NDIA Study Warns of $110 bn Inflation Hit To National Defense
Arlington, VA — The National Defense Industrial Association (NDIA) issued a white paper on Tuesday that calls on Congress to tackle the harmful impact of inflation on national defense in the budget.
In a white paper published on Tuesday, “How Inflation Hurts America’s National Defense – And What We Can Do About It,” NDIA said that the total inflation loss for Fiscal Year (FY) 2021 to FY 2023 is over $110 billion. The study analyses the lengthy DoD budget and acquisition process, and shows how inflation has had an outsized, destructive effect on America’s national defense. The report includes multiple recommendations on how to mitigate the disruption.
The paper’s three authors, the Hon. Dr. John E. Whitley, former acting United States secretary of the Army and NDIA senior fellow as well as the Hon. David L. Norquist, president and CEO of NDIA and the Hon. Lisa S. Disbrow, the former acting secretary and 25th undersecretary of the Air Force, have all served as comptrollers in the Department of Defense, underlining the significance of the study.
“The impact of inflation on our national defense is real. Minimizing the damage requires bi-partisan action,” said Disbrow, who also leads NDIA’s inflation task force. The paper is set to create a major impact on Congress as it names the price of inflation on America’s warfighters, the DoD and America’s defense industrial base as well as the risk to America’s ability to defend itself. The authors offer clear solutions, among them a call to fund inflation in the FY 23 budget that has received strong bipartisan support from several congressional defense committees.
“Decisive action now is essential,” Norquist said. “The cost of failing to act now will be felt across the length and breadth of the DoD and defense industrial base for years to come.” The authors also called for the government to help buttress the DIB by adjusting budgets as well as existing contracts. They warn of the shortfalls in defense spending and caution the government to account for projected inflationary hikes in future planning.
Ms. ML Mackey, NDIA’s small business division chair and CEO and co-founder of Beacon Interactive Systems, a small business innovator lent her support to the study’s findings. “Inflationary impacts on small businesses are felt throughout our companies – from the goods we buy, to the increased cost of living adjustments we make to retain our employees – inflation limits our buying power, depletes reserve funds, and our ability to stay competitive. Many small businesses in the defense ecosystem cannot survive without inflationary updates to their contracts,” she said.
In a separate letter to the Hill on Monday, NDIA alongside trade associations the Aerospace Industries Association and the Professional Services Council also called for a revision related to inflation, new starts, production increases for key munitions and an ability for DOD to adjust existing contracts in the stopgap funding bill known as a continuing resolution that lawmakers are likely to adopt after September.
WHITE PAPER KEY FINDINGS
- To maintain a constant level of buying power, the FY 2023 Defense budget needs be $815 billion, an increase of $42 billion from the budget submission. This funding level would provide no net real growth in capability.
- FY 2021 and FY 2022 outlays are experiencing $50 billion in lost buying power. This loss will either appear as reduced quantities and maintenance backlogs or cost overruns and schedule delays. Whether the cost is initially born by DoD or industry will depend on how the contract is written, but left unfunded, the inevitable consequence for national defense is the same. Because of their limited capital, the excess costs will hit small businesses hardest.
- When all impacts are combined (including over $20 billion in execution impacts for FY 2023), the total inflation loss for FY 2021 to FY 2023 is over $110 billion. This significant financial cut to the DoD and DIB arrives on the heels of the COVID-19 pandemic and supply chain challenges, adding significant risk to defense modernization as a hedge against potential near peer conflict. Because it is easier and faster to adjust prices in the private sector, if the impact of inflation on contracts is not addressed, firms that have a choice may exit the defense industrial base for the commercial markets and reducing competition and diversity in the DIB.
RECOMMENDATIONS
FY 2023 BUDGET CHALLENGES
- Restore Buying Power in 2023 Budget: Congress should add at least $42 billion to the FY 2023 defense budget to reflect updated inflation information and avoid lost buying power.
- Minimize Harm from a Continuing Resolution: If FY 2023 begins on a CR, Congress should adjust this CR for inflation and allow for new starts and procurement quantity changes to avoid creating further program delays.
TODAY’S EXECUTION CHALLENGES
- Stabilize Acquisition Programs: Congress should direct that contract prices are adjusted for inflation. Programs that are currently being executed and that were priced prior to the onset of inflation should be adjusted to correct for unexpected inflation. Future contracts should include an automatic inflation adjustment clause.
- Fix Fuel Funding: Fuel prices have and will continue to fluctuate significantly and disrupt readiness and training. Congress should revise the fuel working capital fund so it is better able to handle future price shocks.
- Enhance Data Reporting: The disruption from the current inflation spike will endure for years after inflation has returned to normal. Congress should direct that appropriate data collection and regular progress reports are undertaken to show where DoD has been able to address the problem (for example, the number and value of contracts indexed and funded to the correct inflation) and what is left to be done (forecasts of future adjustments using updated guidance rates).
For media queries, please contact Habiba Hamid at media@NDIA.org or on (703) 247 2544.
NOTES TO EDITORS
Link to the White Paper Published After Embargo: NDIA.org/Inflation
About the National Defense Industrial Association
The National Defense Industrial Association is the trusted leader in defense and national security associations. As a 501(c)(3) corporate and individual membership association, NDIA engages thoughtful and innovative leaders to exchange ideas, information, and capabilities that lead to the development of the best policies, practices, products, and technologies to ensure the safety and security of our nation. NDIA’s membership embodies the full spectrum of corporate, government, academic, and individual stakeholders who form a vigorous, responsive, and collaborative community in support of defense and national security. For more than 100 years, NDIA and its predecessor organizations have been at the heart of the mission by dedicating their time, expertise, and energy to ensuring our warfighters have the best training, equipment, and support. For more information, visit NDIA.org