The FY2016 Defense Budget and US Strategy: Key Trends and Data Points

Every year, the Department of Defense, OMB, the CBO, and GAO provide a wide range of materials analyzing the President’s proposed defense budget, and current trends in defense spending. These amount to thousands of pages and a wide variety of metrics, maps, charts, and other data.

The Burke Chair has prepared a summary of the key metrics in these presentations which puts their data in the broader context of US strategic needs and priorities, the overall forces shaping the crisis in federal spending, and the credibility of the budget submission in view of outside analyses of US defense spending by the Congressional Budget Office (CBO), General Accountability Office (GAO), and work done on global defense spending by the IISS and SIPRI.

This analysis is entitled The FY2016 Defense Budget and US Strategy: Key Trends and Data Points, and is available on the CSIS web site at https://www.csis.org/analysis/fy2016-defense-budget-and-us-strategy-key-trends-and-data-points.

Highlighting the Lack of Real Strategic Planning and Realistic Programming

This analysis focuses on key national, strategic, and defense spending issues and is not intended as a comprehensive survey of strategy, programs, and budgets. It also highlights the lack of real strategic planning within the Department of Defense. Although the total mass of DoD budget presentation data runs over 500 pages, the references to strategy are limited and virtually never provide any meaningful detail or content on how a strategy will be implemented or resources will be allocated.

While reference is often made to the cost of a five or “future year defense program” (FYDP), one of the key lessons of this analysis is that if one looks closely at the budget data, there is virtually no information as to how this spending will affect the overall force structure, readiness, and modernization of US forces, or how it will shape mission capabilities and the capabilities of the key combatant commands. In spite of the large amount of strategic rhetoric involved, the mass of actual data almost exclusively cover line item budgeting for a single coming year. They are all budget, and not programming or strategy.

In fairness, the vacuous nature of the 2014 QDR, the national strategy document, and the strategic guidance first provided in early 2012 makes it difficult, if not impossible, to tie budgets to specific goals, plans, milestones and measures of effectiveness. They are exercises in drafting broad unfocused goals without meaningful priorities, plans, programs, and longer-term budgets. Strategy does not consist of concepts, it consist precisely of the specific goals, plans, milestones and measures of effectiveness that US strategic documents lack.

It is also clear from this analysis that the focus on sequestration and the budget control act is driven by political calculations as to the level of total spending the administration believes it can add above the sequestration level, and not by strategy, mission priorities, or any form of net assessment. Moreover, as the CBO and GAO studies referenced in this analysis make brutally clear, the Department of Defense has not developed realistic cost models for its budgeting or controlled cost escalation in any major category of defense spending. In fact, the budget is undercosted to the point where CBO projection indicate that the shortfall in the money requested in the President’s defense budget request and the probable nature of the money needs to actually fund it becomes far larger by FY2020 than the impact of having to cut the projected FY2016-FY2020 funding to the Budget Control Act level.

Finally, the reader should be aware that the Office of the Secretary of Defense, the military services, OMB, CBO, and GAO often use different reporting formats and definitions, and uses a mix of data based on budget authorization and budget outlays, constant and current dollars, and fiscal and calendar years. The analysis also relies on summary metrics, and the reader should consult the referenced text for further details. In most cases, the added metrics and narrative provide substantial additional data and explanation.

One Needs Caution in Talking About the Crisis in US Defense Spending: US Defense Spending is Still a Massive Share of the World Total (Pages 3-12)

In spite of recent US cuts in defense spending, the US continues to clearly dominate global military spending. IISS estimates the US share as 37.1% of world in declared spending in 2014, and 25.8% by PPP standards.

US dominance is clear using a wide range of different ways of different ways to portray and compare IISS and SIPIRI estimates of the US share of global military expenditures.

