National defense spending: a review of appropriations and real purchases Essay

National Defense Spending: A Review of Appropriations and RealPurchases A NATIONAL defense buildup has been underway for nearly a decade.It was undertaken in the context of increased international turbulence and a steady strengthening of Soviet nuclear and conventional forces,and now spans three administrations.

This article reviews the buildupin terms of both budget appropriations and real purchases of goods andservices, a national income and product accounting (NIPA) measure.Appropriations are reviewed because they are the form in which thebudgetary aspects of an administration’s defense policy are debatedand acted upon by Congress, and, thus, mirror many of the generalconsiderations–the balance of military power and sharply rising Federaldeficits–that affected the buildup. (The accompanying box traces thebudget process and defines some budget terms used in the article.)However, factors other than appropriations also affected the realizationof the buildup. Some of these–for example, production stretchouts andslowdowns–are discussed before reviewing the buildup as measured byreal purchases.

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National Defense Appropriations In his budget message in early 1975, President Ford announced thathis appropriation request for fiscal year 1976 would reverse the declinein real national defense spending that had occurred over the preceding 7years. Appropriations had declined in 2 years, and, in addition,increases in costs of defense programs had been largely offset byreductions in programs and strength. Presentation of a target in realterms reflected the enhanced awareness of inflation and more clearlyfocused debate on whether, and to what extent, to undertake a buildup.1The administration targeted annual real increases of 4 percent forfiscal years 1976-81. For 1976, an increase in the appropriationrequest– such requests are in current dollars– of $17 billion, or 25percent, to $103 billion, was designed to implement this target (table1). The emphasis was on maintaining defense preparedness, modernization of strategic forces, and strengthening general purposes forces whilereducing support staff.

Much of the proposed increase was accepted byCongress; as enacted, the increase was 13 percent. 1. The real spending estimates that are included in the budgetdocuments are usually in terms of dollars of the current year, and thuscannot be used to create a consistent time series. President Carter, in the budget submitted in early 1978, sought tocontinue real growth. He targeted 3-percent annual real increases forthe next several years, within an emphasis on increases consistent withstrengthening the North Atlantic Treaty Organization (NATO).

Theappropriation request for fiscal year 1979 was $128 billion, up $10billion, or 9 percent, from the preceding year. It was designed toimprove the readiness and sustainability of general purpose forces,accelerate the rebuilding of the fleet, initiate development of a newintercontinental ballistic missile, and otherwise continue themodernization of the strategic forces. Key members of Congress were skeptical that the appropriationincreases were staying ahead of inflation. This concern was evidencedin a second budget resolution, adopted in September 1979, that includeda 5-percent real increase for fiscal years 1981 and 1982. Subsequently,the administration accepted the higher rate in return for Senateconsideration– refused earlier in the wake of the Soviet Union’sinvasion of Afghanistan –of the strategic arms limitation treaty.

Thehearings on the treaty, which was never ratified, reviewed in depth thevarious elements of the balance of military power between the UnitedStates and the Soviet Union. The emerging mood added support forincreased defense spending. However, by March 1980, a revised budget putthe rate back at 3 percent. This action reflected the broad context inwhich the budget was being formulated: the forecasts of a weak economyin 1980 and the beginnings of a drive toward budget balance.Nonetheless, for the first time in 13 years, Congress significantlyincreased appropriations beyond what the administration requested. Forfiscal year 1981, the administration requested $162 billion; $182billion was finally appropriated.

The $20 billion increase was largelyaimed at increasing production rates for most kinds of ships and combatarcraft and at substantially increasing military pay and benefits. In the last budget prepared by the Carter administration, it wasnoted that the United States had exceeded the NATO allies’commitment to increase real national defense spending by 3 percent ayear. Real appropriations were estimated to have increased more than 5percent in fiscal years 1980 and 1981. The request for 1982, and the5-year plan for 1982-86, continued that rate. It was from this base that President Reagan announced, in 1981, aprogram to accelerate the rate of increase in national defense spending.

To begin with, he requested substantial additions to spending in fiscalyears 1981 (of which 6 months remained) and 1982. The initial requestedappropriation for 1982 was $226 billion, $26 billion more than theprevious administration’s request. The increase from the precedingyear was by far the largest in peacetime appropriations history.Relative to the previous administration’s budget, the increasedfunding was for the gamut of military air, land, and sea equipment andalso higher military pay. Within a few months, the administration paredthis request because it became clear that production of equipment couldnot be accelerated in line with appropriations and to help reduce thesharply rising Federal deficit that was then in prospect. Prior to the fiscal year 1982 budget, Congress had accepted theadministration’s broad allocation of the defense budget. However,in the ensuing congressional debate, the allocation was questioned.

