bring us more security.”

Topics: Defense Department, DOD Budget, Procurement