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National defense spending: a review of appropriations and real purchases.

National Defense Spending: A Review of Appropriations and Real Purchases

A NATIONAL defense buildup has been underway for nearly a decade. It was undertaken in the context of increased international turbulence and a steady strengthening of Soviet nuclear and conventional forces, and now spans three administrations. This article reviews the buildup in terms of both budget appropriations and real purchases of goods and services, a national income and product accounting (NIPA) measure. Appropriations are reviewed because they are the form in which the budgetary aspects of an administration's defense policy are debated and acted upon by Congress, and, thus, mirror many of the general considerations--the balance of military power and sharply rising Federal deficits--that affected the buildup. (The accompanying box traces the budget process and defines some budget terms used in the article.) However, factors other than appropriations also affected the realization of the buildup. Some of these--for example, production stretchouts and slowdowns--are discussed before reviewing the buildup as measured by real purchases.

National Defense Appropriations

In his budget message in early 1975, President Ford announced that his appropriation request for fiscal year 1976 would reverse the decline in real national defense spending that had occurred over the preceding 7 years. Appropriations had declined in 2 years, and, in addition, increases in costs of defense programs had been largely offset by reductions in programs and strength. Presentation of a target in real terms reflected the enhanced awareness of inflation and more clearly focused debate on whether, and to what extent, to undertake a buildup.1 The administration targeted annual real increases of 4 percent for fiscal years 1976-81. For 1976, an increase in the appropriation request-- such requests are in current dollars-- of $17 billion, or 25 percent, to $103 billion, was designed to implement this target (table 1). The emphasis was on maintaining defense preparedness, modernization of strategic forces, and strengthening general purposes forces while reducing support staff. Much of the proposed increase was accepted by Congress; as enacted, the increase was 13 percent.

1. The real spending estimates that are included in the budget documents are usually in terms of dollars of the current year, and thus cannot be used to create a consistent time series.

President Carter, in the budget submitted in early 1978, sought to continue real growth. He targeted 3-percent annual real increases for the next several years, within an emphasis on increases consistent with strengthening the North Atlantic Treaty Organization (NATO). The appropriation request for fiscal year 1979 was $128 billion, up $10 billion, or 9 percent, from the preceding year. It was designed to improve the readiness and sustainability of general purpose forces, accelerate the rebuilding of the fleet, initiate development of a new intercontinental ballistic missile, and otherwise continue the modernization of the strategic forces.

Key members of Congress were skeptical that the appropriation increases were staying ahead of inflation. This concern was evidenced in a second budget resolution, adopted in September 1979, that included a 5-percent real increase for fiscal years 1981 and 1982. Subsequently, the administration accepted the higher rate in return for Senate consideration-- refused earlier in the wake of the Soviet Union's invasion of Afghanistan --of the strategic arms limitation treaty. The hearings on the treaty, which was never ratified, reviewed in depth the various elements of the balance of military power between the United States and the Soviet Union. The emerging mood added support for increased defense spending. However, by March 1980, a revised budget put the rate back at 3 percent. This action reflected the broad context in which the budget was being formulated: the forecasts of a weak economy in 1980 and the beginnings of a drive toward budget balance. Nonetheless, for the first time in 13 years, Congress significantly increased appropriations beyond what the administration requested. For fiscal year 1981, the administration requested $162 billion; $182 billion was finally appropriated. The $20 billion increase was largely aimed at increasing production rates for most kinds of ships and combat arcraft and at substantially increasing military pay and benefits.

In the last budget prepared by the Carter administration, it was noted that the United States had exceeded the NATO allies' commitment to increase real national defense spending by 3 percent a year. Real appropriations were estimated to have increased more than 5 percent in fiscal years 1980 and 1981. The request for 1982, and the 5-year plan for 1982-86, continued that rate.

It was from this base that President Reagan announced, in 1981, a program to accelerate the rate of increase in national defense spending. To begin with, he requested substantial additions to spending in fiscal years 1981 (of which 6 months remained) and 1982. The initial requested appropriation for 1982 was $226 billion, $26 billion more than the previous administration's request. The increase from the preceding year was by far the largest in peacetime appropriations history. Relative to the previous administration's budget, the increased funding was for the gamut of military air, land, and sea equipment and also higher military pay. Within a few months, the administration pared this request because it became clear that production of equipment could not be accelerated in line with appropriations and to help reduce the sharply rising Federal deficit that was then in prospect.

