Defense and deficits.

The current administration forecasts that the U.S. federal deficit will amount to $521 billion this fiscal year--a very high level by historical standards. Measured as a percentage of gross domestic product (GDP), the deficit is expected to amount to 4.5 percent--also high by historical standards. Some observers believe that such deficits will bring an end to the recent period of growth in the U.S. defense budget.

They may have history on their side. The last time deficits reached these levels (in the 1980s), defense budget growth abruptly ended and a decade-long period of decline ensued.

Do large deficits signal the end of the defense buildup? I believe the short answer is: not necessarily. Based on my observations during three decades spent watching trends in the defense budget while working for Congress and the Department of Defense, I conclude that deficits do affect defense budget growth, but they do not determine the pattern. Public opinion has some effect, but threats to national security have by far the greatest influence on defense budget trends.

Deficits Matter ... Some

Deficits do have some effect on defense spending. During periods of high deficits, the administration and Congress look for ways to hold down spending in order to minimize the red ink. Defense spending can be one of the targets. During the late 1980s, for example, Congress searched aggressively for ways to hold down all federal spending and, as part of that effort, cut defense spending sharply. Between fiscal year (FY) 1986 and FY 1990, the defense budget declined by an average of 2.5 percent a year in real (that is, inflation-adjusted) terms.

But deficits alone do not determine whether the defense budget rises or falls, at least not during the past 30 years. To substantiate this point, I divided the past 30 years (FY 1975 through FY 2004) into three periods based on the size of the federal deficit (measured as a percentage of GDP): the 10 years when deficits were lowest, the 10 years when they were highest; and the middle 10 years. During the 10 years when deficits were lowest, the defense budget grew at a real rate averaging 2.4 percent a year (see figure 1). (1)

But the defense budget also grew during the 10 years when deficits were highest. During those high-deficit years, the real defense budget grew by an average of 1.8 percent a year--only slightly less than during the low-deficit years. Also, as Figure 1 shows, the defense budget declined in some years when deficits were low (by as much as 2.6 percent in one year) and grew in some years when deficits were high (once by as much as 10.3 percent). Deficits appear to have some affect on defense ... but only some.

Statistical analysis bears out this conclusion. During the past 30 years, there was no statistically significant correlation between real growth or decline in the defense budget and federal deficits measured as a percentage of GDP.

To the extent that deficits do influence defense spending, they currently are exerting downward pressure. As noted previously, the administration expects the FY 2004 deficit to reach $521 billion, or 4.5 percent of GDP. This deficit would be the highest since 1960 in actual dollars and among the top five during the same period when measured as a percentage of GDP.

Moreover, large deficits may continue. The administration forecasts that deficits will decline to $237 billion by FY 2009 because of a stronger economy and restraint on federal spending. However, projections by the Congressional Budget Office (CBO), based on alternative but plausible assumptions, suggest that deficits measured in dollar terms may rise rather than fall between FY 2004 and FY 2009. (2)

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These alternative assumptions assume that discretionary federal spending (that is, the funds Congress appropriates each year for defense and non-defense purposes) grows at about the same rate as the GDP, a rate of growth consistent with history and the political popularity of many of the programs supported by discretionary spending. CBO's alternative projections also assume that Congress takes steps to reduce the growing effects of the alternative minimum tax (raising the exemption level and indexing it to inflation) and that recent tax cuts are made permanent.

Public Opinion Affects Defense

If deficits affect defense budget trends, but only modestly, then what else determines defense spending levels?

I believe that public opinion has some effect. In particular, it influences how much Congress increases or decreases the administration's request for defense spending.

Gallup polls indicating public support for defense spending bear out this point. (3) For the past 35 years, Gallup has periodically asked the American public the same question: Do you think we are spending too much, too little, or about the right amount on national defense and the military?

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The portion of the public stating that we are spending too little--that is, those who favor a higher defense budget--has varied significantly over the period. The percentage favoring higher defense budgets reached its highest level (51 percent) in 1981, after then-candidate Ronald Reagan persuaded the country that higher defense spending was needed. It reached its second highest level (41 percent) in 2001 after then-candidate George W. Bush did the same. For several years after both of those periods, the administration proposed and Congress supported substantial growth in the defense budget.