• NATO and other data show that key traditional partners like Britain (3.8%) and France (3.3%) have cut their share of world military spending faster than the US. German spending (2.7%) is not the main issue; it is Germany’s “no purpose” overall force posture and strategy.
• Partners like Saudi Arabia (5%) have led increases in spending
• IISS estimates indicate that Russian spending (4.4%) remain limited in scope in spite of increases.
• China is the only major power that is making serious increases relatively to total US spending. IISS estimates as 8.0% of world in declared spending in 2014, and 9.8% by PPP standards.
• China (20.8%), Saudi Arabia (27.%), Russia (10.1%) and India (4.6%) lead the total of $43.3 billion increases in declared defense spending in 2014.

One key caveat is that the declared figures shown for key countries like China often use state-determined prices for procurement, construction, and services, and involve conscript forces. As a result, all of the estimates can sharply undercount the actual expenditures of countries like China, Russia and North Korea.

The sheer scale of US spending relative to other nations raises key questions about the way in which the US have approached sizing defense spending, and making cuts in such spending.

•  The US has failed to make any major strategic choices in reallocating its spending.
•  It has effectively focused on downsizing its existing spending regardless of its relevance in dealing with key threats and risks.
• As in the past, no major trade-offs have altered the service share or share of the active and reserve components.
• No effort has been made to tie spending to key missions or combatant commands, or to the force goals set forth in the FY2014 QDR.
• It has also down so with constantly shifting programs and annual cuts made on the basis of short-term opportunity.
• CBO and GAO studies do not validate any DoD claims to greater efficiency on terms of major spending impacts.

Yet, US Defense Spending Experienced a Massive Drop in the Burden It Placed on the GDP and Total Federal Spending During FY1950-FY2016. (Pages 13-19)

While two long wars have created the impression the US is now spending far more on defense, in fact, Department of Defense outlays have recently been less than half the percentage of the US GDP they were during the peak of the Cold War, have been far lower than during the Reagan Presidency.

• US defense spending dropped from 7.2% of the GDP in 1965 to 5.1% at the end of the Cold War, and 3.2% in FY2015. It is now projected to drop to 2.6% in 2025.
• In spite of the Afghan and Iraq Wars, defense spending as a percent of GDP did not rise significantly as a share of total discretionary spending during 2000-2015, and all discretionary spending has dropped sharply since 1970.
• The defense budget is projected to be only 3.1% of the GDP in FY2016, even if the President’s request is fully funded at levels substantially higher than is called for in the Budget Control Act or Sequestration.
• In contrast, spending on Social Security and major health care programs rose from 2.4% of the GDP in 1965 to 6.5% at the end of the Cold War, and 10.0% in FY2015. They now projected to rise to 11.9% in 2025.
• Major health care programs – not social security -- have been the key driver. They were negligible in 1965, but 2.3% in 1990, 5.1% in 2015, and are projected to be 6.2% in 2025 – well over twice the impact of the defense budget.
• Recent defense cuts had almost no impact on the burden federal spending placed on the economy. It would take major cuts in entitlements like health to have that effect.

Defense as a share of federal spending dropped from 57% in the Korean War to 43.4% in Vietnam to 26.8% at the peak of the Reagan build up. It will only be 14.3% if the President’s FY2016 request is fully funded.

• Total non-defense discretionary spending experienced far smaller proportion of cuts as a percent of GDP, and the federal budget.

US Defense Spending Has Had a Marginal Impact on the US Deficit and Debt: The Real Impact Has Come from Rising Interest and Entitlement Costs (Pages 20-27)

The most recent CBO estimates of the federal debt, and the deficit – the forces that triggered “sequestration” and the spending cuts called for by the Budget Control act – show they remain a critical issue.

At the same time, the metrics for total federal spending show that virtually all of the future pressure for federal spending comes from programs other than defense, and that it is the rising cost of entitlements – particularly health and payments to seniors – which drive the rising cost of federal spending.

Impact of Aging and Health Care Costs Goes Far Beyond Federal Heath Care and Social Security Spending (Pages 28-52)

The key issues affecting the federal budget are not shaped by defense spending, or by federal spending alone.

The rise in health care spending has outpaced the increase in Social Security spending and will become a steadily increasing burden in the future, but the problem is not federal, but an incredible rise in the total burden health care puts on the economy relative to the increase in life expectancy.

