BUDGET MATTERS BUDGET
Riding a Defense Budget ‘Bow Wave’
If the Defense Department and industry deliver on modernization plans, a plethora of new aircraft, tanks, ships and other weapons currently under development will enter service at the end of this decade and the beginning of the next. That means hefty acquisition budgets for years to come.
How hefty is a function of the Pentagon and industry’s ability to stay on time and on budget and Congress’ willingness to write checks.
The Congressional Budget Office recently released an analysis, “Long-Term Implications of the 2024 Future Years Defense Program,” and the authors think the checks over the next 15 years are going to be significantly larger than the department is projecting to spend.
Of course, the first step is getting from a continuing resolution to a 2024 budget, which should be around $842 billion for the Defense Department, based on the yet-to-be-reconciled bills passed by the House and Senate months ago. Then comes the challenge of passing subsequent defense budgets when there is growing pressure to tighten the fiscal belt.
In delivering its 2024 request, the department submitted the required Future Years Defense Program, or FYDP, a five-year plan based on the 2024 request.
According to the 2024 FYDP, the Defense Department is projecting an almost flat budget — in real terms — in 2025 through 2028. That tracks with spending principles in the 2023 Fiscal Responsibility Act.
However, the CBO doesn’t see things playing out that way. It projected Defense Department costs in 2024 through 2028 will be $113 billion, or 3 percent, greater than the $4.2 trillion the department outlined in the 2024 FYDP.
Why? “… lawmakers have often enacted increases in compensation for military and civilian personnel that were larger than the increases DoD incorporated in its plans. Similarly, DoD has frequently underestimated costs for [operations and maintenance] and the acquisition of weapon systems,” the CBO wrote.
Looking beyond the FYDP, the office produced two estimates for Defense Department costs in 2029 through 2038, when the department plans to be on a buying spree of new ships, planes, tanks and other platforms.
The first estimate used the department’s projections in the FYDP, the other used the office’s methodology.
Using the department’s projections, defense costs would rise about 1 percent per year in real terms during the decade after the Future Years Defense Program.
The CBO estimate puts costs 5 percent higher, adding $474 billion to the tab for 2029 through 2038, which comes out to $9.4 trillion.
Acquisition costs are a major driver of the increase.
“Using the resulting cost estimates instead of DoD’s cost estimates raises total projected acquisition costs by 4 percent over the FYDP period and by 10 percent over the 2029–2038 period,” the CBO stated. “Those increases equate to an additional $11 billion per year, on average, over the 2024–2028 period and an additional $27 billion per year, on average, from 2029 through 2038. The potential increases are proportionally larger for the years beyond the FYDP period because there is greater uncertainty about the composition and cost of DoD’s acquisition portfolio.”
Within the acquisition category, which includes procurement and research, development, test and evaluation, the former will be pushing the budget, the analysis stated.
“Procurement costs would climb sharply in the first two years after the FYDP period, reaching $198 billion in 2030, up $22 billion (or 12 percent) from their 2028 total,” the CBO stated. “Such costs would then grow more slowly, rising by a total of about 4 percent (that is, by $7 billion) from 2030 to 2032 and by an average of 0.2 percent per year over the next six years, reaching $208 billion in 2038.
“The steep increases in procurement costs in the years immediately after the FYDP period indicate that DoD’s current plans would cause a procurement ‘bow wave’ by constraining procurement during the FYDP period but requiring substantially larger acquisition budgets thereafter,” the analysis said. “Such bow waves beyond the FYDP period have often resulted from constraints on DoD’s plans, particularly during periods when flat or declining budgets have been anticipated. In the case of the 2024 FYDP, DoD officials have stated that they expect several expensive new weapons to enter service in the early 2030s. Meeting those expectations would require sharp funding increases in the years after 2028.”
However, even though the budget office estimate uses more realistic assumptions about costs, its projections might be conservative. The CBO noted in the report it had to make some assumptions about troop levels and defense programs in the decade beyond the 2024 FYDP.
One interesting dimension is how the office assumed costs of systems that are reaching the end of service but for which replacements have not been identified.
“For example, the Air Force may need to begin replacing its fleet of C-17 transport aircraft before 2038,” the report stated. “Air Force officials have indicated that future airlifters may include capabilities that are not present in today’s fleet — but the absence of firm details led CBO to base its estimate of the cost of replacement aircraft on the cost of the C-17.”
Based on the track record of developing new platforms, a replacement will involve significant development costs and higher cost per unit than C-17s.
Thus, the office’s placeholder estimates are likely on the low side.
Regardless, the CBO concluded the Defense Department will have “to scale back its plans or request larger budgets than it anticipated in the 2024 FYDP.”
And the analysis does not include supplemental military funding for Ukraine, Taiwan and Israel.
Given the congressional and fiscal headwinds, the defense budget bow wave is likely to sail on for years.
Topics: Defense Department