Thursday, June 30, 2011

Long-Term Implications of the 2012 Future Years Defense Program


LONG-TERM IMPLICATIONS OF THE 2012 FUTURE YEARS DEFENSE PROGRAM

JUNE 2011

ENTIRE DOCUMENT:

SUPPLEMENTAL MATERIAL:

ABSTRACT

In most years, the Department of Defense (DoD) provides a five- or six-year plan, called the Future Years Defense Program (FYDP), associated with the budget that it submits to the Congress. Because decisions made in the near term can have consequences for the defense budget well beyond that period, the Congressional Budget Office (CBO) has examined the programs and plans contained in DoD’s FYDP and projected their budgetary impact in subsequent years. For this analysis, CBO used the FYDP provided to the Congress in April 2011, which covers fiscal years 2012 through 2016—the most recent plan available when this analysis was conducted. CBO’s projections span 2012 through 2030.

SUMMARY

In most years, the Department of Defense (DoD) provides a five- or six-year plan, called the Future Years Defense Program (FYDP), associated with the budget that it submits to the Congress. Because decisions made in the near term can have consequences for the defense budget well beyond that period, the Congressional Budget Office (CBO) has examined the programs and plans contained in DoD’s FYDP and projected their budgetary impact in subsequent years. For this analysis, CBO used the FYDP provided to the Congress in April 2011, which covers fiscal years 2012 to 2016. CBO’s projections span the years 2012 to 2030.

CBO’S PROJECTIONS

In February 2011, DoD requested an appropriation of $671 billion for 2012. Of that amount, $554 billion was to fund the “base” programs that constitute the department’s normal activities, such as the development and procurement of weapon systems and day-to-day operations of the military and civilian workforce. The remaining $118 billion was requested to pay for overseas contingency operations—the wars in Afghanistan and Iraq and other military activities elsewhere. CBO focused its analysis on the base budget because it reflects DoD’s future plans for manning, training, and equipping the military.
CBO has projected the costs of DoD’s plans for its base budget (reflected in the FYDP, along with other long-term plans released by the department) by using factors that are consistent with the department’s recent experience. CBO’s analysis yields these conclusions:
  • To execute its base-budget plans for the period covered by the 2012 FYDP, DoD would need appropriations totaling about $206 billion (or 8 percent) more over those five years than if funding was held at the 2011 level of $536 billion. Over the 10 years from 2012 to 2021, DoD would need a total of $597 billion (or 11 percent) more than if funding was held at the 2011 level.
  • DoD’s base budget would grow at a real (inflation-adjusted) average annual rate of 1.8 percent from 2012 to 2016 and by 0.5 percent from 2016 to 2030. At those rates, DoD’s base budget would rise from $554 billion in 2012 to $594 billion in 2016 and to $642 billion in 2030.
  • The primary cause of long-term growth in DoD’s budget from 2012 to 2030 would be rising costs for operation and support (O&S), which would account for nearly all of the increase. In particular, CBO projects significant increases in the costs for military and civilian compensation, military health care, and various operation and maintenance activities. O&S costs would grow steadily throughout the projection period, from $350 billion in 2012 to $459 billion in 2030, a growth rate of 1.5 percent per year.
  • That large contribution of operation and support costs to long-term budget growth is a change from the years before the wars in Afghanistan and Iraq, when sharp growth in anticipated requirements to replace and modernize weapon systems (the so-called bow wave) was the primary factor underlying projected budget growth beyond the years covered by the FYDP. In CBO’s current projections, acquisition costs (the costs of developing and procuring weapon systems) would grow steadily from $189 billion in 2012 to a peak of $217 billion in 2019 (an increase of about 14 percent) before decreasing and leveling off—albeit with year-to-year variations—at an average of about $197 billion per year through 2030.

COMPARISON WITH PROJECTIONS INCORPORATING DOD’S ESTIMATES

CBO compared its projection (referred to in this study as “the CBO projection”) with DoD’s estimate of the costs of the FYDP (for the 2012–2016 period) and with an “extension of the FYDP” (for the 2017–2030 period). The latter projection is based on DoD’s estimates of costs if they are available for years beyond 2016 (for some weapon systems, for instance) and on costs consistent with the broader U.S. economy if such estimates are not available (for pay and medical costs, for instance).
By DoD’s estimates, executing its plans for 2012 to 2016 would require real increases in funding of about 0.7 percent annually (excluding supplemental and emergency funding for overseas contingency operations). Over the five-year period, that growth rate would result in costs that were $142 billion (or 5 percent) greater than the amount of DoD’s budget if it was held at the 2011 level.
In most cost categories, the CBO projection is higher than the FYDP and the extension of the FYDP. For instance, health care costs for DoD have grown faster than they have in the broader economy, and the costs of developing and buying weapons have historically been, on average, 20 percent to 30 percent higher than DoD’s initial estimates. The CBO projection—which, starting with 2013, includes estimates of those costs that reflect historical trends—indicates how rapidly defense budgets would have to grow to execute DoD’s plans under the assumption that the department’s costs continue to grow as they have in the past.
CBO’s projection of the total cost of the FYDP through 2016—at $2,885 billion—is $64 billion (or about 2 percent) higher than the department’s estimate. Compared with the FYDP and the extension of the FYDP, annual costs under the CBO projection would be about $25 billion (or 4 percent) higher in 2016, at the end of the FYDP period; $31 billion (4 percent) higher at the end of 10 years; and about $29 billion (5 percent) higher by 2030, at the end of the projection period. Much of the difference derives from CBO’s judgment that recent trends in the costs of military health care, weapon systems, and other support activities are likely to persist. Although the costs of DoD’s base budget would increase under CBO’s projections, that increase would not be as rapid as CBO’s current estimates of the future growth of the economy, so costs would decline as a share of GDP. CBO’s projections should not be viewed as predictions of future defense spending; rather, they are estimates of the costs of executing DoD’s current plans. The degree to which the plans laid out by DoD are executed in the future will depend on the funding that will be provided in an era of increasing pressure on the federal budget as a whole and on the success of ongoing efforts to curb cost growth for such items as medical care and advanced weapon systems.

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