Inparticular, it was alleged that the purchase of complex weapons systemsat the expense of ammunition, spare parts, and training jeopardized the”combat readiness’ of the armed forces. This issue faded, butdid not disappear. As enacted, the appropriation for fiscal year 1982was $219 billion, less than the administration’s request, but up 20percent from 1981 and 50 percent from 1980. The prospect of large and increasing Federal budget deficits, evenwith substantial cuts in nondefense spending, provided a seriouschallenge to accelerated defense spending.

The deficit issue hadsurfaced with regard to the fiscal year 1982 appropriation, and came tothe fore a year later. As submitted in January 1982, the budget forfiscal year 1983 requested an appropriation of $263 billion, up 20percent–an estimated 13 percent in real terms–from the 1982appropriation. The request for 1983 included funds for production ofseveral weapons systems: 7 B-1 bombers ($4 billion), 9 MX missiles($1.5 billion), and 2 nuclear-powered aircraft carriers ($6.8 billion).In May, in negotiations with Senate leaders centering on the deficitissue, the administration agreed to reduce proposed defense spendingover 3 years by moderate amounts. Congress finally approved anappropriation of $246 billion for 1983, $17 billion below the initialadministration request. Also, late in 1982, Congress refused to approveproduction funds for the MX missile.

This action was the firstcongressional denial of the administration’s request for a majorweapon system. As the fiscal year 1984 budget was submitted, the economy wasbeginning to recover from the severe 1981-82 recession, but the Federaldeficit was rising sharply. The administration’s request for 1984defense spending, although trimmed from its initial request for thatyear, represented a 10-percent real increase. Sentiment in Congress wasfor additional restraint, and the allocation of defnese funds was anissue again. In trimming its proposal, the administration hadeliminated a military and civilian pay raise, but had not significantlycut the funding of major weapons systems. This approach not onlyrekindled the readiness issue, but it also carried implications forfuture deficits. Unlike other appropriations (such as for pay) that arespent in a single year, procurement funds are spent over a much longertime–generally 5 years, with highest spending in the middle 3 years.

Thus, trimming appropriations for procurement would have had a largerimpact on future deficits than trimming those for other purposes.Congress first endorsed a real spending increase in the range of 4 to 5percent. By the time Congressional action was completed, the 1984appropriation was $265 billion, down $15 billion from the initialrequest. In real terms, it was an increase of 4 percent. The reductions from initial requests for fiscal years 1982-84 didnot curtail the buildup in a substantial way. Several billion dollarsof the “reductions’ came from lower-than-expected fuel prices.The remaining reductions affected forces, training, and readiness morethan they affected procurement of major weapons systems. Procurement ofthese systems probably was not affected substantially for a number ofreasons.

(1) In many cases, reductions were implemented by stretchoutsand slowdowns. A stretchout extends the procurement for a given numberof units over a longer time by reducing the rate of production. Aslowdown is a temporary reduction in the rate of production, which mayor may not extend the procurement.

Neither stretchouts or slowdownsresult in lost spending; they only delay spending while the system is inthe pipeline. (2) The unit cost of some weapon systems was lowered.For example, the unit cost of the F-18 fighter was lowered byeliminating some electronic equipment. (3) The planned decommissioning of a number of aged ships was accelerated to save funds in the shortrun, in order to obtain funds for a new ship. The same factors that reduced appropriations in the short run willcause future national defense appropriations to remain high.

As noted,stretchouts and slowdowns generally have not resulted in canceling anyweapon systems, but in delivery of systems over a longer period and,reflecting the lower rate of production, at a higher unit cost.Reductions in unit costs such as achieved by eliminating electronicequipment from aircraft will only be temporary; at some point the extracost will have to be incurred if the system is to perform its missionfully. Another indication that future appropriations will remain highis the steady increase in the share of national defense spendingaccounted for by prior-year contracts and obligations. Prior-yearcontracts and obligations were 20 percent of national defense outlays infiscal year 1977; they increased to 32 percent in fiscal year 1983 andare projected to increase to 43 percent in fiscal year 1989. To theextent that the prioryear contracts, cover systems being stretched outand slowed down, this development is part of the effect just noted.However, a part is for systems, such as the B-1 bomber and the MXmissile, that have only recently entered into production and willrequire annual appropriations.