Prior to the fiscal year 1982 budget, Congress had accepted the administration's broad allocation of the defense budget. However, in the ensuing congressional debate, the allocation was questioned. In particular, it was alleged that the purchase of complex weapons systems at the expense of ammunition, spare parts, and training jeopardized the "combat readiness' of the armed forces. This issue faded, but did not disappear. As enacted, the appropriation for fiscal year 1982 was $219 billion, less than the administration's request, but up 20 percent from 1981 and 50 percent from 1980.

The prospect of large and increasing Federal budget deficits, even with substantial cuts in nondefense spending, provided a serious challenge to accelerated defense spending. The deficit issue had surfaced with regard to the fiscal year 1982 appropriation, and came to the fore a year later. As submitted in January 1982, the budget for fiscal year 1983 requested an appropriation of $263 billion, up 20 percent--an estimated 13 percent in real terms--from the 1982 appropriation. The request for 1983 included funds for production of several weapons systems: 7 B-1 bombers ($4 billion), 9 MX missiles ($1.5 billion), and 2 nuclear-powered aircraft carriers ($6.8 billion). In May, in negotiations with Senate leaders centering on the deficit issue, the administration agreed to reduce proposed defense spending over 3 years by moderate amounts. Congress finally approved an appropriation of $246 billion for 1983, $17 billion below the initial administration request. Also, late in 1982, Congress refused to approve production funds for the MX missile. This action was the first congressional denial of the administration's request for a major weapon system.

As the fiscal year 1984 budget was submitted, the economy was beginning to recover from the severe 1981-82 recession, but the Federal deficit was rising sharply. The administration's request for 1984 defense spending, although trimmed from its initial request for that year, represented a 10-percent real increase. Sentiment in Congress was for additional restraint, and the allocation of defnese funds was an issue again. In trimming its proposal, the administration had eliminated a military and civilian pay raise, but had not significantly cut the funding of major weapons systems. This approach not only rekindled the readiness issue, but it also carried implications for future deficits. Unlike other appropriations (such as for pay) that are spent in a single year, procurement funds are spent over a much longer time--generally 5 years, with highest spending in the middle 3 years. Thus, trimming appropriations for procurement would have had a larger impact on future deficits than trimming those for other purposes. Congress first endorsed a real spending increase in the range of 4 to 5 percent. By the time Congressional action was completed, the 1984 appropriation was $265 billion, down $15 billion from the initial request. In real terms, it was an increase of 4 percent.

The reductions from initial requests for fiscal years 1982-84 did not curtail the buildup in a substantial way. Several billion dollars of the "reductions' came from lower-than-expected fuel prices. The remaining reductions affected forces, training, and readiness more than they affected procurement of major weapons systems. Procurement of these systems probably was not affected substantially for a number of reasons. (1) In many cases, reductions were implemented by stretchouts and slowdowns. A stretchout extends the procurement for a given number of units over a longer time by reducing the rate of production. A slowdown is a temporary reduction in the rate of production, which may or may not extend the procurement. Neither stretchouts or slowdowns result in lost spending; they only delay spending while the system is in the pipeline. (2) The unit cost of some weapon systems was lowered. For example, the unit cost of the F-18 fighter was lowered by eliminating some electronic equipment. (3) The planned decommissioning of a number of aged ships was accelerated to save funds in the short run, in order to obtain funds for a new ship.

The same factors that reduced appropriations in the short run will cause future national defense appropriations to remain high. As noted, stretchouts and slowdowns generally have not resulted in canceling any weapon systems, but in delivery of systems over a longer period and, reflecting the lower rate of production, at a higher unit cost. Reductions in unit costs such as achieved by eliminating electronic equipment from aircraft will only be temporary; at some point the extra cost will have to be incurred if the system is to perform its mission fully. Another indication that future appropriations will remain high is the steady increase in the share of national defense spending accounted for by prior-year contracts and obligations. Prior-year contracts and obligations were 20 percent of national defense outlays in fiscal year 1977; they increased to 32 percent in fiscal year 1983 and are projected to increase to 43 percent in fiscal year 1989. To the extent that the prioryear contracts, cover systems being stretched out and slowed down, this development is part of the effect just noted. However, a part is for systems, such as the B-1 bomber and the MX missile, that have only recently entered into production and will require annual appropriations. Further, it may well be that the sophistication of the new generation of weapons will mean that the training, spare parts, and ammunition needed to support them will be expensive and require higher appropriations.

