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 February 2010 

Lt. Gen. Lawrence P. Farrell, Jr., USAF (Ret)Predicted Fiscal Train Wreck Fast Becoming a Grim Reality

February 2010

by Lt. Gen. Lawrence P. Farrell, Jr., USAF (Ret) 

The fiscal year 2011 defense budget is about to be released by the Obama administration. The budget, as well as the Quadrennial Defense Review and the Nuclear Posture Review, are much-anticipated documents because they will provide the first real insight into the administration's long-term military and national security strategies.

Some high level details on the budget have come to light. As way of background, it should be noted that the 2010 budget is $636.3 billion — including $101 billion for ongoing military operations. The administration in February requested $130 billion for war costs in fiscal year 2010. Then in December, Defense Secretary Robert Gates said the surge of 30,000 troops in Afghanistan would cost $35 billion more. So it looks as if the 2010 bill for defense will eventually amount to something on the order of $700 billion when all is said and done. 

According to news reports, the 2011 budget will increase by $15 billion, or $556.4 billion for the 2011 baseline. The jump reflects Gates’ view that defense needs to grow by 2 percent a year through 2015 to sustain the 2010 program. Officials told Inside Defense that war costs for 2011 are estimated to be $163.1 billion. That amounts to $719.5 billion for 2011 — a $20 billion increase.  The 2012-2015 budgets also could see annual increases of $11 billion.

Sixty billion more for 2011-2015 doesn’t look too bad. But it is safe to assume that the squeeze is coming, sooner rather than later.

Chairman of the Joint Chiefs of Staff Adm. Michael Mullen recently described as "unsustainable" the current rate of defense spending. "Money is not going to keep rolling in … It's just not going to happen," Mullen said in a speech this month at the Naval War College in Newport, R.I. The key reason why defense spending at current levels cannot continue much longer is the dire state of the U.S. economy, Mullen said. "We're in a time of real economic challenge," said Mullen. The military's budget will be affected by these realities, he added. "It's unrealistic to expect this [recent growth trend] will continue," he said.

Mullen said the 2011 budget and the QDR will seek to "balance" the capabilities of the Defense Department by shifting more funds to weapons systems that are relevant to "irregular" warfare and counterinsurgency. "But we are not walking away from conventional" capabilities, he said.

He stressed that one portion of the budget that will not be shortchanged is the "people" programs (personnel, health care, benefits, family support). Sixty to 70 percent of the Pentagon's budget is committed to those programs. This is an issue of concern, obviously, because people and weapons accounts all come out of the same pot, so something has to give.

One can draw some conclusions by looking back to the program decisions that came along with the 2010 budget. We saw big program terminations, and the implication that there will be fewer new starts of big programs. As both Gates and Mullen have stated repeatedly, the fiscal emphasis has shifted to near-term challenges. 

Now that major program adjustments have been made, one might expect the QDR and 2011 budget to have fewer big program cuts. Some clues might come from watching moves by industry, including consolidations by some of the largest contractors.

Consider also pressures on the defense budget from burgeoning health-care costs and the continuing bill for combat operations (logistics primarily) and the capital equipment recapitalization bill that accompanies intense combat operations.

Beyond all this, the QDR and budget are likely to emphasize intelligence collection and analysis capabilities, connectivity, integration and making more effective use of existing technologies.

The predicted modest budget increases will likely be consumed by ongoing and increasing demands.

The concern expressed by Mullen — and largely overlooked in most analyses as the source of the "coming squeeze" — is the financial condition of the United States going forward. Several studies have predicted growing pressure on the Treasury from Social Security and Medicare. Both trust funds are expected to be exhausted around 2017, when general revenues will then make up the program deficits directly. The unfunded liability of Medicare, Social Security and the drug prescription benefit Part D all run in the neighborhood of $50 trillion dollars. Add all this to the federal budget deficit of $1.4 trillion this year and greater than $1 trillion going forward and one can see a train wreck coming. Defense is likely to be at the epicenter of this explosion.

A recent article in Newsweek by Harvard professor Niall Ferguson was clear about the problem the nation faces. "As interest payments eat into the budget, something has to give — and that something is nearly always defense expenditure. According to the Congressional Budget Office, a significant decline in the relative share of national security in the federal budget is already baked into the cake. On the Pentagon's current plan, defense spending is set to fall from above 4 percent now to 3.2 percent of GDP in 2015 and to 2.6 percent of GDP by 2028."

Later the author states: "This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the Army, Navy, and Air Force."

We just don't know it yet; we can't quite feel it, but the squeeze is already on. Stay tuned.

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