Defense Budget: Long-Term Challenges for FY2006 and Beyond

CRS Report for Congress
Defense Budget:
Long-Term Challenges for
FY2006 and Beyond
April 20, 2005
Stephen Daggett
Specialist in National Defense
Foreign Affairs, Defense, and Trade Division

Congressional Research Service ˜ The Library of Congress

Defense Budget: Long-Term Challenges for
FY2006 and Beyond
Over the next few months, Congress will be considering Administration
requests for more than half a trillion dollars for national defense, including money
in the regular defense budget for Fiscal Year 2006 (FY2006), supplemental
appropriations for costs of ongoing military operations in FY2005, and, possibly,
additional funds in FY2006 to provide a “bridge” until future supplemental
appropriations for operations in Iraq and Afghanistan are available.
The Administration’s defense budget plans face some potentially daunting,
though by no means unprecedented, long-term challenges, including:
!Will projected budget deficits constrain the Administration’s long-
term defense budget plans?
!Should Congress try to restrain further increases in military
personnel pay and benefits, as some Administration officials have
argued, in view of dramatic increases in personnel costs in recent
!What are the implications of continuing, perennial increases in
defense operation and maintenance costs for the affordability of the
Administration’s plan?
!How affordable is the Administration’s long-term plan for
modernizing military forces in light of substantial and continuing
cost growth in many systems?
!How might recent widely discussed changes in defense strategy
affect priorities within the defense budget?
This report reviews long-term trends in the defense budget and discusses the
challenges Congress and the Defense Department may face in trying to adjust plans
in the face of fiscal constraints. It will be updated periodically to reflect
congressional action and new information.

Will Budget Deficits Constrain Long-TermDefense Budget Plans?...........2
Should Further Increases in Military Pay and Benefits be Restrained?.........6
Will Increasing Operation and Maintenance Costs Compete with
Weapons Modernization?.......................................9
Bow Waves, Train Wrecks, and Ship Wrecks:Are Long-Term Weapons
Plans Affordable?.............................................11
What Are the Implications of Changes in Military Strategy for
Budget Priorities?.............................................15
List of Figures
Figure 1. National Defense Budget Authority and Outlays, FY1950-FY2010
Figure 2. National Defense Outlays Percentage of GDP, FY1950-FY2010.....3
Figure 3. Federal Outlays by Major Category, Percentage of GDP,
FY1962-FY2010 ..............................................4
Figure 4. DOD Budget Authority by Title, FY1976-FY2006................6
Figure 5. Military Personnel Budget Authority per Active Duty Troop
Indexed to FY1972.............................................7
Figure 6. Operation and Maintenance Budget Authority per
Active Duty TroopFY1955-FY2010...............................9
List of Tables
Table 1. Real Growth/Decline in National Defense Budget Authority and
Outlays, FY2004-FY2010*......................................2
Table 2. Alternative Federal Deficit Projections, FY2005-FY2015...........6
Table 3. Changes in Defense Funding by Title, FY2000-FY2006...........10
Table 4. Allocation of Changes in Defense Funding by Title, FY2000-FY2006

Defense Budget: Long-Term Challenges for
FY2006 and Beyond
Over the next few months, Congress will be considering Administration
requests for more than half a trillion dollars for national defense, including money
in the regular defense budget for Fiscal Year 2006 (FY2006), supplemental
appropriations for costs of ongoing military operations in FY2005, and, possibly,
additional funds in FY2006 to provide a “bridge” until future supplemental
appropriations for operations in Iraq and Afghanistan are available. These are the
!On February 7, the Administration formally released its budget
request for FY2006, the fiscal year that runs from October 1, 2005,
to September 30, 2006. The request includes $442 billion for
national defense, of which $421 billion is for the Department of
Defense, $17 billion for Department of Energy nuclear weapons
programs, and $3 billion for defense-related programs of other
agencies. This does not include any projected funding for operations
in Iraq, Afghanistan, or elsewhere in FY2006 or beyond.1
!Subsequently, on February 14, the Administration submitted a
request for supplemental appropriations of $82 billion for FY2005,
of which $75 billion is to cover costs of military operations through
the remainder of the fiscal year, which ends on September 30, 2005.
The other $7 billion is for non-defense programs, mostly
reconstruction assistance to Iraq and Afghanistan run by the State
Department, plus about $1 billion for Tsunami relief activities.2
!It is also possible that Congress will provide additional money to
cover costs of operations in Iraq and Afghanistan in the first few
months of FY2006. Last summer, Congress provided a down
payment of $25 billion for military operations in FY2005 as a bridge
between the start of the fiscal year and the time it would take to
provide supplemental funding.

1 Details of the Administration request are available from the Department of Defense at
[ ].
2 The overall Administration request is available from the Office of Management and Budget
at [].
Additional information on the Department of Defense portion of the request is available at
[]. For a review of
congressional action, see CRS Report RL32783, FY2005 Supplemental Appropriations for
Iraq and Afghanistan, Tsunami Relief, and Other Activities, by Amy Belasco and Larry
Nowels, at [].