Real National Defense Purchases

National defense purchases is the final point in the spending process: Appropriations lead to obligations and then to outlays; outlays, in turn, are followed by purchases.2 Purchases are measured on a delivery basis, that is, when goods and services are delivered to the military. They include compensation of military and civilian employees as well as purchases of goods and services--such as aircraft, missiles, research and development, and depot maintenance--from the business sector. Real--that is, constant-dollar --national defense purchases are prepared using detailed information on purchases and prices paid by the Department of Defense. They are only available for the period beginning in 1972 (table 2). (See the November 1982 SURVEY OF CURRENT BUSINESS for a discussion of the development of estimates of real national defense purchases, and table 2 page 9 of this issue for current quarterly estimates.)

2. For a reconciliation of outlays for national defense, a functional category in the unified budget, to national defense purchases, see table 9 in Joseph C. Wakefield and Richard C. Ziemer, "Federal Fiscal Programs,' SURVEY 64 (February 1984): 17. The main conceptual difference is that outlays include, and purchases do not, spending for military retirement; in the NIPA's, military retirement pay is a transfer payment.

This section begins by discussing some of the factors other than appropriations that, working through production rates, affect the pattern of real purchases. After providing historical perspective, it reviews the calendar-year changes in real national defense purchases and the shifts in their composition since 1976. First it provides an overview. Then it highlights purchases of military equipment, which is where the buildup has been concentrated.

Production rates

As mentioned earlier, a number of factors other than increases in appropriations affected the pattern of growth of real national defense purchases. These include "buy sizes', competition, cost overruns, stretchouts, slowdowns, and management decisions. All of them work through production rates, which affect both costs and prices and, real purchases. A major way that production rates affect costs and prices is through the allocation of fixed costs. Production of weapon systems involves large fixed costs, such as for research and development and for tooling. As production rates increase with larger buy sizes, these fixed costs can be allocated over more units, resulting in lower unit prices. Although it is not possible to quantify the effect of these factors some illustrations are suggestive.

Efforts to get production rates up and prices down have been countered by budget constraints and by the large number of different weapon systems in production. Two ways in which budget constraints have been brought to bear are reductions in the buy size--that is, the number of units to be purchased in a year--and stretchouts. for example, the Army was mandated in the 1984 Defense Authorization Act to reduce its buy size of light armored vehicles. The fixed costs will now be spread over 751 units, as opposed to 1,501 units, for the combined purchases of the Army and Marine Corps. As a result, the estimated unit cost of the vehicles is to increase 50 percent. This reduction in the buy size of a weapon system resulted in a moderate savings in current-dollar spending but a far larger reduction in real purchases; at the higher unit price, the appropriation bought fewer vehicles.

Stretchouts have been used to reduce spending in a particular year without cancelling a program. Recently, the purchase of 32 AH-64 helicopters was deferred to achieve a shortrun budget savings in 1984. As in the case of the reduction in buy size, real purchases were reduced in the year. If the helicopters are delivered in a future period, unit costs will be higher. According to a special study by the Congressional Budget Office, the administration's changes to the fiscal year 1985 defense budget indicate that unit prices of many weapon systems will increase because of stretchouts.3

3. Congressional Budget Office, U.S. Congress, "A Review of the Department of Defense December 31, 1983 Selected Acquisition Report (SAR),' Special Study (July 1984).

By contrast, other factors--such as competition and management decisions --may have reduced unit prices, allowing increased real purchases. Competition generally plays only a limited role in the production of major weapons systems. Although several firms may compete for the initial contract to do the research and development, the field usually has narrowed by the time the contract for production is to be let, and purchases are usually from a single supplier. An attempt to develop a multisupplier situation for the Dragon missile program provides insight on the effects of competition. For that program, two producers competed annually for the majority share of the planned production for that year. The competition appears to have resulted in significant price reduction for these missiles. In 1972, prior to competition, the Dragon missile had a unit price of $6,542. In 1974, two contractors were supplying the missile at unit prices of $6,473 and $4,569. In the following year, the higher priced contractor had a unit price of $2,633 and the other contractor, a unit price of $3,227. A recent example of a private management decision was the sale by one firm of its tank production facilities to another. Under the new management, the unit price of the 1984 buy was reduced 13 percent. Subsequently, Congress upped the buy size to utilize the "saving.'