Further, it may well be that thesophistication of the new generation of weapons will mean that thetraining, spare parts, and ammunition needed to support them will beexpensive and require higher appropriations. Real National Defense Purchases National defense purchases is the final point in the spendingprocess: Appropriations lead to obligations and then to outlays;outlays, in turn, are followed by purchases.2 Purchases are measured ona delivery basis, that is, when goods and services are delivered to themilitary. They include compensation of military and civilian employeesas well as purchases of goods and services–such as aircraft, missiles,research and development, and depot maintenance–from the businesssector. Real–that is, constant-dollar –national defense purchases areprepared using detailed information on purchases and prices paid by theDepartment of Defense. They are only available for the period beginningin 1972 (table 2). (See the November 1982 SURVEY OF CURRENT BUSINESSfor a discussion of the development of estimates of real nationaldefense purchases, and table 2 page 9 of this issue for currentquarterly estimates.) 2.

For a reconciliation of outlays for national defense, afunctional category in the unified budget, to national defensepurchases, see table 9 in Joseph C. Wakefield and Richard C. Ziemer,”Federal Fiscal Programs,’ SURVEY 64 (February 1984): 17.The main conceptual difference is that outlays include, and purchases donot, spending for military retirement; in the NIPA’s, militaryretirement pay is a transfer payment. This section begins by discussing some of the factors other thanappropriations that, working through production rates, affect thepattern of real purchases. After providing historical perspective, itreviews the calendar-year changes in real national defense purchases andthe shifts in their composition since 1976. First it provides anoverview.

Then it highlights purchases of military equipment, which iswhere the buildup has been concentrated. Production rates As mentioned earlier, a number of factors other than increases inappropriations affected the pattern of growth of real national defensepurchases. These include “buy sizes’, competition, costoverruns, stretchouts, slowdowns, and management decisions.

All of themwork through production rates, which affect both costs and prices and,real purchases. A major way that production rates affect costs andprices is through the allocation of fixed costs. Production of weaponsystems involves large fixed costs, such as for research and developmentand for tooling. As production rates increase with larger buy sizes,these fixed costs can be allocated over more units, resulting in lowerunit prices. Although it is not possible to quantify the effect ofthese factors some illustrations are suggestive. Efforts to get production rates up and prices down have beencountered by budget constraints and by the large number of differentweapon systems in production. Two ways in which budget constraints havebeen brought to bear are reductions in the buy size–that is, the numberof units to be purchased in a year–and stretchouts. for example, theArmy was mandated in the 1984 Defense Authorization Act to reduce itsbuy size of light armored vehicles.

The fixed costs will now be spreadover 751 units, as opposed to 1,501 units, for the combined purchases ofthe Army and Marine Corps. As a result, the estimated unit cost of thevehicles is to increase 50 percent. This reduction in the buy size of aweapon system resulted in a moderate savings in current-dollar spendingbut a far larger reduction in real purchases; at the higher unit price,the appropriation bought fewer vehicles. Stretchouts have been used to reduce spending in a particular yearwithout cancelling a program.

Recently, the purchase of 32 AH-64helicopters was deferred to achieve a shortrun budget savings in 1984.As in the case of the reduction in buy size, real purchases were reducedin the year. If the helicopters are delivered in a future period, unitcosts will be higher. According to a special study by the CongressionalBudget Office, the administration’s changes to the fiscal year 1985defense budget indicate that unit prices of many weapon systems willincrease because of stretchouts.3 3. Congressional Budget Office, U.

S. Congress, “A Review ofthe Department of Defense December 31, 1983 Selected Acquisition Report(SAR),’ Special Study (July 1984). By contrast, other factors–such as competition and managementdecisions –may have reduced unit prices, allowing increased realpurchases. Competition generally plays only a limited role in theproduction of major weapons systems. Although several firms may competefor the initial contract to do the research and development, the fieldusually has narrowed by the time the contract for production is to belet, and purchases are usually from a single supplier. An attempt todevelop a multisupplier situation for the Dragon missile programprovides insight on the effects of competition. For that program, twoproducers competed annually for the majority share of the plannedproduction for that year.

