Long-Term Implications of the 2014 Future Years Defense Program

In most years, the Department of Defense (DoD) provides a five-year plan, called the Future Years Defense Program (FYDP), associated with the budget that it submits to the Congress. Because decisions made in the near term can have consequences for the defense budget well beyond that period, CBO regularly examines DoD’s FYDP and projects its budgetary impact roughly a decade beyond the period covered by the FYDP. For this analysis, CBO used the FYDP that was provided to the Congress in April 2013; that FYDP spans fiscal years 2014 to 2018, and CBO’s projections span the years 2014 to 2028.

For fiscal year 2014, DoD requested appropriations totaling $607 billion. Of that amount, $527 billion was to fund the “base” programs that constitute the department’s normal activities, such as the development and procurement of weapon systems and the day-to-day operations of the military and civilian workforce. The remaining $79 billion was requested to pay for what are termed overseas contingency operations (OCO)—the war in Afghanistan and other nonroutine military activities elsewhere. The FYDP describes DoD’s plans for its normal activities and therefore generally corresponds to the base budget. DoD’s 2014 plans are similar to its 2013 plans.

CBO produced two projections of the base-budget costs of DoD’s plans (expressed in terms of total obligational authority for each fiscal year) as reflected in the FYDP and other long-term planning documents released by DoD. The “CBO projection” uses CBO’s estimates of the costs of military activities and the extent to which those costs will change over time; those estimates reflect DoD’s experience in recent years. For comparison, the “extension of the FYDP” starts with DoD’s estimates of the costs of its plans through 2018 and extends them beyond 2018 using DoD’s estimates if available and CBO’s projections of price and compensation trends for the overall economy if DoD’s estimates are not available. Neither projection should be viewed as a prediction of future funding for DoD’s activities; rather, the projections are estimates of the costs of executing the department’s current plans without changes.

Under either projection, the costs of DoD’s plans would rise steadily over time. In addition, those costs would significantly exceed the limits on budget authority established by the automatic enforcement provisions of the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012—hereafter referred to collectively as the Budget Control Act (BCA)—for all remaining years subject to those limits (2014 through 2021). To close that gap, which CBO estimates will average between about $60 billion and about $90 billion per year, DoD would have to make sharp cuts to the size of its forces, the development and purchase of weapons, the extent of its operations and training, or some combination of the three.

The CBO Projection Shows That the Cost of DoD’s Plans Would Increase Over Time

The costs to implement DoD’s 2014 plans would increase over the next 15 years. Under the CBO projection, after adjusting for inflation, the annual cost of the plans would grow from $534 billion in 2014 to $559 billion in 2018 and $615 billion in 2028, for an average annual growth rate of 1.0 percent from 2014 to 2028 (see the figure below). The projected growth in the costs of DoD’s plans over the next fifteen years can be attributed to two main factors:

• The rising costs of operation and support (O&S), which accounts for 67 percent of the cost to implement DoD’s plans in 2014, resulting from significant increases in the costs of military health care, compensation of the department’s military and civilian employees, and various operation and maintenance activities. After adjusting for inflation, O&S costs would rise by 1.2 percent a year between 2014 and 2028, CBO projects.
• The rising costs of replacing and modernizing weapon systems, which accounts for 31 percent of the cost to implement DoD’s plans in 2014. CBO projects that, after adjusting for inflation, the costs of such activities would rise by 3.0 percent a year between 2014 and 2021, remain at about the 2021 level through 2025, and then decrease through 2028.

According to the CBO projection, the average costs of DoD’s base-budget plans from 2014 through 2018 would exceed average spending for DoD from 1980 to 2012 by about $90 billion a year after adjusting for inflation. Moreover, the average costs of DoD’s plans from 2014 through 2028 would exceed the 1980–2012 average by about $130 billion a year after adjusting for inflation.

The growth in DoD’s costs over time would be slower than CBO’s projection of the growth of the U.S. economy, so costs would decline as a share of gross domestic product (GDP). Spending for DoD’s base budget was 3.1 percent of GDP in 2012 and would decline to 2.7 percent of GDP in 2018 and to 2.5 percent in 2028, according to the CBO projection of the costs of DoD’s plans.

