Long-Term Implications of the 2016 Future Years Defense Program

In most years, the Department of Defense (DoD) produces a five-year plan, called the Future Years Defense Program (FYDP), associated with the budget that it submits to the Congress. The FYDP describes DoD’s plan for its normal, peacetime activities (corresponding to what is often labeled its base budget). DoD’s current plans are described in its 2016 FYDP, which covers fiscal years 2016 through 2020.

Those plans call for relatively flat budgets that average $534 billion for 2016 through 2020. (Unless otherwise noted, all costs in this report are expressed in 2016 dollars to remove the effects of inflation.) If DoD’s plans are projected for an additional 10 years, CBO’s analysis indicates that defense budgets would be larger, averaging $565 billion per year from 2021 through 2030 under DoD’s cost assumptions. Moreover, CBO estimates that the cost of DoD’s plans would be 4 percent higher over the next 15 years under a set of policies and prices that more closely matched recent experience.

DoD’s Plans Call for No Real Growth in Budgets Through 2020

For fiscal year 2016, DoD requested appropriations totaling $585 billion. Of that amount, $534 billion was to fund the department’s base budget, which encompasses activities such as the development and procurement of weapon systems and the day-to-day operations of the military and civilian workforce. The remaining $51 billion of DoD’s request was to pay for the costs of overseas contingency operations (OCO), mostly Operation Freedom’s Sentinel in Afghanistan and Operation Inherent Resolve in Iraq and Syria.

For that year, the Consolidated Appropriations Act, 2016, provided $580 billion in funding for DoD’s base budget and OCO budget combined—slightly less than the sum DoD requested. Compared with the department’s request, there were modest reductions in funding for day-to-day operations and modest increases in procurement. Those changes were small and will probably have little effect on DoD’s plans through the FYDP period. Therefore, this report, which was largely prepared before the appropriations were enacted, focuses on DoD’s plans and not the actual 2016 appropriations.

Under those plans, real (inflation-adjusted) costs for the base budget would increase to $538 billion in 2017, DoD estimates, and decline slowly to $527 billion in 2020 (see figure below). That decline, coupled with CBO’s projections for continued economic growth, would see DoD’s costs as a percentage of gross domestic product (GDP) decrease from 2.8 percent in 2016 to 2.5 percent in 2020. Nevertheless, the average costs of the plan, $534 billion per year for 2016 through 2020, would be greater than the funding DoD received in all but six years (1985, and 2008 through 2012) since 1980, after adjusting for inflation.

Contributing to DoD’s projection of nearly flat budgets over the next five years are continued reductions in the number of active duty military personnel—from 1.31 million in 2016 to 1.27 million in 2020—as well as anticipated savings from a variety of other initiatives, including reforms to military compensation, a new round of base realignments and closures, and a restructuring of some elements of the force. Despite those changes, the shares of DoD’s budget allocated to costs for operation and support (O&S) and acquisition would remain nearly unchanged from 2016 to 2020. (O&S includes compensation for the department’s military and civilian employees, military health care, and the department’s other operation and maintenance activities; acquisition includes research, development, test, and evaluation as well as procurement of weapon systems and other major equipment.)

The Bipartisan Budget Act of 2015, which amended discretionary funding limits established under the Budget Control Act of 2011 (BCA), set new, higher limits for 2016 and 2017. Those limits apply to total funding (excluding OCO) for DoD, the nuclear weapons activities of the Department of Energy, and security activities in several other agencies that collectively are subject to the BCA’s caps on national defense funding. The higher limits, combined with appropriations for OCO that include funding for some base-budget activities, very nearly accommodated the Administration’s total request for national defense in 2016. (The appropriations for DoD in 2016 are about $5 billion, or 1 percent, less than the department requested.) The higher limit in 2017 falls short of the Administration’s current base-budget plans for that year. Over the final four years of the FYDP, 2017 through 2020, the Administration’s planned budgets for DoD and other national defense activities exceed the BCA’s limits by a total of $107 billion (in 2016 dollars).