The competition appears to have resulted insignificant price reduction for these missiles. In 1972, prior tocompetition, the Dragon missile had a unit price of $6,542. In 1974,two contractors were supplying the missile at unit prices of $6,473 and$4,569.

In the following year, the higher priced contractor had a unitprice of $2,633 and the other contractor, a unit price of $3,227. Arecent example of a private management decision was the sale by one firmof its tank production facilities to another. Under the new management,the unit price of the 1984 buy was reduced 13 percent. Subsequently,Congress upped the buy size to utilize the “saving.’ Historical perspective To provide historical perspective, a series on real nationaldefense purchases prior to 1972 was approximated by using the implicitprice deflator for total Federal Government purchases to deflate current-dollar national defense purchases. The broad pattern ofresponse to international crisis or perceived national interest isclear. In 1941, real purchases increased significantly as the UnitedStates entered World War II. Following the war, they declined for abrief period before turning up in 1948 in response to the “coldwar’.

A singnificant increase in 1951 reflected the outset of theKorean conflict, and increases continued through 1953. Purchasesdeclined in 1954 and continued to do so through 1960, except in 1957,when there was unrest in Eastern Europe and the Near East. Theyincreased in 1961-62 in response to a Berlin crisis and a generalstrengthening of the military, but then declined through 1965. In 1966,the Vietnam conflict pushed purchases up significantly, and theycontinued to increase through 1968. Thereafter, purchases declined untilthey showed a small increase in 1977.

4 4. For the years 1972-77, when this approximation of realpurchases and the published real purchases series overlap, theapproximated series declined by about the same amount as the publishedseries and both increased in 1977 by the same amount. In the 36 years from 1940 to 1976, real national defense purchasesincreased in fewer years than they declined. The longest period ofincreases was from 1948 through 1953; the longest period of declines wasfrom 1969 through 1976. It was this period of declining realpurchases–from a Vietnam peak of roughly $100 billion in 1968 to $65billion in 1976–that, in part, set the background for the currentnational defense buildup.

In the past, national defense purchases accounted for a much largershare of Federal Government expenditures, and also of GNP, than inrecent years (chart 1). Earlier, both because of their large share andthe very sharp changes, increases and decreases in defense spendingimpacted significantly on the changes in real GNP. For example, at theend of World War II, real GNP declined 15 percent in 1946; excluding theapproximated real national defense purchases –which declined almost 80percent –real GNP increased 30 percent. The national defense buildupsince 1977 has had a much smaller impact on the changes in real GNP(chart 2). In 1977 and 1978, the percent increases in real nationaldefense purchases were less than in the remainder of GNP; GNP excludingnational defense purchases increased only 0.3 percentage point more thantotal GNP. In 1979, national defense purchases and the remainder of GNPincreased at the same rate. Since then, the percent increases in realnational defense purchases were more than those in the remainder and GNPexcluding national defense purchases increased less or declined morethan total GNP, but never by more than one-half percentage point.

An overview Real national defense purchases first registered the currentbuildup with an increase in 1977. Since then, real purchases increasedeach year and by 1983 were 30 percent higher than in 1976. The increasesaveraged 4 percent a year, and accelerated over the period (table 3).

The increases in real national defense purchases excluding thecompensation of military and civilian employees were larger, especiallyafter the first 2 years. Through 1983, the average annual rate ofincrease was 6 1/2 percent. As indicated by the more rapid increase in real purchases excludingcompensation than in total purchases, the share of total purchasesallocated to compensation declined (table 4 and chart 3). In 1976,compensation of military and civilian employees accounted for almost 50percent of total purchases. Since then, the share declined steadily to46 percent in 1980 and 41 percent in 1983.

The decline occurred in bothmilitary and civilian compensation, but was more pronounced in themilitary share. The share of compensation declined because the national defensebuildup has not involved any significant increase in the size of thearmed forces or in civilian personnel. From a Vietnam peak of 3.6million (measured in full-time equivalents) in 1968, the size of thearmed forces declined steadily to 3.2 million in 1970 and 2.

2 million in1980. It increased 50,000 in 1981 and then by smaller amounts, reaching2.3 million in 1983. Civilian employment declined from 1.1 million in1968 to about 1.