Costs Would Increase Less Under the Extension of the FYDP Than Under the CBO Projection

CBO compared its projection of the costs of DoD’s plans with a projection based on DoD’s estimate of the costs of its plans through 2018 and an extension of those estimates through 2028. That extension is based on DoD’s estimates of costs beyond 2018 if they are available (for instance, for some weapon systems) and on costs consistent with CBO’s projections of price and compensation trends for the overall economy if estimates by the department are not available (for instance, for health care costs and pay). For most categories of DoD’s budget, costs under the CBO projection are higher than the costs estimated by DoD in the FYDP and the extrapolated costs for the extension of the FYDP. In particular, DoD’s costs of providing health care and of developing and buying weapons, which CBO uses in constructing its projection of the costs of DoD’s plans, have historically been higher than the department’s planning estimates, which DoD incorporates in the FYDP and CBO extrapolates for the FYDP extension.

CBO’s analysis yields three conclusions:

• Using DoD’s estimates of costs and CBO’s extension of those estimates, the department would need $527 billion in 2014 to execute its base budget. Costs would then edge down, to $524 billion by 2018 after adjusting for inflation, before rising again, to $575 billion in 2028. Between 2014 and 2028, costs would grow at an average annual rate of 0.6 percent after adjusting for inflation.
• DoD’s estimate of the cumulative cost of its plans over the 2014–2018 period is 3.4 percent lower than the CBO projection, an average of $19 billion less per year after adjusting for inflation. The cumulative cost of DoD’s plans through 2028 (using DoD’s estimates and CBO’s extension of the FYDP) is 5.6 percent lower than the CBO projection, an average of $33 billion less per year.
• DoD’s estimate of the cost of its base budget in 2014 is $7 billion less than CBO’s estimate for two reasons. First, CBO includes the cost of all active-duty personnel, whereas DoD proposes to shift the cost of some of those personnel (including not only their pay but also some other costs to support those personnel) to the OCO budget. Second, CBO assumes that the Congress will continue its history of rejecting many of DoD’s proposals to shift some health care costs to the military beneficiaries receiving the care.

The Costs of DoD’s Plans Greatly Exceed the Limits Established by the Budget Control Act

CBO compared both projections of the costs of executing DoD’s plans with the funding that could be provided to the department under the BCA, which limits discretionary appropriations through 2021. If DoD continues to receive its historical share of the national defense budget, CBO’s analysis yields these four conclusions:

• Under the CBO projection, the cumulative cost of DoD’s base-budget plans for 2014 through 2021 would be $701 billion, or about $88 billion a year, higher (in nominal terms) than the funding that would be provided to DoD under the limits set by the BCA’s automatic enforcement procedures. (That gap would be $645 billion after adjusting for inflation.)
• If the automatic reductions were repealed and the original caps on funding established by the BCA were restored, the cumulative cost of DoD’s base-budget plans under the CBO projection for 2014 through 2021 would be $283 billion higher (in nominal terms) than the funding that would be provided to DoD. (That gap would be $256 billion after adjusting for inflation.)
• Under the FYDP and its extension, the cumulative cost (in nominal terms) of DoD’s plans for 2014 through 2021 would be $471 billion, or about $59 billion a year, higher than would be available under the BCA’s automatic enforcement procedures and $7 billion higher per year than would be available under the original caps.
• Even with the BCA’s automatic enforcement procedures in effect, DoD’s base budget in 2014 would be larger than it was in 2006 (in 2014 dollars) and larger than the average base budget during the 1980s, a decade that included a large military buildup. After 2014, the BCA will allow the base budget to grow very slowly in real terms through 2021.

How the automatic enforcement provisions of the BCA would affect DoD’s budget in 2014 depends on how much the Congress appropriates for the department. If the Congress appropriates no more for DoD’s base budget than the amount permitted under the BCA, there would be no sequestration (the cancellation of budgetary resources after they have been appropriated), and any funding provided for overseas contingency operations would not be affected. However, if the Congress appropriates more than the BCA allows, the difference between the appropriated amount and the BCA limit would be subject to sequestration, as it was in 2013; in that case, funding for overseas contingency operations could also be cut. Those same procedures would apply in subsequent years through 2021.