Historical perspective

To provide historical perspective, a series on real national defense purchases prior to 1972 was approximated by using the implicit price deflator for total Federal Government purchases to deflate current-dollar national defense purchases. The broad pattern of response to international crisis or perceived national interest is clear. In 1941, real purchases increased significantly as the United States entered World War II. Following the war, they declined for a brief period before turning up in 1948 in response to the "cold war'. A singnificant increase in 1951 reflected the outset of the Korean conflict, and increases continued through 1953. Purchases declined in 1954 and continued to do so through 1960, except in 1957, when there was unrest in Eastern Europe and the Near East. They increased in 1961-62 in response to a Berlin crisis and a general strengthening of the military, but then declined through 1965. In 1966, the Vietnam conflict pushed purchases up significantly, and they continued to increase through 1968. Thereafter, purchases declined until they showed a small increase in 1977.4

4. For the years 1972-77, when this approximation of real purchases and the published real purchases series overlap, the approximated series declined by about the same amount as the published series and both increased in 1977 by the same amount.

In the 36 years from 1940 to 1976, real national defense purchases increased in fewer years than they declined. The longest period of increases was from 1948 through 1953; the longest period of declines was from 1969 through 1976. It was this period of declining real purchases--from a Vietnam peak of roughly $100 billion in 1968 to $65 billion in 1976--that, in part, set the background for the current national defense buildup.

In the past, national defense purchases accounted for a much larger share of Federal Government expenditures, and also of GNP, than in recent years (chart 1). Earlier, both because of their large share and the very sharp changes, increases and decreases in defense spending impacted significantly on the changes in real GNP. For example, at the end of World War II, real GNP declined 15 percent in 1946; excluding the approximated real national defense purchases --which declined almost 80 percent --real GNP increased 30 percent. The national defense buildup since 1977 has had a much smaller impact on the changes in real GNP (chart 2). In 1977 and 1978, the percent increases in real national defense purchases were less than in the remainder of GNP; GNP excluding national defense purchases increased only 0.3 percentage point more than total GNP. In 1979, national defense purchases and the remainder of GNP increased at the same rate. Since then, the percent increases in real national defense purchases were more than those in the remainder and GNP excluding national defense purchases increased less or declined more than total GNP, but never by more than one-half percentage point.

An overview

Real national defense purchases first registered the current buildup with an increase in 1977. Since then, real purchases increased each year and by 1983 were 30 percent higher than in 1976. The increases averaged 4 percent a year, and accelerated over the period (table 3). The increases in real national defense purchases excluding the compensation of military and civilian employees were larger, especially after the first 2 years. Through 1983, the average annual rate of increase was 6 1/2 percent.

As indicated by the more rapid increase in real purchases excluding compensation than in total purchases, the share of total purchases allocated to compensation declined (table 4 and chart 3). In 1976, compensation of military and civilian employees accounted for almost 50 percent of total purchases. Since then, the share declined steadily to 46 percent in 1980 and 41 percent in 1983. The decline occurred in both military and civilian compensation, but was more pronounced in the military share.

The share of compensation declined because the national defense buildup has not involved any significant increase in the size of the armed forces or in civilian personnel. From a Vietnam peak of 3.6 million (measured in full-time equivalents) in 1968, the size of the armed forces declined steadily to 3.2 million in 1970 and 2.2 million in 1980. It increased 50,000 in 1981 and then by smaller amounts, reaching 2.3 million in 1983. Civilian employment declined from 1.1 million in 1968 to about 1.0 million in 1983. While the share of real purchases allocated to compensation declined, the shares allocated to durable goods and to other services--that is, noncompenation services--increased and that allocated to nondurable goods changed very little. Since 1976, the share of nondurable goods fluctuated around 3.5 percent. Within nondurables, the share of total purchases allocated to ammunition increased. The 1983 ammunition share--1.1 percent--equaled the 1975 share, but was considerably below that of the early 1970's. The share allocated to structures, which declined in the late 1970's, was 2.4 percent in 1983, about the same as in 1976.