0 million in 1983. While the share of real purchasesallocated to compensation declined, the shares allocated to durablegoods and to other services–that is, noncompenation services–increasedand that allocated to nondurable goods changed very little. Since 1976,the share of nondurable goods fluctuated around 3.5 percent. Withinnondurables, the share of total purchases allocated to ammunitionincreased. The 1983 ammunition share–1.

1 percent–equaled the 1975share, but was considerably below that of the early 1970’s. Theshare allocated to structures, which declined in the late 1970’s,was 2.4 percent in 1983, about the same as in 1976. The increase in the shares of durable goods and other servicesreflect earlier decisions to modernize and increase the size of theinventory of military equipment. The increase in the share of otherservices also reflected those decisions; much of the spending for theseservices, particularly for research and development and for depotmaintenance, was directly related to weapon systems. Real purchases of other services increased at an average annualrate of 6 percent from 1976 to 1983, half again as fast as totalpurchases. Research and development (R&D), the largest category,declined steadily in the mid-1970’s as R;D appropriations werecut back; they increased moderately in 1978-79 and at an average rate of9 percent in 1980-83. Much of the R;D increase since 1980 wasassociated with the cruise and MX missiles and the B-1 bomber.

Thefastest and most sustained increase was for depot maintenance; purchasesof these services increased at an average rate of 12 percent since 1976.Other increases were associated with reducing a backlog of maintenanceand with repair of equipment and facilities. Military equipment From 1976 to 1983, real purchases of military equipment increasedat an average rate of 8 percent. Increases, ranging from 3 1/2 percentto over 15 percent, were registered every year except in 1978. By 1983,equipment purchases were 70 percent higher than in 1976.

Each type of military equipment purchased increased faster thantotal purchases. The slowest increase was for real purchases ofaircraft, which increased at an average annual rate of 5 percent. Thisrelatively slow rate reflected the fact that a shift to a new generationof aircraft began in the early 1970’s, before the current nationaldefense buildup. For example, the Navy began to take deliveries of theF-14 in 1972, and the Air Force began to take deliveries of the F-15 in1974 and the E-3 in 1975. Since 1977, the buildup has consisted ofincreased production rates for all types of aircraft as well as newgenerations–the B-1 will replace the B-52 and the KC-10 replaces theC-130. Aircraft deliveries prior to 1979 were erratic, reflectinguneven production funding. Since 1979, when deliveries increased 14 1/2percent, real growth has been continuous. Real purchases of missiles increased at an average annual rate of 71/2 percent.

Prior to the buildup, purchases of missiles declinedsignificantly in 1975 and 1976, as the production of various types ofmissiles–such as Minuteman III, Poseidon, and Pershing –came to ahalt. The recent buildup has funded a new generation of missiles,including the Patriot, Trident, MX, and cruise missiles. Since 1979,purchases of missiles have increased at an accelerating pace, reaching29 1/2 percent in 1983.

Real purchases of ships also increased at an average annual rate of7 1/2 percent. A naval buildup was underway prior to 1977, but wasplagued by declining labor productivity, contract disputes, changes inthe number and types of ships to be built, and a number of otherproblems. In the early 1980’s, many of these problems wereresolved, particularly in regard to submarines.

Submarines were a majorcontributor to large increases in 1982 and in 1983. Real purchases of vehicles, dominated by tanks, recorded thefastest average annual rate of increase–16 1/2 percent. The inventoryof M-60 tanks had been run down to resupply Israel in 1973. It wasrebuilt in 1976-79, when purchases of vehicles increased at a rate ofabout 25 percent a year. The M-1, the replacement for the M-60, hadsome early production problems, and, as a result, purchases declined in1980 and 1981. When these production problems were resolved, M-1deliveries surged in 1982 and 1983.

Delivery of new Bradley fightingvehicle systems and a variety of noncombat vehicles also contributed tothe recent large increases. Table: 1.–National Defense Appropriations Table: 2.–National Defense Purchases of Goods and Services,1972-83 Table: 3.–Change in Constant-Dollar National Defense Purchases ofGoods and Services Table: 4.–Composition of Constant-Dollar National DefensePurchases of Goods and Services Photo: CHART 1 Constant-Dollar GNP and National Defense Purchasesof Goods and Services: Percent Change From Preceding Year Photo: CHART 2 National Defense Purchases of Goods and Services asa Percent of Federal Government Expenditures, NIPA Basis Photo: CHART 3 Composition of Constant-Dollar National DefensePurchases of Goods and Services


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