FPI Analysis: Obama’s FY2014 Defense Budget & the Sequestration Standoff

April 11, 2013

By: Robert Zarate, Policy Director

The Foreign Policy Initiative

Even though the United States is still a nation at war and facing latent yet growing threats around the globe, the military’s budget is being held hostage by the White House and Capitol Hill in a protracted standoff over taxes, government spending, and America’s fiscal future. What’s further worrisome is that President Obama’s budget proposal to fund the Pentagon and the wider federal budget in fiscal year (FY) 2014 does little to chart an end to the standoff—and even risks exacerbating it. As the Obama administration and Capitol Hill wrangle to responsibly replace sequestration’s automatic cuts and caps to the next decade’s worth of defense spending, some lawmakers and pundits are refusing to acknowledge the basic and demonstrable fact that the Pentagon’s budget not only has drastically declined in real dollars in recent years, but will fall to dramatic lows in the years to come. It will likely be impossible to have measured and informed deliberations about the future of defense spending unless and until all sides in the debate are willing to admit certain basic facts.

This FPI Bulletin shows how, even during a time of war, defense spending has suffered a magnitude of real-dollar cuts not seen since the 1950s, and faces further ill-conceived reductions that put at risk not only the military’s future readiness and capabilities, but also national security in an uncertain and dangerous world. Our analysis draws on the Pentagon comptroller’s historical budget data, coupled with the Center for Security and Budgetary Analysis (CSBA) estimates of sequestration’s fiscal effects.

(1) Defense spending has drastically declined in real dollars in recent years.
Obama’s defense budget ignores automatic spending caps in FY 2014 that are damaging to the military, yet remain the law of the land due to the failure of the President and Congress to enact major deficit reductions. In particular, it requests $526.6 billion in discretionary funding for the Defense Department’s core annual funding in fiscal year (FY) 2014—exceeding this year’s automatic spending caps by $52 billion. It also requests $88 billion in the military’s overseas contingency operations (OCO) funding for the war in Afghanistan. Moreover, it cuts $100 billion in non-inflation-adjusted dollars in the next ten years, even though sequestration and automatic spending caps demand $500 billion in devastating defense cuts over the same period. However, it remains unclear whether and how the President will work with lawmakers not only to fully fund this Pentagon budget proposal given the White House and Capitol Hill’s inability to reverse sequestration and automatic caps on defense spending, but—more immediately—to avoid sequestration’s roughly $43 billion in FY2013 cuts.

Accounting for sequestration’s automatic cuts, CSBA’s Todd Harrison calculates that total budgetary authority for the Pentagon, including war funding, will total $565.8 billion in FY 2013. If we compare that amount to what the military has annually spent in inflation-adjusted dollars during the post-World War II period, we find that the Pentagon’s FY 2013 budgetary authority has been exceeded in 12 individual fiscal years since 1948—namely, in FY 1952, from FY 1985 to FY 1986, and from FY 2004 to FY 2012. (See Figure 1.)

In other words, current defense spending was eclipsed during one year of the Korean War, two years of the Reagan peacetime military build-up, and most of Bush’s and Obama’s wartime presidencies.

(2) Rapidly declining defense spending is damaging military modernization and other investment accounts.
For more than a decade, the Pentagon has dedicated increasingly more of its budget in real dollars to its “operations and maintenance” account, which is used to train and ready troops, keep up equipment and facilities, and operate military forces, and to its “military personnel” account, which is used to provide salary and benefits to active-duty troops. (See Figure 2.) This resource shift is largely due to the fact that the United States has fought manpower-intensive land wars in Afghanistan and Iraq and conducted global operations to counter post-9/11 terrorist threats.

But the Defense Department, in turn, has dedicated fewer resources to its so-called investment accounts—in particular, to its procurement account, which it uses to modernize the military’s ships, planes, tanks, and other weapons platforms. If we account for sequestration cuts, the Pentagon’s budgetary authority for procurement in FY 2013 has been exceeded in 32 individual fiscal years since 1948—namely, from FY 1951 to FY 1953, in FY 1959, from FY 1962 to FY 1964, from FY 1966 to FY 1970, from FY 1981 to FY 1991, and from FY 2004 to FY 2012. (See Figure 3.)