The Administration’s defense budget plans face some potentially daunting,
though not unprecedented, long-term policy challenges, including:
!Will projected budget deficits constrain the Administration’s long-
term defense budget plans?
!Should Congress try to restrain further increases in military
personnel pay and benefits, as some Administration officials have
argued, in view of dramatic increases in personnel costs in recent
!What are the implications of continuing, perennial increases in
defense operation and maintenance costs for the affordability of the
Administration’s plan?
!How affordable is the Administration’s long-term plan for
modernizing military forces, particularly in view of recent decisions
to slow or terminate some major weapons programs and in light of
continuing cost growth in many systems?
!How might recent widely discussed changes in defense strategy
affect priorities within the defense budget?
Will Budget Deficits Constrain Long-Term
Defense Budget Plans?
Leaving aside supplemental appropriations to cover war costs, the FY2006
Department of Defense budget is about 4.5% above the regular, FY2005 non-war
budget, or about 2% higher after adjusting for inflation. Projections show a similar,
modest rate of growth over the next five years (see Table 1).
Table 1. Real Growth/Decline in National Defense Budget
Authority and Outlays, FY2004-FY2010*
(current and constant FY2006 dollars in billions)
Actua l Est . Proj. Proj. Proj. Proj. Proj.
FY04 FY05 FY06 FY07 FY08 FY09 FY010
National Defense Budget Function
Budget Authority
Current year dollars490.6423.6441.8465.4483.9503.8513.9
Constant FY2006 dollars516.8433.5441.8454.3461.0468.1465.4
Real growth/decline4.6%-16.1%1.9%2.8%1.5%1.5%-0.6%
Current year dollars455.9465.9447.4448.9466.1487.7504.8
Constant FY2006 dollars480.1476.5447.4438.1443.9453.0457.2
Real growth/decline9.4%-0.7%-6.1%-2.1%1.3%2.1%0.9%
Source: Congressional Research Service from Office of Management and Budget data.
* Administration projections. Figures for FY2005 and beyond do not include additional supplemental
appropriations for Iraq and Afghanistan, while the FY2004 figures includes such funds.

Figure 1. National Defense Budget AuthorityThis relatively
and Outlays, FY1950-FY2010modest pace comes after
several years of
substantially higher
growth. Between
FY2000, the last budget
controlled wholly by the
Clinton Administration,
and FY2006, the regular,
“non-war” DOD budget
has grown by about 45%
in nominal terms or about
22% after inflation. The
increases of the last few
years have boosted
defense spending,
excluding funding for
Iraq and Afghanistan, to a level above the peacetime average during the Cold War
and about equal to the peaks of the Vietnam War and the buildup of the 1980s.
Figure 1 shows the trend in national defense funding, adjusted for inflation, since
Figure 2. National Defense Outlays PercentageEven with the
of GDP, FY1950-FY2010recent increases,
however, defense
spending as a share of
the economy has
continued to decline
over time. Figure 2
shows national defense
outlays as a share of
GDP since FY1950. In
more recent years, the
decline reflects, in part,
real reductions in the
defense budget between
FY1986 and FY1998.
For the most part,
however, the trend is
due simply to
continuing growth in the U.S. economy that progressively reduced the economic
burden of maintaining the Cold War and post-Cold War military establishment.
Some defense advocates argue that the nation can easily afford substantially
greater defense spending, since it sustained a measurably larger burden in the past.
The issue is not only a matter of economics, however, but also of evolving Federal
budget pressures and priorities. As Figure 3 shows, overall Federal spending has
remained fairly steady at about 20% of GDP for the past 40 years. Within the budget,
mandatory programs, mainly entitlement programs like Social Security, Medicare,
and Medicaid, plus interest on the debt have grown substantially, both as a share of

Figure 3. Federal Outlays by Major Category,the budget and as a share
Percentage of GDP, FY1962-FY2010of the economy.
Meanwhile, non-defense
discretionary spending has
remained quite stable as a
share of GDP, while the
decline in the defense share
of the budget has offset the
increase in mandatory
spending. To increase
defense spending
substantially as a share of
GDP, therefore, would
require either increasing
total Federal spending
above historical norms or
imposing offsetting cuts in
other parts of the budget.
Increased spending would require either higher taxes or greater borrowing. Growth
in mandatory budget accounts may put even more pressure on other parts of the
budget — including defense — after 2010, as members of the “baby boom”
generation reach retirement age.
Moreover, defense spending may be constrained, for the foreseeable future as
it has been in the past, by pressures to reduce the Federal budget deficit. For most
of the past 25 years, congressional debate about both defense and non-defense
Federal spending has been dominated by apparently intractable budget deficits. In
November 1985, in an effort to cope with budget deficits that reached a peak of 6%
of GDP in FY1983, Congress passed the Gramm-Rudman-Hollings deficit control
act, P.L. 99-177. The Gramm-Rudman-Hollings law set annual targets for reducing
the deficit to zero in five years and imposed automatic cuts in spending if
congressional action fell short, with 50% of the cuts in defense and 50% in non-
defense expenditures. Congress amended the law in 1987, 1990, 1993, and 1997,
each time pushing out the date for balancing the budget.3
In each of the 13 years from FY1986 through FY1998, defense spending
declined in inflation-adjusted dollars. Initially driven by deficit concerns, the decline
in defense spending continued with the end of the Cold War and the subsequent
reduction of almost one-third in the size of the force. Throughout the period,
pressures to reduce the deficit remained a major factor shaping the debate over
defense spending. The defense budget began to turn up again in FY1999, once the
budget situation began to ease, and increases accelerated during the first four years
of the Bush Administration.