• Total US health care spending now place roughly twice the burden on the US GDP as health spending by other developed countries.
• Its cost is far higher in per capita terms than in other countries (over twice), but does not produce any proportionate benefit in terms of added life expectancy. .
• In one survey, US healthcare ranked only 11th out of 11 developed countries, but had a per capita cost more that twice that of the highest-ranked country.
• The CBO estimates that excessive cost growth has been a major factor in the increase in health costs. It accounts for 22% today, and will account for nearly a third of all US spending on major health care programs by 2039.
• An aging America is also a major factor, however, and it should be noted that the metrics shown here only count federal spending. They do not address the fact that Social Security does not cover all older Americans and is not in tended to fund an entire retirement. It does not address the steady the decline in private pension programs, 401K matching, and saving for old age.

OECD and other estimates show that the steep rises in US health spending raise key questions as to the cost-benefits of total current US national spending, and offer far more potential for far more useful savings than can be obtained by cutting defense.

Changes in Medicare and the Affordable Care Act will not address the far broader societal problem in having medical costs rise from under 7% of the GDP to nearly 18% -- an incredible increase in the total burden on the economy.

Similarly, addressing the cost of Social Security does not address the fact it is not a substitute for adequate private savings and/or a real national pension plan.

The most recent Social Security Administration data warn that:

• 51% of the workforce has no private pension coverage.
• 34% of the workforce has no savings set aside specifically for retirement
• Some 10% of Americans 65 or above have no Social security coverage or retirement savings or benefits.
• Among elderly Social Security beneficiaries, 52% of married couples and 74% of unmarried persons receive 50% or more of their income from Social Security.
• Among elderly Social Security beneficiaries, 22% of married couples and about 47% of unmarried persons rely on Social Security for 90% or more of their income.

Estimates of the trends in pensions, employer retirement savings programs, and private retirement savings are often dated, differ sharply, and generally seem to be based on limited and uncertain sampling.

Many indicate, however, a major drop in pension coverage, rates of 401K and other employer matched retirement savings, and drops in private savings and assets over time and especially since the Great Recession.”

The cumulative pressure of an aging society that lives longer on both federal spending and the private sector can only be address by examining both the need for federal entitlement programs and the combined impact of employer programs and private savings.

Unless these issues are resolved, the pressure on defense and other discretionary spending – as well as the federal debt and deficit – will continue to grow in spite of the state of the economy. National security spending is also too small a share of the GDP and current federal spending to address these issues.

The Past and Future Cost Impact of the “Longest Wars” Is Uncertain and Does Remain an Issue (Pages 45-52)

The short-term direct costs of the Afghan and Iraqi Wars placed a surprisingly small burden on the US GDP and total federal spending.

• Defense spending in direct budget outlays did rise. Total defense spending peaked in FY2008 at $760.1 billion in constant FY2016 dollars at during the height of the Afghan-Iraq conflicts.
• This compared with peaks of $663.0 billion in Korea, $566.3 billion in Vietnam, and $615.9 billion during the Reagan build-up.
• However, the impact on the defense share of the GDP and Federal spending was very limited.

Much does depend, however, on how one estimates the total cost of the Afghan and Iraq conflicts.

• CBO and Congressional research Service estimates put the total cost of both wars from FY2001 to FY2015 at $1.609 to $1,649 trillion, and as peaking at around 1% of the GDP.
• These estimates are based on OCO spending. The Administration and the Congress have never reported any figures on the total costs of either war, or shown any indication of a concern over public accountability.
• It is clear that the OCO account has been used as a DoD slush fund for expenditures that have had nothing to do with either conflict.

Outside academic estimates put the total costs – including medical payments through the life of wounded veterans over the next 40 years – at $4 to $6 trillion.

Uncertain Trends in FY2016 Defense Budget Request: Too Much Strategic rhetoric and Too Little Strategic Substance. Everything is “Budget”, with no clear “Plan or “Program.” (Pages 53-61)

The President’s proposed FY2016 defense budget and FY2017-FY2020 program puts OCO spending at $57 billion in FY2016 versus a peak of $162 billion at the height of both wars. Total defense spending would range from $585 to $597 billion, and baseline (non OCO) spending would range from $534 to $570 billion.