On the other hand, the portion of the public supporting higher defense budgets fell to its lowest level (8 percent) in 1969, toward the end of the unpopular war in Vietnam. A period of substantial budgetary decline followed.

Today the Gallup polls suggest mixed support for the defense budget. The latest poll, taken in February 2004, showed that 22 percent of the public favors higher defense spending--down substantially from the recent peak of 41 percent in 2001. The decline in the portion of the public supporting higher defense budgets probably reflects weakness in the economy and may also reflect concerns about the war in Iraq.

Security Threats Matter Most

While deficits and public opinion have some effect, I believe that threats to U.S. national security have by far the largest effect on defense spending trends. Cynics argue that pork-barrel politics determine defense spending trends. There is no doubt that parochial interests play a role in determining the details of defense plans, but in my experience they do not determine the overall spending levels.

The long-term history of defense spending supports this conclusion. Figure 2 shows real levels of defense spending from FY 1950 through FY 2004. Peaks occurred during periods when threats seemed largest. Three of those peaks occurred during war years (Korea, Vietnam, and most recently the War on Terrorism). The other peak occurred during the Reagan years, when President Reagan successfully argued for higher defense budgets in order to bring about the end of the Cold War. In the years between these peaks, when threats to national security subsided, defense spending fell substantially.

Outlook for Defense Spending

In sum, real defense spending seems likely to continue to grow modestly for the next few years despite high deficits. Those deficits will exert downward pressure on all federal spending, including defense, and public support for defense budgets is mixed. However, the key factor--threats to U.S. security--seems likely to remain high for several years, as we work to complete our missions in Afghanistan and Iraq and as terrorists continue to pose threats to our interests at home and abroad. The likelihood of a continued defense buildup is heightened by administration plans that call for modest growth in the defense budget, which makes it easier for Congress to support such growth even in the face of large budget deficits. Administration plans for the period between FY 2005 and FY 2009 call for real growth averaging between 2 and 3 percent a year.

Should national security threats subside while federal deficits remain high, then the outlook would change sharply and defense spending might well experience a period of real decline. However, it does not appear that threats will subside in the next few years.

While I expect modest growth in the defense budget to continue, there may be some tactical shifts that appear to reduce defense spending without actually doing so. For example, Congress may cut a few billion dollars from defense in order to bolster spending for popular non-defense programs without appearing to increase the federal deficit. Then the Department of Defense would be permitted to "get well" through additional spending approved under the emergency supplemental appropriations associated with the wars in Afghanistan and Iraq. With this approach, the defense budget might appear to grow very little or even to decline. However, the real resources available to the Department would remain unchanged.

In sum, at least to this observer, it seems that the current pessimism regarding the likelihood of defense budget growth is exaggerated. Continuing threats to U.S. national security seem likely to keep defense resources growing at--or close to--the pace proposed.

Figure 1. Deficits Matter to Defense ... Some

Least 30 Years of      Real % Change in DoD Budget
Deficits             Average       Low          High

10 Highest Years      +1.8%        -9.3%        +10.3%
10 Medium Years       -1.7%        -8.0%        + 4.2%
10 Lowest Years       +2.4%        -2.6%        +11.1%

Endnotes

(1) Source for all defense budget data is National Defense Budget Estimates for FY 2005 Budget (Green Book), March 2004. Defense budget numbers are for budget authority for the Department of Defense budget (Function 051). Calculations exclude recent wartime emergency supplementals.

(2) Congressional Budget Office, "The Budget and Economic Outlook: Fiscal Years 2005 to 2014," January 2004.

(3) The Gallup Organization, "More Americans Say U.S. Spending Too Much on Defense," March 4, 2004.

The Honorable Robert F. Hale is currently a program director and senior fellow at LMI Government Consulting. From 1994 to 2001 he served as Assistant Secretary of the Air Force (Financial Management and Comptroller). For the 11 years prior to this assignment, he headed the National Security Division at the Congressional Budget Office. Mr. Hale is a past national president and lifetime member of ASMC and a Certified Defense Financial Manager. Mr. Hale is a member of the Washington Chapter of ASMC.