3 The 1997 deficit control measures expired after FY2002. In 2002, Congress did not extend
automatic deficit reduction measures, and limits on spending are now established only in
annual congressional budget resolutions.

For a few years, projected budget surpluses fostered an atmosphere of budgetary
abundance that propelled tax cuts, increased spending on defense, and more money
for domestic priorities like transportation and, even after surpluses had disappeared,
Medicare prescription drug coverage. That interlude was very brief, however. Now
the Bush Administration has announced its intention to reduce the budget deficit by
one-half between FY2004 and FY2009. And in Congress, a sober, late-1980s-style
tone of fiscal abstinence has returned. Last year, proposals to reduce defense
spending were, for the first time in many years, on the congressional agenda. Though
the Senate rejected a Budget Committee recommendation to pare $7 billion from the
Administration’s defense plan, the final, regular FY2005 defense appropriations bills
were about $2 billion below the request. More recently, in December 2004, in the
final stages of preparing the FY2006 budget request, the White House Office of
Management and Budget directed the Defense Department to trim $30 billion from
the six-year FY2006-FY2011 program.
If the past is a guide, current plans to reduce budget deficits may prove more
difficult to implement than official projections anticipate. As the Congressional
Budget Office and others have pointed out, Administration estimates do not take into
account additional war costs, the effects of extending tax cuts after FY2009, or the
costs of indexing or repealing the Alternative Minimum Tax. The Administration
plan also assumes cuts in spending that have not yet been identified or enacted, and
it includes no contingency for potential costs of changes in Social Security. Table 2,
based on CBO projections, shows alternative baseline deficit trends under various
assumptions.4 If deficits remain stubbornly difficult to control, as they have proven
to be in the past, then it may be too optimistic to expect defense budgets to grow at
even the moderate pace the Administration is now projecting.

4 For a similar analysis and a discussion see CRS Report RS22045, Baseline Budget
Projections Under Alternative Assumptions, by Gregg Esenwein and Marc Labonte.

Table 2. Alternative Federal Deficit Projections, FY2005-FY2015
(outlays in billions of current year dollars)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
CBO baseline deficit, March 2005-365-298-268-246-219-201-95576999122
Include war costs after FY2004*-30-73-82-76-59-47-44-48-51-54-57
Extend tax cuts*0-5-17-32-49-53-207-324-355-388-424
Index AMT to inflation*0-12-35-4-56-69-62-42-50-60-70
AMT/tax extension interaction**0-1-2-5-7-8-30-47-52-57-62
Adjusted baseline-395-389-404-403-390-378-438-404-439-460-491
Increase discretionary with GDP*0-15-41-71-103-135-168-201-234-269-306
Baseline with discretionary growth-395-404-445-474-493-513-606-605-673-729-797
Source: Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 2006 to
2015, January 2005, Table 1-3, with revised March 2005 baseline from Congressional Budget Office,
CBOs Current Budget Projections, March 2005, online at
[ h t t p : / / www. c b o . g o v / s h o wd o c . c f m ? i n d e x = 1944&sequence=0].
* All figures include interest costs resulting from increased borrowing. Additional war cost outlays
in FY2005 are amounts resulting if the pending FY2005 $76 billion supplemental appropriations
request is enacted.
** AMT/tax extension interaction estimated by CRS as a proportion of the cost of tax extensions.
Should Further Increases in Military Pay and
Benefits be Restrained?
Within the defense
Figure 4. DOD Budget Authority by Title,budget, when budgets are
FY1976-FY2006declining or growing only
slowly, there are necessary
trade-offs between, on the
one hand, costs of paying
personnel and operating the
force and, on the other
hand, investments in
modernizing the force by
developing and procuring
new weapons. As a rule,
the most variable part of
the budget has been the
amount spent to procure
new weapons. Figure 4
illustrates the point.
Funding for weapons
procurement has varied dramatically, climbing rapidly when overall budgets were
growing but also plunging disproportionately when budgets declined.
In contrast, Military Personnel and Operation and Maintenance costs have been
considerably more stable, though there are some noteworthy trends. Military