In other words, current spending on defense procurement was exceeded during most of the Korean War, one year of the Eisenhower presidency, all of Kennedy’s military build-up, most of Johnson’s wartime presidency, almost all of the Reagan and Bush presidencies, and most of Bush’s and Obama’s wartime presidencies.

As defense procurement drops to near-historic lows under sequestration’s cuts and automatic spending caps in the coming decade, the consequences will fall on our nation’s warfighters, who will field older and less capable tools as they work to protect the United States and its allies.

(3) Sequestration and automatic spending caps will further diminish the Pentagon’s available resources in real dollars over the next decade.
To begin with, sequestration’s automatic cuts are indiscriminately slashing the entire account for “national defense spending”—roughly 96% percent of which is consumed by the Defense Department—in FY 2013. Moreover, sequestration will be imposing significantly lowered caps on national defense spending (relative to what the Obama administration had earlier projected would be spent over the long term) for nearly a decade.
That said, some lawmakers and pundits claim that—despite sequestration’s long-term spending caps, which limit budgetary authority for regular annual spending on national defense, but not for OCO war funding—spending will still continue to “grow.” For example, the Washington Examiner’s Byron York writes “defense spending will increase in every year, even with sequestration cuts.” And Veronique de Rugy, an economist at George Mason University’s Mercatus Center, argues that defense spending “will continue to grow in spite of automatic cuts.”
However, such arguments are incorrect, stemming from the tendency of some Pentagon watchers to depict projections of future national defense spending solely in non-inflation-adjusted dollars. Indeed, as Figure 4 shows, when you look at sequestration’s spending caps on national defense spending in nominal dollars, it appears to “grow” over the next decade. But as figure 4 also shows, if you adjust for inflation, budgetary authority for national defense, in fact, does not grow in terms of real dollars under sequestration’s spending caps, but rather remains basically flat. Lastly, figure 4 demonstrates the yawning trillion dollar gap between the higher real-dollar level of national defense spending in FY2012 versus the dramatically lower levels over the next decade.

(4) The military’s diminished resources over the next decade come into sharper focus if we put sequestration’s spending caps over the next decade in historical context.

Sequestration’s caps on budgetary authority for the Defense Department—which, again, constrains regular annual spending and not war funding—limit Pentagon spending to roughly $472-to-$475 billion in FY 2014. As Figure 5 illustrates, that amount has been exceeded in 27 individual fiscal years since 1948—namely, from FY1951 to FY1953, from FY1966 to FY1970, from FY1982 to FY1990, and from FY2003 to FY2012.

In other words, the cap for the FY 2014 defense spending was exceeded during most of the Korean War, most of Johnson’s wartime presidency, almost all of the Reagan’s peacetime military buildup, part of the first Bush’s presidency, and most of Bush’s and Obama’s wartime presidencies.
In sum, the record shows that defense spending since FY 2010 has taken a real-dollar nosedive, the likes of which hasn’t been seen since the 1950s, and is going to be further exacerbated by sequestration. Consequently, as America’s defense institutions prepare to deal with the threats of ongoing international terrorism, nuclear proliferators like Iran and North Korea, China’s military rise, and other security challenges in the 21st century, they will have fewer resources than they had during many intervals of the last seven decades.
In closing, it’s critical to observe that, contrary to the prevailing stereotype, defense spending in real dollars has not spiraled in growth during the post-World War II era. Rather, as Figure 6 vividly shows, defense spending has remained comparatively flat when contrasted with total domestic spending, which, even in inflation-adjusted terms, has grown nearly exponentially.

No doubt, it is imperative that the Executive Branch and Congress work together to reform the Pentagon’s acquisition costs and efficacy, curb the rising costs for military personnel and benefits, and find more efficiencies in the Defense Department’s command and support structures. Yet so long as the prevailing stereotype about the spiraling and inexorable growth of military spending remains unchallenged, policymakers, lawmakers, and the general public are likely to keep looking to defense cuts to avoid the hard choices required to genuinely constrain the major drivers of America’s deficit and debt.