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Budget Policy, Deficits, and Defense: A Fiscal Framework for Defense Planning

Authored by Dr. Dennis S. Ippolito. | June 2005

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Since the war on terrorism began in earnest after September 11, 2001, defense budgets have risen sharply. It would be reassuring to believe that the resources to fight this war will continue to be made available, regardless of its cost or duration, and that Congress and the President will at the same time maintain the broader military capabilities needed to protect the nation?s security interests. Fiscal realities, however, have often compromised military capabilities in the past and may do so again in the future. The short-term threat to defense is tied to deficit control. Reducing the very large deficits projected for the next several years will require cutbacks in discretionary spending. As a result, defense will be competing with domestic programs for a shrinking share of the budget, and the politics of this competition could prove highly unfavorable for defense.

Over the longer term, the budget policy outlook is clearly negative. Like other advanced democracies, the United States must find a way to reform its social welfare system in response to an aging population. Unless retirement and healthcare entitlements for the elderly are retrenched significantly, these programs will generate enormous spending pressures, making it more and more difficult to support defense as well as other national needs. And since the defense commitments of the United States are unique, the fiscal challenge associated with welfare state modernization is especially pressing.

The purpose of this monograph, then, is to present a fiscal policy framework that is likely to shape current and future defense funding levels. This framework is not immutable, but it does mean that defense planners need to take into account the ways in which domestic policy commitments, budget policy trends, and budgetary politics affect defense. In particular, current defense plans contain optimistic, and arguably unrealistic, assumptions about long-term funding for the core defense budget. Recent Future Years Defense Programs have projected real (inflation-adjusted) spending levels well above Cold War peaks and assumed that these levels, unlike the Cold War peaks, can be sustained indefinitely. However, with unusually severe budgetary constraints in place for the foreseeable future, defense spending levels will likely be lower and more volatile than current planning envisions. The challenge for strategic planners, then, is to impose clear priorities on a defense budget that cannot accommodate all they deem desirable. These priorities must also be prudent, which in a wartime context means protecting funding for the urgent and the necessary?readiness and traditional modernization?against the highly uncertain potential benefits of transformational modernization.


Annual congressional debates about the President?s defense program focus primarily on immediate military requirements, and this focus necessarily tightens during wartime and other emergencies. Many decisions about weapons systems, force levels and compensation, and other defense programs, however, have long-term implications with respect to the level of budgetary resources needed to support the nation?s military. The Department of Defense?s (DoD) Future Years Defense Program (FYDP) offers important guidance about these long-term effects by providing 5-6 year cost estimates for future defense programs and priorities.

Recent FYDPs have indicated that the core defense budget will require continued real increases over the next several years. Under the FY 2005 FYDP, for example, defense spending authority (excluding the supplemental appropriations that have been used to fund military operations in Iraq and Afghanistan) is projected to increase from $402 billion in 2005 to $455 in 2009.1 According to the Congressional Budget Office (CBO), extended costs would be still higher, with constant-dollar spending averaging $485 billion from 2010-22.2

Defense spending levels would have to be substantially higher to accommodate what the CBO terms ?cost risk??future military commitments equivalent to the Afghanistan, Iraq, and global war on terror engagements along with less optimistic (and more historically-based) cost assumptions about weapons programs. Total cost risk for2005-09 added to core defense budget estimates raises average annual spending to nearly $500 billion in constant dollars; the projection for 2010-22 is more than $550 billion.3 Both the level and the duration of these defense spending commitments would be unprecedented historically and politically problematical.

Moreover, fiscal realities will make it much more difficult to protect defense against competing political needs. Budget deficits over the past 3 years (FY 2002-04) have totaled nearly $950 billion; projected deficits for FY 2005-09 are approximately $1.4 trillion.4 Any serious effort to reduce these deficits requires tight control over discretionary spending, forcing defense to compete with domestic programs for a shrinking share of the budget. The long-term budget outlook is even more unfavorable, since entitlement financing pressures will further reduce discretionary spending margins and exacerbate the defense-domestic program competition.

The strategic and policy challenges facing defense planners today cannot be divorced from fiscal considerations. It might be helpful, then, to complement their strategic and policy debates with some basic facts about the budget policy framework that determines, over time, the budgetary resources available for defense. In particular, long-term trends in budget policy have enormous implications for current and future defense budgets. This monograph will focus on several of these trends?namely, the changing level and composition of spending policy; the deficit and debt dynamic in recent fiscal policy; and the long-term fiscal impact of retirement and healthcare entitlement programs.