DoD’s Plans Would Require Larger Budgets After 2020

Because decisions made in the near term can have consequences for the defense budget well after the five years described in the FYDP, CBO annually projects the budgetary impact of DoD’s plans a decade or more beyond that period. For this analysis, CBO’s projection spans the years 2021 to 2030. The projection is based on DoD’s cost estimates in the 2016 FYDP as well as DoD’s longer-term estimates, if available. (For example, DoD provides annual cost estimates for major weapon acquisitions that often extend many years beyond the FYDP period.) Where estimates from DoD were not available (for example, estimates of the rise in labor costs), CBO used its projections of prices and compensation trends for the overall economy as the basis of its estimates of DoD’s costs. The projection is not a prediction of future DoD budgets; it is an extrapolation of DoD’s cost estimates under the assumption that the primary aspects of the current defense plan remain unchanged.

After staying fairly constant over the FYDP period, the cost of implementing DoD’s plans would rise by 4 percent in 2021, CBO estimates. Costs would climb more slowly in most of the years thereafter, reaching $577 billion in 2030—an average increase of 0.5 percent per year. That total is 2.2 percent of CBO’s projection of GDP for that year.

The steeper increase projected for the years immediately following the FYDP period is attributable primarily to DoD’s plans to develop and purchase new weapons (activities categorized as acquisition), the costs for which are estimated to increase by a total of 10 percent the first three years beyond the FYDP period before declining slowly through 2030. That “bow wave” in acquisition funding suggests that weapons development and procurement is currently being deferred to keep budgets constrained through the end of the FYDP period. In contrast to the sharp increase in acquisition costs, CBO projects that the costs for O&S would grow steadily at an average annual rate of 1.3 percent from 2020 through 2030. By that year, the costs for O&S would reach $396 billion, an increase of 14 percent over the Administration’s request for 2016.

Historical Experience Indicates That the Costs of Current Plans Will Probably Be Higher Than DoD Anticipates

The FYDP and CBO’s extension of DoD’s costs through 2030 are estimates of long-term costs if current plans do not change. Of course, international events, decisions made by the Congress, and other factors could result in substantial departures from those plans. Nevertheless, even if current plans remain generally unchanged, many program-level policies that underlie DoD’s cost projections may not come to pass, and some of DoD’s cost estimates may prove to be optimistic. For example, DoD’s 2015 FYDP incorporated the assumption that the Air Force would begin to retire its fleet of A-10 attack aircraft and that DoD would implement certain changes to the military health care system—policies that were both blocked in the Congress. Furthermore, historical experience indicates that the FYDPs prepared by DoD often incorporate estimates that understate costs. If the Congress blocks similar policy proposals put forth in the 2016 FYDP or if costs in other areas grow as they have historically, DoD would need larger budgets to implement its plans.

Several areas of DoD’s budget have frequently turned out to cost more than originally planned or to increase more rapidly than expected from an extrapolation of recent trends. Those areas include the following:

• Costs to develop and purchase weapon systems,
• Compensation costs for military and civilian personnel (including military health care), and
• Operation and maintenance costs.

How much the costs of specific programs in each of those areas might differ from DoD’s current estimates is not certain. Changes could result from some combination of Congressional action, DoD’s difficulty in controlling costs, or growth in costs in the economy as a whole. However, CBO projects that, if the costs in several broad areas of DoD’s budget were to experience growth similar to that observed in its budgets in the recent past (CBO’s historical-cost scenario), total costs for DoD from 2016 to 2020 would be about $57 billion (or 2 percent) higher than indicated in the FYDP, and total costs from 2016 through 2030 would be $318 billion (or 4 percent) higher than under current cost estimates. About 40 percent of those higher costs through 2030 would result directly from the adoption of different policies than DoD has requested, most of which ($118 billion) would require Congressional approval. The remaining higher costs would come from other factors that are harder to control.