BUDGET MATTERS BUDGET
The Challenge of Predicting Future Defense Spending
iStock illustrationRites of spring in Washington: cherry blossoms explode along the Tidal Basin, and a budget request emerges from the White House, thus beginning another congressional cycle of trying to fund the government.
In addition to the annual budget request, the secretary of defense releases the Future Years Defense Program, a five-year projection of defense programs and spending. The FYDP “is intended in part to link [the Defense Department’s] internal review structure for programs with Congress’s review structure for resources, including funding,” according to a Congressional Research Service brief.
In other words, the FYDP should provide a roadmap for Congress to use in crafting the annual defense authorization and appropriation bills to promote consistency and predictability.
In a January report, “Long-Term Implications of the 2023 Future Years Defense Program,” the Congressional Budget Office used the 2023 FYDP as a baseline to make projections about defense spending.
In one model, the CBO used the department’s assumptions about strategic direction, acquisition programs, divestments and other needs in the data to project defense costs for the decade beyond the five-year window in the program. In a separate model, the office adjusted the Pentagon’s assumptions based on past performance — factoring in historic underestimation of costs in past five-year estimates.
The report noted that the 2023 defense budget request was $772 billion, and the FYDP projected average budgets of $773 billion over the remaining four years, adjusted for inflation.
Although the topline is steady, there are swings in specific categories like acquisitions, where procurement costs will increase by 9 percent and research-and-development costs will decrease by 9 percent. “That shift suggests that DoD plans to field more weapons over the period,” the report stated.
When Congress settled on a 2023 defense budget — three months late — it added $46 billion to the administration’s request. “Nearly all that increase was for additional weapon acquisitions and military construction projects and for adjustments to account for higher inflation than the administration anticipated when the 2023 budget was prepared,” the report stated.
“As a result, the differences will not necessarily have a significant effect on the inflation-adjusted costs of DoD’s plans in later years,” the report said.
Taking the Defense Department’s projections out through 2037, the defense budget would increase almost 1 percent per year in real terms, and in 2037 reach $830 billion in today’s dollars, the report stated.
However, the Defense Department historically underestimates costs for pay raises, operations and maintenance and acquisition. Programs fail, requirements change, or contractors miss the mark, which is why the office created an alternate projection of costs based on the 2023 plan “using estimates that better reflect the patterns of growth in DoD’s costs over the past several decades.”
According to that analysis, the department is undercounting the costs in the five-year window by $175 billion. Applying the alternative methodology to the five-year window and the following decade results in an $895 billion increase above projected spending based on the FYDP.
In other words, should the Defense Department execute on its current plans, it could cost almost $1 trillion more over the next 15 years than the department’s projections would indicate.
However, the report is quick to point out that today’s projections could veer wildly off course due to technical difficulties with programs, costs to extend existing platforms and uncertainty in cost projections for inflation, labor and raw materials.
“For those reasons, CBO’s projections should not be viewed as predictions of future funding for DoD; rather, the projections are estimates of how the costs of executing the department’s 2023 plans would evolve over time under the premise that those plans would not change,” the report said.
Other factors that could skew the projections include: “Lower-than-anticipated annual funding, which can increase total costs by disrupting established plans and schedules and by extending programs … over longer periods; and unanticipated technological challenges posed by new systems, including their integration with established systems,” the report said.
Bottom line, the report is handing Congress lower and upper estimates of Defense Department funding through 2037 based on current planning.
What Congress will do with the data is an open question. The 15-round bout over electing a speaker empowered House members who seek to shrink federal spending. Defense hawks are pushing back on talk of cuts to defense spending or a cap at 2022 levels. Either way, the battle on Capitol Hill over the 2024 defense budget portends to be epic.
And the funding debate is playing out as Congress is examining the health of the defense industrial base and its ability to meet the needs of deterring China — or worst case, providing the materiel for a conflict.
During a February House Armed Services Committee hearing on the state of the defense industrial base, witnesses said that one of the biggest challenges for the industrial base is the unpredictability of the congressional budgeting process.
Eric Fanning, president and CEO of the Aerospace Industries Association, told the committee it needed to send a clear signal by authorizing a strong topline budget and working with appropriators to complete bills before the end of the fiscal year.
“Every step should be taken to avoid the damage inflicted by stopgap funding bills, especially a long-term or full-year continuing resolution,” he added.
Matthew Paxton, president of the Shipbuilders Council of America, added that while predicting 30 years into the future is difficult, “there must at least be stability and fidelity in the FYDP and the 10-year horizon, otherwise there will be significant disruption to the industrial base.”
Count on cherry blossoms this year, but betting on stability and fidelity in congressional defense budgeting is a longshot.