The fiscal obstacles confronting defense planners are formidable. Over the short term, politically potent demands for deficit reduction, permanent tax cuts, and domestic program expansions will make it difficult to maintain core defense budget needs at adequate levels. Over the long term, the spending margins available to support defense and other national commitments will be defined by the extent and timing of retirement and healthcare entitlement reforms.

The Bush administration?s FY 2006 budget, for example, calls for reducing the deficit to approximately 1.3 percent of GDP by 2010. Under this deficit-reduction program, discretionary spending-GDP levels would fall sharply over the next several years.47 More important, the administration is proposing cutbacks in constant-dollar outlays for defense and nondefense programs. The proposed cuts in nondefense programs are larger than the defense reductions?from a total of $413 billion in FY 2005 to $364 billion in FY 2010 (measured in FY 2000 dollars).48 But the latter are appreciable. With supplementalsexcluded, constant-dollar outlays for defense would decline from over $400 billion in 2005 to less than $380 billion in 2010.49 The core defense budget, then, would have negative real growth over the next several years when measured in actual spending.

Given this funding trajectory, the demands on the U.S. military are even more daunting?fighting a highly unpredictable global war on terrorism while implementing a largely undefined transformation in organization, equipment, and doctrine. Current defense budget projections ignore future costs of the former and understate the potential costs of the latter. But quite apart from these shortcomings, defense plans that assume steady increases in real spending levels are fiscally unrealistic and politically naïve. Instead, difficult choices are inescapable with regard to the major components of the defense budget?readiness, force levels, and procurement to support traditional and transformational modernization. The debate over Army end-strength illustrates the dilemma. Army Chief of Staff Peter Schoomaker recently stated that the temporary increase of 30,000 Army troops might have to be raised to 50,000 and made permanent.50 If this proves correct, offsetting procurement cutbacks will be needed to hold defense budgets within politically realistic limits.

The procurement issue, moreover, will almost certainly intensify over time. There have already been stretch outs, reductions, and terminations in numerous procurement programs. The Army?s next-generation Comanche helicopter program has been cancelled, and the development phase for its Future Combat System program has been extended. The Navy?s DD(X) destroyer procurement schedule has been delayed by 1 year and its attack submarine program schedule by 2 years. The Air Force?s investment plans are being buffeted by rapidly increasing costs for its new fighter attack aircraft and related programs, making it difficult to maintain procurement schedules and procurement quantities. Even taking these into account, the investment programs that remain in place will require significant increases in aggregate real spending over the next several years. Finally, it is reasonable to assume that cost overruns will affect many of the new technologies and exotic weapons systems currently under development, complicating still further the investment projections now in place.

Since the defense budgets likely to be in place over the next several years cannot accommodate higher force levels, improved readiness, traditional modernization, and transformational modernization, there must inevitably be painful tradeoffs. The key tradeoff, moreover, will likely involve the scale and pace of modernization initiatives, particularly for the transformational technologies, against the readiness requirements for attracting and retaining a highly-skilled military. Slowing the former to ensure adequate funding for the level and quality of forces is a prudent choice in terms of the tangible military capabilities currently needed to meet existing threats. It is also more predictable, more controllable, and more reversible in terms of costs. Given the fiscal outlook that defense planners face, these advantages are compelling.51


1.The Long-Term Implications of Current Defense Plans: Summary Update for Fiscal Year 2005, Washington, DC: U.S. Congressional Budget Office, September 2004, p. 2.


3.Ibid., p. 3.

4.These are baseline deficit estimates. See The Budget and Economic Outlook: Fiscal Years 2006-2015, Washington, DC: U.S. Congressional Budget Office, 2005, p. xiv.

47.Historical Tables, Budget of the United States Government, Fiscal Year 2006, Washington, DC: U.S. Government Printing Office, 2005, p. 128.

48.Ibid., p. 126.


50.James Kitfield, ?Changing and Fighting, Simultaneously,? National Journal, October 30, 2004, p. 3301.

51. For a comprehensive and exceptionally detailed analysis of the modernization debate and these tradeoffs, see Stephen Biddle, Military Power, Princeton: Princeton University Press, 2004. With respect to budget priorities, Biddle concludes that:

One should be wary . . . of proposals to protect modernization at the expense of readiness. . . . The issue is the relative pace of modernization, and the analysis above suggests that trading slower modernization for lesser cutbacks in training, schools, and quality-of-life accounts (i.e., those parts of the budget that help create and retain skilled personnel capable of implementing demanding modern-system force employment) would be a better choice than the reverse. At the margin, a less-skilled military is more dangerous than less-advanced technology (p. 203).