The increase in the shares of durable goods and other services reflect earlier decisions to modernize and increase the size of the inventory of military equipment. The increase in the share of other services also reflected those decisions; much of the spending for these services, particularly for research and development and for depot maintenance, was directly related to weapon systems.

Real purchases of other services increased at an average annual rate of 6 percent from 1976 to 1983, half again as fast as total purchases. Research and development (R&D), the largest category, declined steadily in the mid-1970's as R&D appropriations were cut back; they increased moderately in 1978-79 and at an average rate of 9 percent in 1980-83. Much of the R&D increase since 1980 was associated with the cruise and MX missiles and the B-1 bomber. The fastest and most sustained increase was for depot maintenance; purchases of these services increased at an average rate of 12 percent since 1976. Other increases were associated with reducing a backlog of maintenance and with repair of equipment and facilities.

Military equipment

From 1976 to 1983, real purchases of military equipment increased at an average rate of 8 percent. Increases, ranging from 3 1/2 percent to over 15 percent, were registered every year except in 1978. By 1983, equipment purchases were 70 percent higher than in 1976.

Each type of military equipment purchased increased faster than total purchases. The slowest increase was for real purchases of aircraft, which increased at an average annual rate of 5 percent. This relatively slow rate reflected the fact that a shift to a new generation of aircraft began in the early 1970's, before the current national defense buildup. For example, the Navy began to take deliveries of the F-14 in 1972, and the Air Force began to take deliveries of the F-15 in 1974 and the E-3 in 1975. Since 1977, the buildup has consisted of increased production rates for all types of aircraft as well as new generations--the B-1 will replace the B-52 and the KC-10 replaces the C-130. Aircraft deliveries prior to 1979 were erratic, reflecting uneven production funding. Since 1979, when deliveries increased 14 1/2 percent, real growth has been continuous.

Real purchases of missiles increased at an average annual rate of 7 1/2 percent. Prior to the buildup, purchases of missiles declined significantly in 1975 and 1976, as the production of various types of missiles--such as Minuteman III, Poseidon, and Pershing --came to a halt. The recent buildup has funded a new generation of missiles, including the Patriot, Trident, MX, and cruise missiles. Since 1979, purchases of missiles have increased at an accelerating pace, reaching 29 1/2 percent in 1983.

Real purchases of ships also increased at an average annual rate of 7 1/2 percent. A naval buildup was underway prior to 1977, but was plagued by declining labor productivity, contract disputes, changes in the number and types of ships to be built, and a number of other problems. In the early 1980's, many of these problems were resolved, particularly in regard to submarines. Submarines were a major contributor to large increases in 1982 and in 1983.

Real purchases of vehicles, dominated by tanks, recorded the fastest average annual rate of increase--16 1/2 percent. The inventory of M-60 tanks had been run down to resupply Israel in 1973. It was rebuilt in 1976-79, when purchases of vehicles increased at a rate of about 25 percent a year. The M-1, the replacement for the M-60, had some early production problems, and, as a result, purchases declined in 1980 and 1981. When these production problems were resolved, M-1 deliveries surged in 1982 and 1983. Delivery of new Bradley fighting vehicle systems and a variety of noncombat vehicles also contributed to the recent large increases.

Table: 1.--National Defense Appropriations

Table: 2.--National Defense Purchases of Goods and Services, 1972-83

Table: 3.--Change in Constant-Dollar National Defense Purchases of Goods and Services

Table: 4.--Composition of Constant-Dollar National Defense Purchases of Goods and Services

Photo: CHART 1 Constant-Dollar GNP and National Defense Purchases of Goods and Services: Percent Change From Preceding Year

Photo: CHART 2 National Defense Purchases of Goods and Services as a Percent of Federal Government Expenditures, NIPA Basis

Photo: CHART 3 Composition of Constant-Dollar National Defense Purchases of Goods and Services
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Author:Galbraith, Karl D.; Wakefield, Joseph C.
Publication:Survey of Current Business
Date:Nov 1, 1984
Words:4226
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