Personnel funding fell in the 1990s, as the size of the force declined following the
end of the Cold War, but then began to climb. Operation and Maintenance costs
leveled off for several years after the mid-1980s, again as the size of the force
declined, but then also began to climb.
The leap in military personnel costs between FY2000 and FY2005 is
particularly dramatic. Beginning with the FY2000 defense authorization bill,
Congress approved substantial pay and benefits increases, partly with Administration
concurrence and partly over its objections. The increases include
!six years of pay raises of ½ percent above the “Employment Cost
Index,” an economy-wide measure of wage costs,
!three rounds of “pay table reform” that gave much larger pay raises
in middle grades to improve retention of skilled personnel,
!a multi-year plan to eliminate differences in on-base and off-base
housing costs,
!approval of a phased-in plan to allow military retirees with a
veteran’s disability rating of 50% or greater to receive both retired
pay and veteran’s administration disability benefits,
!a program known as “TRICARE for Life” under which 65 and older
military retirees will have access to DOD provided health care in
addition to Medicare,
!repeal of the 1986 “Redux” retirement program which gave lower
pensions to those recruited after that time, and
!repeal of a measure that lowered benefits to survivors of military
retirees once they qualified for Social Security benefits at age 62.
Taken together, asFigure 5. Military Personnel Budget Authority
Figure 5 illustrates, theseper Active Duty Troop Indexed to FY1972

changes have driven up
active duty personnel
costs by more than 30%,
after adjusting for
inflation, since 1999. The
rate of increase in
personnel costs may slow
over the next few years,
though starting from a
higher base than just a
few years ago, provided
Congress does not
authorize additional
major increases in
personnel benefits. But
that proviso has become a
matter of some
controversy. In January, David Chu, the Under Secretary of Defense for Personnel
and Readiness, argued against further boosts in benefits for military retirees, saying
“The amounts have gotten to the point where they are hurtful. They are taking away

from the nation’s ability to defend itself.”5 That judgment provoked some harsh
recriminations from veterans organizations and some Members of Congress.6
The problem for defense planners is that many of the recent, large benefit
increases, such as TRICARE for Life, concurrent receipt of VA disability benefits
and retired pay, Redux repeal, and increased survivor benefits, do not necessarily
promote recruitment and retention of high quality military personnel. They are,
however, costly for the Defense Department, which is required to contribute the
actuarially determined cost of future benefits for current personnel into the military
retirement fund in order to capture the full costs of personnel.7 From the Pentagon’s
point of view, if recruitment and retention falter, it would be much cheaper to expand
enlistment and reenlistment bonuses. As Under Secretary Chu commented, “I’d like
to believe 19-year-olds paid attention to their annuity package, [but] ....
[n]ineteen-year-olds want cash to buy a pickup truck.”8 For veterans groups and for
many legislators, however, the question has been whether military retirees and their
survivors are being treated equitably in view of their contributions to the nation, and
Congress has approved benefit increases for reasons quite apart from their effects on
recruitment and retention.

5 Gregg Jaffe, “As Benefits For Veterans Climb, Military Spending Feels Squeeze,” Wall
Street Journal, January 25, 2005, p. 1, quoting Undersecretary of Defense David Chu.
6 See, for example, Rick Maze, “Hurtful Benefits Comment Draws Wrath from Hill,” Army
Times, January 26, 2005 and Joseph L. Galloway, “U.S. Must Keep Promises to Veterans,”
Miami Herald, February 13, 2005.
7 The principle is known as “accrual accounting,” which holds that agencies should pay the
total costs of hiring personnel, including the costs of future retirement benefits, out of
current budgets. Benefits to retirees are then paid from the retirement fund rather than by
the agency. Accrual accounting was first applied to uniformed military personnel in 1985.
8 Gregg Jaffe, “As Benefits For Veterans Climb, Military Spending Feels Squeeze,” Wall
Street Journal, January 25, 2005.

Will Increasing Operation and Maintenance Costs
Compete with Weapons Modernization?
The growth ofFigure 6. Operation and Maintenance Budget
Operation andAuthority per Active Duty Troop
Maintenance spending isFY1955-FY2010

a longstanding
phenomenon. As
Figure 6 illustrates,
O&M funding per troop
has increased at an
average annual rate of
2.6% above inflation ever
since the end of the
Korean War. Many things
explain the trend: (1) the
steadily growing cost of
operating and
maintaining new
generations of more
capable and sophisticated
weapons; (2) efforts to
improve the extent and
quality of military training; (3) efforts to ensure that the quality of life in the military
keeps up with the quality of life in the civilian sector as the military has shifted to an
all volunteer, older, more commonly married, and more skilled force; (4) the growth
in health care costs for military personnel and their dependents; (5) requirements that
the Defense Department, like other Federal agencies and private organizations,
reduce pollution and clean up earlier contamination; and (6) modest but steady real
growth in the compensation of DOD civilian personnel, most of whom are paid with
O&M funds. The cost of maintaining aging equipment in recent years does not
appear to be a major factor.9
The growth in Military Personnel costs after 1999, together with ongoing
increases in Operation and Maintenance costs, account for the largest share of the
fairly substantial increases in military spending in the first years of the Bush
Administration. As Table 3 shows, under the Administration plan, the overall
Department of Defense for FY2006, not including war costs, is about 45% greater
than the FY2000 budget. It is about 22% higher after adjusting for inflation. Much
of the increase, however, has gone, not to buy or develop new weapons, but simply
to pay the cost of paying the troops and operating the force.
9 Congressional Budget Office, The Effects of Aging on the Costs of Operating and
Maintaining Military Equipment, August 2001.

