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Recently the Senate Committee on the Budget voted to recommend zero real growth in defense budget authority for 1986 (that is, provide the same budget authority in 1986 as in 1985 plus an amount sufficient to offset the effects of inflation). This paper presents three examples of ways to achieve that level of budget authority for 1986. There are, of course, almost countless ways to achieve a real freeze in defense budget authority, and these examples are only illustrative. They were prepared in response to the request of Senator Lawton Chiles, the Ranking Minority Member of the Senate Committee on the Budget. In keeping with CBO's mandate to provide objective analysis, the paper contains no recommendations.

This paper complements an earlier CBO paper that illustrates alternative ways to reach a nominal freeze in defense budget authority (that is, the same budget authority in 1986 as in 1985). Copies of that paper are available from CBO.

This paper was prepared by John D. Mayer of CBO's National Security Division, under the general supervision of Robert F. Hale. Michael Miller, of CBO's Budget Analysis Division, and Bonita Dombey contributed to the analysis.
 

Rudolph G. Penner
Director
March 1985
 
 

At the request of Senator Lawton Chiles, Ranking Minority Member of the Senate Committee on the Budget, the Congressional Budget Office (CBO) has put together three examples of packages that would achieve zero real growth in defense budget authority (that is, the same budget authority in 1986 as in 1985 plus an increase to offset the effects of inflation). Using the economic and other assumptions in the Senate Budget Committee's most recent markup, this leads to a reduction in 1986 of $19.7 billion in budget authority below the Administration's proposal for the national defense function.¹ The packages vary in their emphasis on operating savings versus investment savings.

In order to provide concrete examples, CBO has identified changes in specific policies and systems proposed in the Administration's budget that, if enacted, would produce the desired savings. This paper does not constitute a recommendation that those policies or systems be altered. There are thousands of policies and systems within the Department of Defense and hence almost countless ways to combine them into examples. Those included in this paper are meant only as illustrations.²

All three examples achieve savings by altering policies and systems; none assume savings from financing reductions stemming from overestimates of past inflation, lower-than-expected contract prices, or similar factors. In past years, the Congress and the Administration have reduced the defense budget based on financing changes. But CBO has no firm evidence that further savings are possible and therefore has not included them. Moreover, the examples do not assume that further efficiencies will be achieved within the Department of Defense. If achieved, such efficiencies could offset the need for policy changes.

Conclusion

All the examples would lead to less growth in defense capability than would the Administration's proposal. The examples suggest, however, that zero real growth does not require deferral and termination of a large number of major weapons, though that could happen. Should budget authority for the operating accounts (Operation and Maintenance and Military Personnel) be allowed to grow at the rate requested by the Administration--except for a freeze on military and civilian pay at the current level--then the investment accounts, including investment in major systems, would be reduced significantly. Program delays, deferrals, and some cancellations of major systems would probably be necessary. On the other hand, should the operating accounts share in the reductions, then less of the burden would fall on major systems. Indeed, if the operating accounts grow only enough to accommodate increases in the forces, and supporting investment accounts like research and development also grow only modestly in real terms, then the examples suggest that deferrals and cancellations of major weapons could be avoided.

The choice of how to achieve a real freeze in 1986 might also depend on assumptions about what would happen to the defense budget beyond 1986. If the freeze were to be followed by a resumption of real growth, it might be more reasonable to accommodate the one-year freeze by larger cuts in operating costs that would preserve many ongoing investment programs. If, however, there were to be several years of no real growth, it might be more reasonable to make changes in the investment accounts to accommodate this long-term shift.

Cuts with Heavy Emphasis on Investment (Example 1)

One approach to achieving a real freeze in budget authority, while saving $5.2 billion in outlays in 1986 relative to the Administration's request, would heavily emphasize cuts in investment, including major procurement programs (see Tables 1 and 2 for a summary of Example 1; see the Appendix for details).³ Specifically, the operating accounts (Operation and Maintenance and Military Personnel) would be reduced by only $1.0 billion, the net savings associated with freezing military pay at its current level but not reducing civilian pay by the 5 percent requested by the Administration. The budget authority requested by the Administration to fund increases in the operating tempo of the current forces, and all proposed increases in the military and civilian personnel strengths, would be provided. The remaining $18.7 billion in savings necessary to achieve a real freeze would all come from investment (in this paper, investment refers to Procurement, Research and Development, and Military Construction).

This approach would presumably be consistent with the view that, in order to continue to improve the readiness of our forces and maintain the quality improvements achieved over the past several years, real increases in the operating accounts are necessary. This approach, however, results in major reductions in investment. Under the CBO illustrative example, total budget authority for investment would actually increase relative to the 1985 level by $0.7 billion, but this would not cover anticipated inflation and total investment would decrease by 4k percent in real terms (see Table 2). There are many ways to achieve this specific level of reduction. The CBO example assumes major reductions in military construction and supporting procurement. These are held at their 1985 level, with adjustments only for inflation. Ammunition and tactical missile accounts, however, are held at the 1985 level without adjustment for inflation. Research and development grows by 7 percent in real terms, primarily due to the large growth assumed in the Strategic Defense Initiative. The remaining reductions come in major procurement and would result in substantial reductions in buy rates, deferrals of new starts, and some program cancellations. The Appendix presents a list of possible actions. Together these actions would mean a major slowdown in the modernization of military forces relative to the Administration's proposal.

Even after these reductions, however, total budget authority for investment would be 85 percent higher in 1986 than it was in 1980, after adjustment for inflation; hence the United States would still have substantially increased its defense investment. Moreover, as the lengthy list in the Appendix suggests, the procurement reductions in this example need not involve large numbers of cancellations of ongoing weapon systems if the Congress and the Administration elect instead to reduce procurement rates, defer new starts, or cancel a few high-cost programs.