The President’s FY2016 request is substantially higher that the level called for the Budget Control act during FY2016-FY2020, but is at the minimum level required to fund the forces needed in the Strategic Choices and Management review, and substantially lower than in the program the President proposed in FY2013 and FY2014.

• The budget justification documents indicate that the FY2016 request is “guided” by the 2014 QDR, but provides no useful details to show what this means beyond mentioning some procurement programs, and stating that the FY2016 force levels will be “sufficient to execute the strategy.”
• The baseline program is estimated to be the absolute minimum needed to fund the program called for in the Strategic Choices and Management Review, and seems to be substantially below the level needed for a real world funding of the force level called for in the 2014 QDR.
• The budget discussion of the FY2016-FY2020 program generally fails to describe specific goals for the period, to provide meaningful tangible examples, and to show how the program will address any major perceived threat or mission

Money is uncertain and funding levels and the Budget Control Act (BCA) remain a critical issue

As the DoD budget request notes, “The Department’s fiscal environment remains uncertain. Beginning in Fiscal Year (FY) 2013, the Department began a $487 billion, 10-year reduction in spending, compared to the projections in the FY 2012 budget, to adhere to spending limits established by the Budget Control Act (BCA) of 2011.

“The subsequent failure of the Joint committee on Deficit Reduction resulted in a sequestration mechanism that triggered annual reductions to the discretionary caps established in the BCA. In FY 2013, as a result of sequestration, the DoD base budget was reduced by $30 billion from the original base budget request. The Bipartisan Budget Act of 2013 amended the BCA to provide modest relief from sequestration in FY 2014 and 2015 but, unless Congress acts, annual sequestration cuts are set to begin once more in FY 2016.

To protect the nation’s security interests while maintaining the national security imperative of deficit reduction, the President’s Budget proposes a Defense budget approximately $36 billion above the sequestration level in FY 2016, and about $155 billion above estimated sequestration levels over a 5-year period, to provide a balanced and responsible path forward. The base budget request is approximately $38.2 billion above the Department’s FY 2015 enacted appropriations.”

But,

• There is no real OCO budget – only a $27 billion set of annual placeholders in FY2017-FY2020, and a $57 billion figure for FY2016 that is not justified in detail in the unclassified budget requests and seems to continue the use of the OCO account as a slush fund.
• The projected baseline-spending program for FY2016-FY2020 is far lower than the President requested in FY2013 and FY2014, and the gap between them on FY2020 is roughly twice the size of the projected impact of the BCA (Sequestration) cuts for that year.

No allowance is made for cost escalation, and CBO estimates indicate that the Department has systematically undercosted the real price of its proposed five year defense programs (FYDPs) at levels roughly equal to the full impact of sequestration.

• The Department of Defense does not address a key issue raised by the CBO. The Department has consistently underestimated it real spending needs in projecting its baseline budget. The CBO estimates that funding the program that the Department proposes would actually cost substantially more than the Department plans, and a failure to provide the added funds would have roughly the same impact on US forces as the estimate of the impact of the Budget Control act as shown in DoD projections.

FY2016 Baseline Trends: Programming and “Reform” Consist of Cutting the Existing Budget Without clear Strategic or Mission Priorities (Pages 62-69)

The adjustments made in FY2016 are the equivalent of telling a barber to “take a little off of the top.” They do not reflect clear strategic or mission priorities except to push the army and Marine Corps back towards prewar force levels. “Reform” consists largely of selected budget, force, and procurement cuts, not real improvements in overall efficiency,

The FY2016 request would continue to raise procurement spending in the coming five years, but leave other major categories of spending relatively level. This reverse the trend during FY2000-FY20014, when acquisition costs rose 2%%, but military personnel costs rose 46% and O&M rose 34%.

• Basic pay only rose 18%. Tricare and retirement costs rose 26%.
• 33% of the rise in O&M costs came from the Defense Health Program.

