Defense budget sets stage for tough choices ahead.

AS CONGRESS CONTINUES to dissect the details of the Bush administration's proposed defense budget for fiscal year 2008, it is becoming increasingly apparent that the nation's military faces a worrisome financial future.

At first glance, it is hard not to notice the substantial increases in overall defense spending. The president's request of $481.4 billion--in addition to $141.7 billion for war costs in fiscal 2008--is 11 percent larger than last year's budget. Funding for new weapons technology--at nearly $102 billion for procurement and $75 billion for research and development--is at its highest level since the 1980s Reagan buildup. This budget, it is worth noting, represents the 10th consecutive year of growth in defense spending.

The budget, however, does not include the additional $12 billion to $15 billion that will be needed to cover the planned growth of 92,000 troops in the Army and the Marine Corps. Further, there is a mismatch between the long-term modernization plans and the funding projections, according to many analysts. The budget also assumes that Congress will approve a measure to have military veterans pay a larger portion of their health care premiums. Most lawmakers are likely to oppose such a politically unpopular move, which means the Pentagon may have to add at least $16 billion to the budget.

Significantly, the $481.4 billion baseline budget for fiscal 2008 is $49 billion higher than 2007 and $17 billion higher than what the Pentagon had forecast a year ago that it would need for 2008.

This budget also sets the stage for what could be the beginning of a drawn-out debate over how the services should share a limited pool of defense dollars.

In 2008, the Army's share increases from 25.4 percent to 27 percent--on an absolute basis, over twice the increase of any other service, and the Marine Corps' from 3.7 percent to 4.3 percent. The Navy's portion will be dropping from 25.5 to 24.8 percent, and the Air Force's from 29.7 percent to 28.2 percent. While it's unquestionable that ground forces are bearing the brunt of the current fight and should be resourced accordingly, the Air Force and the Navy are in dire need of modernization dollars to revamp their aging fleets.

Interservice rivalries are not in the nation's best interest, especially in a time of war. But unless the defense budget top line experiences continuous and substantial growth, we are likely to see intense competition among the services, especially in the procurement arena. That problem could intensify in 2009 and beyond. The administration currently projects a Pentagon baseline budget of $513 billion in fiscal 2009, with $50 billion additional for war costs. But given the substantial supplementals of recent years, it is hard to see how $50 billion will be enough. During the 2010-12 period, the base budget is projected to stay relatively flat, or even decline slightly, in teal terms. By fiscal year 2012, it appears that the Defense Department's base budget would be roughly the same as the budget requested for fiscal 2008, analysts point out.

These forecasts beg for some tough questions. If spending is expected to flatten out, how will the Pentagon pay for the additional troops? War costs have been on the rise for the past five years. The estimates for repairing equipment for the Army and the Marine Corps have more than doubled this year, to $37 billion. And procurement programs only will get more expensive. The 2008 request includes funding to move forward dozens of big-ticket programs, but it is not hard to predict that, when push comes to shove, the Pentagon will have to cut or delay these programs to pay for escalating personnel, health care and war operations. In the budget plan, procurement would rise from $81.3 billion in 2007 to $101.7 billion 2008. This would mark nearly a doubling, in real terms, of procurement funding since fiscal 1997.

A study by the Center for Strategic and Budgetary Assessments says it is doubtful whether, even with these large increases, the Defense Department will be able to fully implement its costly long-term modernization and force structure plans. Moreover, given growing concerns about the federal deficit and the high costs associated with the impending retirement of the baby-boomer generation, it is unclear how long the United States will sustain the high levels of funding for defense included in the new plan. In the coming years, many analysts predict, the cash from foreign lenders that has financed our soaring military expenditures could dry up.

At NDIA, we are concerned about the future, and what these funding trends mean for the nation's military superiority.

This is the first time we see that there will be a need to make tough choices. Unless the budget pie gets bigger for defense, it is fair to expect that the ground forces needs for reset/recap and equipping the increased force structure will continue to demand increased funding. The corollary adjustment to this demand could be a gradual downsizing of the Air Force and Navy, both of which will be operating with rapidly aging equipment.

In the 2010 timeframe and beyond, we will see the outlines of emerging priorities. If the Iraq war has a major slowdown, there will be a rush to rapidly reduce defense spending at a time when ground forces are trying to reset, while air and naval forces are in the midst of major modernization programs.

Those of us who have worked budgets while in government understand how hard the Defense Department and the services work their budget requests, and how finely balanced they are.

It is difficult to think, that with this huge budget, almost unimaginable only a few years ago, we won't have enough to address pressing needs. But it seems to be true. And given the financial needs of the country as a whole, even these inadequate projections might not be realized.

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