Table 3. Changes in Defense Funding by Title, FY2000-FY2006
(current year dollars in billions)
Actua l Request Percent
FY2000 FY2006 Change change
Military Personnel73.8111.3+37.4+50.7%
Operation & Maintenance108.8148.4+39.7+36.5%
Procurement 55.0 78.0 +23.1 +42.0%
RDT &E 38.7 69.4 +30.6 +79.2%
Military Construction5.17.8+2.7+52.9%
Family Housing3.54.2+0.7+19.7%
Other 5 .6 1.9 -3.6 -65.0%
Subtotal, DOD290.5421.1+130.6+45.0%
Atomic Energy Defense Activities12.417.5+5.1+40.6%
Other Defense-Related Activities1.23.2+2.0+167.7%
Total, National Defense304.1441.8+137.7+45.3%
Source: Congressional Research Service calculations based on data from the Department of Defense
and the Office of Management and Budget.
Specifically, Table 3 compares the FY2006 request with the FY2000 budget,
broken down by titles of the annual defense appropriations bill. Of the $131 billion
difference in the DOD portion of the budget, $77 billion, almost 60%, is in the
“Military Personnel” and “Operation and Maintenance” accounts (see Table 4). In
effect, this is the cost of maintaining the current force, without significantly
increasing the pace of weapons modernization.
The remaining 40% of the increase has still permitted substantial increases in
weapons procurement and, particularly, in research and development, in which the
growth rate, though from a smaller starting point, far outstripped any other category
of the defense budget. In the future, however, assuming that defense spending levels
off as the Administration is projecting, increases in personnel and operating accounts
may leave relatively little room for new initiatives in weapons acquisition. Trade-
offs between major weapons programs may become more contentious. Increased
funding for Army programs, for example, may come only at the expense of funding
for Navy and Air Force programs. In addition, cost growth in major programs will
drain funds for other priorities. An environment in which a growing budget allows
new priorities to be funded without cutting something else is very different from one
in which any new initiative may be seen as a threat to established programs — and
it may be less fertile ground for innovation.

Table 4. Allocation of Changes in Defense Funding by Title,
(budget authority, current year dollars in billions)
Amount ofPercentage of
increase ($)total increase
Total Increase in DOD Budget+130.6 —
Increase for Military Personnel + O&M+77.159.0%
Increase for Procurement + RDT&E+53.741.1%
Source: Congressional Research Service calculations based on data from the Department of Defense
and the Office of Management and Budget.
Bow Waves, Train Wrecks, and Ship Wrecks:
Are Long-Term Weapons Plans Affordable?
A perennial issue in defense policy is whether future weapons acquisition
budgets will be large enough to finance all of the programs that are in the pipeline.
There are a couple of variations on the theme.
One issue is whether a “bow wave” of acquisition costs will become
unsustainable at some point in the future. The term “bow wave” technically refers
to the normal funding profile of a major program: funding is small in the early stages
of development, climbs during engineering development, peaks during full rate
procurement, and then declines again as production winds down. When several
weapons programs appear likely to grow in concert, then a large collective “bow
wave” may appear to be looming in the future.
A second issue is whether projected weapons procurement budgets are large
enough to replace aging weapons as they reach the ends of their nominal service
lives. A 1999 report by the Center for Strategic and International Studies (CSIS),
entitled The Coming Defense Train Wreck, argued that projected procurement
budgets would fall as much as 50% a year short of the amount needed to maintain a
modernized force.10 That study evoked considerable controversy. Very different
estimates of the amounts needed to finance the weapons inventory would result from
minor changes in assumed rates of cost growth from one generation of weapons to
the next, in assumptions about possible extensions of nominal service lives with
upgrades, and in assumptions about whether some elements of the force (such as
strategic nuclear weapons) need to be updated at all.11
Since 1999, the Congressional Budget Office has done a series of closely related
studies of what it calls a “steady state” procurement rate (i.e., the rate at which

10 Daniel Goure and Jeffrey M. Ranney, Averting the Defense Train Wreck in the New
Millennium, (Washington: Center for Strategic and International Studies, 1999).
11 See Steven Kosiak, CSIS ‘Train Wreck’ Is Off Track Backgrounder, Washington: Center
for Strategic and Budgetary Assessments, March 28, 2000.