The Department warns that the request forces “difficult trade-offs” because of the limited funds, but does not specify them in detail.

It provides a list of “reforms” that seem to be largely budget cuts, and resubmits FY2015 proposals that are largely budget cuts or deferrals. These include a number of cuts in compensation.

Substantial modernization will still take place, along with investments in nuclear weapons. ICBM operations, and space capabilities.

Reference is made to, “Sustain the path to full spectrum readiness,” but it is far from clear what this means or when improvements will actually take place. Full flight readiness for the USAF seems to be deferred to FY2023.

FY2016 Impact on Each Service of Only Getting BCA (Sequestration) Funding: Mostly Dollar Data, Not Impact or Risk Assessments (Pages 70-82)

OSD never explains the overall impact of sequestration in terms of specific details and metrics. It does not provide any explanation of the steady cut in the project FYDP since the President’s FY2013 budget request, or the risk inherent in funding the absolute bottom of the projected cost of the FY2016-FY2020 FYDP estimated to meet the needs of the Strategic Choices and Management Review, much less whatever forces the 2014 QDR can actually be “guesstimated” to require.

There is no meaningful attempt to project out year trends and impacts beyond dollars, and sometimes total military personnel.

Each service focuses on showing the budget impact by service, but provides a different set of arguments against cutting spending to the Budget Control Act Level – often focusing more on the size of the projected budget cut than its impact.

• The Army notes that only 9 of 30 brigade combat teams would be ready for rapid deployment, and major further personnel cuts would be needed.
• The Navy emphasizes across-the-board budget cuts, and impacts on USN and USMC personnel strength.
• The Air Force emphasizes serious readiness issues, force cuts, modernization cuts and delays, and loss of global reach.

There is no indication as to whether the level funded in the President’s FY2016 request is adequate.

There is an urgent need to provide consistent formats and data, focus on the numbers, and look beyond the coming fiscal year and address impact on the program over time.

The Great Readiness Mystery: “Trust Me” (Pages 83-88)

A close look at the readiness data in the budget request shows that far too many statements are vague promises of future improvement with so little content that they add up to “trust me.”

The most flattering comment that can be made of the readiness data provided by OSD and the services is that they cumulative add up to an inchoate mess.

• There are no real trend data showing the decline caused by past cuts or the future trend. To the extent there is anything at all, it is almost always a FY2014-FY2016 snapshot.
• There is far too little effort to provide consistency. Mission related metrics, or an explanation in detail of the risks inherent in the President’s FY2016 FYDP request and how this compares with the impact of actually going down to the BCA level.
• Each service provides a different type of short-term snapshot of readiness provides and improvements with no consistency in format or effort to show all aspects of readiness in a total force context
• No mention made of the need to address the scale and nature of mass rises in cost, and in the share of defense spending identified in CBO studies.

The Department and Services fail to address the steady and massive rises in the cost of full spectrum readiness reflected in CBO trend analysis, or suggest changes and reforms that could control such costs.

Budget documents say the FY2016 request will “Sustain the path to full spectrum readiness,” but it is far from clear what this means or what improvements will actually take place and when.

• Full readiness is explicitly deferred to at least FY2023 in some cases.
• Rises in Tricare and retirement accounted for 26% of the total 2000-2014 cost rises in military personnel.
• Rises in Military Health and fuel costs accounted for 53% of the 2000-2014 rises in O&M costs.

There is a clear need to improve readiness reporting, standardize full reporting on full spectrum readiness over a longer period of time, and ensure that readiness reporting is not separated from maintaining actual force levels.

FY2016 Global Presence and OCO Trends: No clear Plan for Shaping the Force to Fit the Mission and needs of Combatant Commands (Pages 89-108)

DoD and the services provide a great deal of detail on total forces, deployments, and OCO spending, but no future plans, no links to a strategy, and goals for given combatant commands.

No effort is made to address specific goals for the “rebalancing to Asia,” creating a stable base of USCENTCOM forces, dealing new tensions with Russia.

Korea – a key contingency requirement is not addressed.