Cuts Emphasizing Investment but Minimizing Cancellation or Deferral of Major Systems (Example 2)

Another approach to achieving a real freeze in budget authority, while saving $7.2 billion in outlays in 1986, would make reductions with less emphasis on investment than in the previous example and with minimal deferrals of major procurement programs. Specifically, changes in the operating accounts would provide roughly half the real growth requested by the Administration. Even given increased force levels, this would allow increased operating tempos, albeit less than the Administration would like, and moderate increases in personnel strengths. The military pay raise would be deleted and the civilian pay raise set at zero. The remaining $16.0 billion in savings necessary to achieve a real freeze would come from all the investment acounts (see Table 1). This approach would be consistent with the view that readiness spending should continue to increase modestly with most reductions needed to achieve a real freeze coming from the investment accounts.

With these assumptions, total budget authority for investment would increase by $3.4 billion over the 1985 level but would still decrease by 2 percent in real terms. Again, there are many ways to achieve these reductions. The CBO illustrative example assumes that supporting procurement--items such as communication equipment and trucks--and military construction grow enough in nominal terms to offset the effects of inflation. Funds for ammunition and tactical missiles are held at the 1985 level in nominal terms. Research and development grows by 7 percent in real terms primarily due to the large growth assumed in the Strategic Defense Initiative. The remaining savings would come out of major procurement. To the extent that the remaining savings are obtained through program reductions and deferrals, as the example assumes, no major procurement programs would have to be cancelled. The illustrative example does, however, require deferral of some major systems that would otherwise have procurement beginning in 1985 (see Appendix for details).

Cuts With Less Emphasis on Investment that Avoid Program Deferrals or Cancellations (Example 3)

A third approach to achieving a real freeze in budget authority, while saving $8.9 billion in outlays in 1986, would make reductions with less emphasis on investment and without any program deferrals or cancellations. Specifically, the operating accounts would be reduced by $5.6 billion. This would leave enough operating funds so that, by CBO's estimates, forces in 1986 could be operated at roughly the same levels of operations spending per unit as in 1985, after adjustment for inflation.⁴ The military pay raise would be deleted and the civilian pay raise set at zero. These reductions would allow only modest increases in personnel strengths and benefits. (Alternatively, the Congress could preserve more growth in personnel and benefits if it enacted major reforms, such as revision of the military retirement system.) The remaining $R.l billion needed for a real freeze would come from all categories of investment (see Table 1). This approach would be consistent with the view that, given recent improvements in readiness and the seemingly low probability of a major conflict in the near term, one should accept some retrenchment in growth in the operating accounts to minimize adverse effects on long-term investment.

Under this approach, budget authority for investment would increase relative to the 1985 level by $5.3 billion but would still decrease by 1 percent in real terms (see Table 2). Under this CBO illustrative example, reductions in military construction and supporting procurement would be identical to those in the previous examples. Research and development, however, would be limited to only 4 percent real growth as opposed to the 7 percent in the other examples, based on assumed reductions in funding for the Strategic Defense Initiative. Ammunition and tactical missile accounts would be funded at the 1985 level plus an amount sufficient to offset the effects of inflation. Reductions in major procurement under this example would be the smallest of any of the three cases. Thus, although this example would still require a slow-down in the rate of procurement for a number of major programs, it would require no program deferrals or cancellations.⁵

These three examples do not, of course, exhaust all the possibilities. In order to protect more investment budget authority, the Congress could make even larger reductions in the operating accounts than those in the examples, though these reductions would have increasingly adverse effects on readiness. Also, to avoid cancellation of systems or large cuts in supporting investment, the Congress could elect to achieve needed reductions in major procurements by slowing procurement rates of more systems below the 1985 level. This approach, however, could decrease many procurement rates below the 1985 level and thus could increase unit costs of weapons above 1985 levels.

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1. Different assumptions would produce different savings. Using the assumptions of the Senate Budget Committee, the zero real growth level in budget authority for national defense is $302.5 billion. This is $19.7 billion below the level of budget authority requested by the Administration. Using CBO economic assumptions and freezing military and civilian pay at their current levels produces a zero real growthlevel of $303.7 billion or $18.5 billion below the Administration's request.

2. The recent CBO report, Reducing the Deficit: Spending and Revenue Options, discusses the pros and cons both for aggregate approaches to budget reduction in the defense area and for specific policies such as cancelling or reducing buys of major weapon systems. Here, no effort is made at repeating those discussions.

3. Outlays associated with zero real growth options including those in these examples or in other Congressional actions will vary depending on the assumed mix of fast-spending versus slow-spending accounts.

4. This "constant operations" estimate for the operating accounts is based on CBO's Defense Resources Model (DRM). The DRM bases its projection on the current and projected inventory of major items of equipment (ships, planes), force structure (Army divisions), and facilities (military bases). Inventories are adjusted to be consistent with levels proposed by the Defense Department, as amended by the Congress. Any item that remains in the inventory from the previous year receives the same operating dollars (for military personnel and operation and maintenance) as it received last year, adjusted only for inflation. Funding for new additions to the inventory is determined by CBO's best estimate of cost per unit (often derived with the help of the military services). Deletions from the inventory lead to elimination of associated funding. As much as possible, funding for support accounts (such as training and supply) is related to inventories of equipment and facilities.

5. Press reports have suggested that the Administration plans to delete funds for the AMRAAM missile ($0.5 billion) and the Air Force's Low Level Laser Guided Bomb ($0.1 billion). Should the Congress agree to cancel these programs, less savings would be required in other programs.