weapons would have to be replaced to maintain a modernized force of a given size)
and also of the cumulative cost of the Pentagon’s actual weapons plans.12 These
assessments have been much less alarmist than the CSIS “train wreck” scenario.
CBO’s initial “steady state” studies found a shortfall, but not of the magnitude CSIS
projected. CBO’s most recent affordability studies, however, have warned against
a potentially substantial “cost risk” if program costs grow above what the services
have been projecting.
Now it appears that the future “cost risk” that CBO warned against is becoming
an imminent threat. Cost growth in major weapons programs has become so endemic
and so severe that it may be producing, if not a train wreck, then, perhaps, a ship
wreck. A key issue in Congress this year is “Whatever happened to the shipbuilding
budget?” The Navy’s FY2006 shipbuilding plan calls for constructing just four new
ships, two fewer that the Navy planned for the FY2006 budget last year, and far short
of the 8-9 ships per year that the Navy has said are needed to preserve the current size
of the fleet in the long term.13
Navy plans have also been revised to procure fewer ships over the following
five years. A Defense Department budget decision in December 2004, called
“Program Budget Decision 753” or PBD-753, reduced the planned procurement rate
of DD(X) destroyers from two per year to one, cut planned submarine production
from three boats every two years to one per year, eliminated funds for an amphibious
ship from the FY2008 plan, and delayed by one year planned funding for a new
aircraft carrier.
Navy officials have said that cost growth in Navy shipbuilding is at the root of
the problem. In testimony before the Senate Armed Services Committee on February
10, 2005, the outgoing Chief of Naval Operations, Admiral Vernon Clark, said that
costs of the major types of ships had grown by as much as 400% beyond inflation
over the past thirty years, that greater capabilities explain only part of the increase,
that so few ships are being built that overhead costs are spread too narrowly, and that
the Navy cannot afford more than 250 ships in the long run unless costs are brought
under control.14 In his prepared statement for the hearing, Admiral Clark said:

12 The most recent reports are Congressional Budget Office, The Long-Term Implications
of Current Defense Plans: Detailed Update for Fiscal Year 2005, September 2004, and
Congressional Budget Office, The Long-Term Implications of Current Defense Plans:
Summary Update for Fiscal Year 2005, September 2004.
13 The math is straightforward. Assuming an average service life of 35 years for each ship,
a Navy of 300 ships requires building 300 ÷ 35 = 8.6 ships per year on average. Recently
the Navy responded to a congressionally mandated requirement that it provide an estimate
of long-term ship building requirements with a report that showed two alternatives, one with
260 ships in 2035 and one with 325 ships. See Department of the Navy, “An Interim Report
to Congress on Annual Long-Range Plan for the Construction of Naval Vessels for
FY2006,” March 2005.
14 Scott Nance, “Clark Calls for Reform in Shipbuilding Practice,” Defense Today, February
11, 2005. For an overview of recent cost growth in Navy shipbuilding, see Government
Accountability Office, Defense Acquisitions: Actions Can Be Taken to Reduce Cost Growth

Among the greatest risks we face is the spiraling cost of procurement for modern
military systems, and shipbuilding is no exception. When adjusted for inflation,
for example, the real cost increase in every class of ship that we have bought
since I was an Ensign, United States Navy, has been truly incredible. It becomes
more so when taken in comparison to other capital goods like automobiles, where
the inflation-adjusted cost growth has been relatively flat over the same period
of time. Shipbuilding cost increases have grown beyond our ability to control as
compared to decades prior. As we seek greater combat capability and greater
operational efficiencies through upgraded power, propulsion, and computing
technologies, we find a ratio of cost growth beyond our seeming control, which15
may not be fully explainable solely by reduced economies of scale.
In recent years, the pace of growth in shipbuilding costs has not abated. For the
past several years, the Navy has requested additional appropriations to cover cost
growth in ships already under construction. In the FY2006 budget, the Navy is
requesting $394.5 million for “Completion of Prior Year Shipbuilding Programs,”
and the Navy’s long-term program includes and additional $449.8 million in FY2007
and $502.5 million for cost growth. Moreover, the Navy is now beginning to
reestimate future shipbuilding costs in light of recent experience. The President of
Northrop Gumman’s Newport News shipbuilding division recently acknowledged
that the CVN-21, the next-generation carrier, will likely cost more $13 billion,16
compared to last year’s estimate of $11.7 billion. And Navy officials are beginning
to increase estimates of DD(X) destroyer costs substantially. As recently as 2003, the
Navy estimated costs of $1.5-1.8 billion per ship after the initial design models of the
ship were built, but more recently has said $2.2-2.6 billion. Now it appears the cost17
of later ships in the production run could exceed $3 billion each.
PBD-753 made cuts in a number of other major acquisition programs as well,
notably, terminating F/A-22 fighter production after FY2008, terminating C-130J
cargo aircraft production after FY2006, cutting $5 billion over the six year FY2006-
FY2011 period from missile defense, and trimming funds for a number of satellite
The fate of the F/A-22 may be an object lesson. Originally, as the aircraft was
being developed in the late 1980s, the Air Force planned to buy 750 aircraft as
replacements for 1970s-era F-15s. When the Defense Department formally decided
to begin engineering development in 1990, the program timeline was delayed by two
years and the plan was for 648 aircraft. The Clinton Administration’s 1993 Bottom-
Up Review of post-Cold War requirements reduced the planned total to 442 aircraft,

14 (...continued)
in Navy Shipbuilding Programs, GAO-05-183, February 28.
15 See Statement of Admiral Vernon Clark, USN, Chief of Naval Operations, Before the
Senate Armed Services Committee,10 February 2005, pp. 20-21, available online at
[http://armed-s ervi statemnt/2005/February/Clark%2002-10-05.pdf].
16 Dave Ahearn, “Northrop Aide Urges Splitting Ships Funding; Killing Subs Yard Costly,”
Defense Today, March 10. 2005.
17 See CRS Report RL32109, Navy DD(X), CG(X), and LCS Ship Acquisition Programs:
Oversight Issues and Options for Congress, by Ronald O’Rourke.