Some passing factoids:

• The budget projects $50.9 billion in spending with $3.8 billion to aid Afghan forces, $5.3 billion to fight ISIL, $2.1 billion for counterterrorism partnerships. The remaining $40 billion plus offers major slush fund opportunities.
• The US Army has seen OCO spending cut from $121billion in FY2008 to $21 billion in FY2016. It still sustains a substantial global presence, with 27,360 in Europe, 7,990 in Afghanistan, 1,700 in Iraq, 13,030 in the rest of the Middle East, 2,340 in Japan, and 19,480 in South Korea.
• Navy ship deployments will rise from 99 out of 279 ships today to 103 of 282 in FY2016. Navy Air strength will increase from 3,947 in FY2014 to 4,056 in FY2016.
• Fully funding the FY2016 request would avoid cuts in Marine Corp active strength from 182,000 to 175,000.
• The Air Force stations some 71,000 personnel overseas, and flew nearly 20,000 closer air support and 35,000 IS&R missions in 2015.

Wherever we are now is the right strategy, force strength, and basis for strategic partnerships? Really!

Soldier Benefits vs. Enough Soldiers: No Clear Approach is Shown for Setting Personnel Levels, Tailoring Them to a Strategy or Mission Priorities, or Dealing with Compensation (Pages 109-116)

The FY2016-FY2020 program seems to do little more than push the service share of military manpower back to prewar levels with no indication that strategy affects the service share of military personnel or spending, or any adjustments will take place in the role of active and reserve forces.

• Total active duty military end-strength will drop from 1,338,200 in FY2004 to 1,305,200 in FY2016, and 1,273,200 in FY2020.
• Total reserve military end-strength will drop from 824,400 in FY2004 to 811,000 in FY2016, and 798,0000 in FY2020

No clear plan emerges for adjusting the balance of active and reserve forces, and virtually all budget data focus on the active forces.

However, a variety of data and metrics warn that cost per solider may have risen beyond an affordable level, and savings are needed to maintain adequate from strength.

• A boom and bust cycle has developed in military pay increases.
• Operations costs per solider more than doubled in FY2015 dollars between 1980 and 2015.

Compensation reform seems to look very much like mixing cuts to personnel numbers with cuts in compensation other than pay in order to minimize its visibility to the solider.

The risks inherent in having too few military personnel relative to increased in compensation are never addressed.

Civilian “equivalents” continue to increase with no clear assessment or plan, and without any data on the growth of dependence on civilian contractors.

The end result continues to be rises in compensation and operating costs per solider that threaten the ability to fund a large enough, and ready enough, force to meet serious contingency needs. The US must have enough soldiers to field forces large enough to win and protect each other.

Defense Procurement Cost Trends Continue to Be a Critical Problem (Page 117-125)

The budget submission does not show the impact of force cuts and cuts in future procurement numbers on the overall force strength for either past or future trends.

• Only a few out of context examples tie procurement to strategy or mission needs.

GAO studies show the total cost of the DoD procurement portfolio has gone down, but because of cuts in procurement activity, not better management of programs and costs.

GAO and CBO studies indicate that the cumulative impact of cost-escalation in procurement in 2015-2030 will make new systems lead “force subtractions” in the total force in areas where cost-effective improvements in technology should produce “force multipliers

• Defense reform has not produced any consistent reduction in procurement cost escalation and it remains a critical problem.
• The 10 costliest programs drive procurement costs and are the main source of cost escalation.
• Shipbuilding, UAVs, rotary wing, and satellite systems are key sources of cost-escalation.

Singling Out the Cost of Military Health Care (Pages 126-140)

As shown earlier, medical costs have played a critical role in driving up personnel and O&M costs.

Charts for a 2014 CBO study show that,

• Military retiree and family health costs, not wounded warriors, dominate the massive past cost rise.
• Tricare families pay 18-21% of costs of comparable civilians.
• The CBO has examined options that could cut medical costs by over $100 billion in FY2015-FY2023.

The DoD budget submission provides a volume called Defense Health Program, along with exceptional detail on the cost and structure of the current health program. But, it but does not address longer-term cost trends or plans for reform.