enough for four deployable wings of 72 aircraft each, with spare aircraft for training,
maintenance, and replacement reserves.
Subsequently, projected program costs grew, procurement plans were delayed
and trimmed further, Congress imposed a ceiling on total production costs, costs
grew yet again, and the planned total production run was further reduced. By 2004,
the total planned procurement was reduced to 279 aircraft, about one-third of the
original plan, to fit within the cost cap, though the Air Force still wanted more than
330 to equip three deployable wings. The initial Air Force development estimates
in 1990 projected a total program unit cost of $93 million per aircraft in FY1990
prices, or about $140 million in FY2006 prices. In the end, the spiral of cost
increases, production cuts, and further unit cost increases had pushed the price up to
over $300 million per aircraft in FY2006 dollars. Now the Defense Department,
against the wishes of the Air Force, has decided to halt production after building
about 180 airplanes.18
Cost growth has also been severe in many other programs, including,
!Air Force/Navy/Marine Corps F-35 Joint Strike Fighter: Official
DOD estimates of JSF costs, provided to Congress in quarterly
Selected Acquisition Reports, grew by $45 billion, from $199.7
billion in the September 30, 2003 estimates, to $244.8 billion in the
December 31, 2003 estimates, in current year dollars, not adjusted
for inflation, a 23% increase.
!Space launch systems: Over the same period projected Air Force
Evolved Expendable Launch Vehicle (EELV) program costs grew
by $11.6 billion, from $20.8 billion to $32.3 billion, a 56% increase.
!Space-Based Infrared System-High (SBIRS-High), Space Tracking
and Surveillance System (STSS) (formerly called the Spaced-Based
Infrared System-Low (SBIRS-Low)), and Airborne Laser (ABL)
programs: The SBIRS-High, an Air Force-run program to develop
a new missile launch detection and tracking satellite that would be
tied into a national missile defense, has more than doubled in cost
since 1995 to over $8 billion, including a $2 billion estimate
increase in 2001, and it still appears to be experiencing delays and
cost growth. Last year, the Air Force confirmed reports that the cost
would grow by another $1 billion and that satellite launches would
be delayed another two years. There have been similar, though less
severe delays and cost growth in the Missile Defense Agency-run
STSS program to develop a low-earth-orbit missile tracking satellite,
though costs are now classified. And the Air Force-run, Missile

18 See CRS Report RL31673, F/A-22 Raptor, by Christopher Bolkcom, available online at
[]. For initial and current cost
estimates, see Department of Defense, “Selected Acquisition Report Summary Tables,” as
of September 30, 2004, available online at [

Defense Agency-funded Airborne Laser program has been delayed
and has suffered enough cost growth that the Air Force has decided
to use available R&D funds for one rather than two aircraft.
!The Army Future Combat System (FCS): The FCS program remains
at a very early stage of development, with several differing design
alternatives still under consideration. Until last year, production was
planned to begin in 2008 with an initial operational capability in
2010. In an April 2004 report, GAO found that 3/4 of the necessary
technologies for the system were immature when the program started
and that prototypes would not be available for testing until shortly
before production was planned.19 Subsequently, the Army
announced a major restructuring of the program which will delay
major components for at least two years and increase total program
costs by $25 to $30 billion.20 A year ago, estimated procurement
costs (not including R&D) were estimated at $92 billion. Recently,
Army officials said that procurement could total as much as $145
billion, not including $25 billion for an associated communications
Taken together, constraints on future amounts of funding for procurement and
for R&D, plus widespread, substantial cost growth in major weapons programs,22
draw into question the viability of long-term service weapons acquisition plans. The
program cuts imposed in PBD-753 in December may very well turn out to be only
the first in a number of fairly substantial changes needed to keep acquisition costs
within bounds.
What Are the Implications of Changes in Military
Strategy for Budget Priorities?
A final long-term question is how changes in the international environment —
and in U.S. perceptions of it — will affect defense budget priorities. Currently, the
Defense Department is engaged in a congressionally-mandated “Quadrennial Defense
Review” (QDR), which is required to be completed no later than February 2006, but
which may well be reported before then. This QDR is the fifth such reassessment of
U.S. defense policy in the post-Cold War era — the others were the “Base Force”

19 U.S. Government Accountability Office, Defense Acquisitions: The Army’s Future
Combat Systems’ Features, Risks, and Alternatives, GAO-04-635T, April 1, 2004.
20 Jonathan Karp and Greg Jaffe, “Army Plans To Postpone Modernization Program:
Boeing-Led Development Of Technology Will Require At Least Two More Years,” Wall
Street Journal, July 14, 2004.
21 See Tim Weiner, “An Army Program To Build A High-Tech Force Hits Cost Snags,” New
York Times, March 28, 2005, p. 1.
22 For a similar assessment, see Government Accountability Office, Defense Acquisitions:
Assessments of Selected Major Weapons Programs, GAO-05-301, March 31,2005, available
online at [].

analysis of 1990, the Clinton Administration’s “Bottom-Up Review” of 1993, and
two previous QDRs in 1997 and 2001.
While the 2001 QDR was released after the terrorist attacks of September 11,
2001 — specifically on September 30 — it was prepared very early in the Bush
Administration, and it did not reflect the full weight of developments in the post-9/11
period. Significantly, it also preceded the Bush Administration’s first statement of
the “National Security Strategy of the United States,” which the White House issued
in September 2002,23 and which, among other things, called for the United States to
act preemptively to prevent potentially unacceptable threats to U.S. security from
arising. And, of course, it preceded the wars in Afghanistan and Iraq.
So the 2005-2006 QDR will be the first to reflect fully the lessons the Defense
Department has drawn from its post-9/11 experiences. And it will be the first to
reflect, as well, the full imprint of changes in Pentagon organization and procedures
that have been instituted under Secretary of Defense Donald Rumsfeld.
Perhaps the key issue in the QDR is to what extent Defense Department
priorities may be reshaped in view of new assessments of long term challenges to
U.S. security. Over the past year-and-a-half or so, senior defense officials have laid
out what they call a new “strategic framework” that identifies “four challenges” to
U.S. security.24 Priorities among the four challenges in turn, are based on the
likelihood that threats will appear and on the perceived vulnerability of the United
States to such dangers.
!“Traditional” challenges from regional competitors like Iraq under
Saddam are seen as unlikely and U.S. forces are seen as fully
capable of coping with them, so vulnerability is low.
!“Irregular” challenges of unconventional warfare are highly likely,
but the vulnerability of the U.S. homeland is seen as low.

23 The White House, National Security Strategy of the United States of America
(Washington, September 2002). Available online at [
24 The “four challenges” framework was first briefly mentioned publicly in March 2004 in
a congressionally mandated report on base closures, entitled, “Report Required by Section
2912 of the Defense Base Closure and Realignment Act of 1990, as Amended through the
National Defense Authorization Act for Fiscal Year 2003” (March 2004), available online
at []. The framework was later
discussed in May 2004 in Joint Chiefs of Staff, The National Military Strategy of the United
States of America (May 2004), available online at [
document_377_National%20Military%20Strategy%2013%20May%2004.pdf]. The fullest
discussion is in a briefing for the Department of Defense “Senior Level Review Group,”
entitled “A Framework for Strategic Thinking,” (August 2004), not released publicly by the
Defense Department and restricted as “For Official Use Only,” but available online at
[]. The briefing was first discussed in
Thomas E. Ricks, “Shift from Traditional War Seen at Pentagon,” Washington Post,
September 3, 2004, p. 1.

!“Disruptive” threats from a future global peer or near-peer
competitor that would attack U.S. military advantages — through,
for example, attacks on satellites or cyberwarfare — are seen as
unlikely, but vulnerability is seen as high.
!And “catastrophic” threats from states or non-state actors with
weapons of mass destruction are seen as likely and U.S. vulnerability
as high.
It is possible to read into this list of priorities some far-reaching implications for
future U.S. defense programs. The F/A-22 and the Navy ships that the Pentagon cut
from its plan in December, 2004, for example, might well be classified as forces for
traditional challenges. An obvious question, then, is whether the reductions imposed
by PBD-753 are harbingers of deeper contractions in major programs yet to come.
For their part, Navy officials have said that they are redesigning forces to be more
relevant to future challenges, so conflict in the littorals (i.e., in coastal areas) and the
concept of sea-basing of forces to project power ashore are being emphasized.25
Army officials, similarly, have cast the current wholesale reorganization of the Army
as an attempt to make the Army more deployable in order cope with irregular threats
that, in DOD’s view, are highly likely.26 It remains to be seen, however, how
disruptive and catastrophic challenges will be reflected in future budget trade-offs.
Meanwhile, in Congress and elsewhere, China’s potential to pose a military
challenge to the United States has become a matter of increasing discussion,
particularly since China passed an anti-secession law threatening military action if
Taiwan declares independence.27 Recent assessments from the Defense Department28
and the intelligence community29 have stressed Chinese investments in military
capabilities, including air and naval forces, that might challenge U.S. naval
predominance in East Asia.30 A potential future threat from China may be cited as
a rationale for more and more substantial shares of U.S. defense budgets

25 John T. Bennett, “Clark: QDR Likely Will Endorse Shift in How Navy Designs New
Ships,” Inside the Pentagon, January 13, 2005.
26 Jen DiMascio, “Chief Cites Modularity, Balancing and Stabilizing Force as Focal Points,”
Inside the Army, January 17, 2005.
27 See, for example, Jim Yardley and Thom Shanker, “Chinese Navy Buildup Gives
Pentagon New Worries,” New York Times, April 8, 2005
28 Department of Defense, Chinese Military Power, May 2004, available online at
29 National Intelligence Council, Mapping the Global Future, December 2004, available
online at [].
30 For an independent assessment, see Harold Brown, Joseph W. Prueher, and Adam Segal,
Chinese Military Power, Council on Foreign Relations Independent Task Force Report,
May, 2003, available online at [].