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Foundation: Base DoD Budget of $488B by 2016

By JOHN T. BENNETT
Defense News
Published: 19 Oct 2010 16:59

The “defense drawdown is coming,” proclaims the TechAmerica Foundation in a new report that predicts baseline Pentagon budgets will steadily shrink to about $488 billion annually.
In a report to be formally unveiled Oct. 20, the foundation warns a “double tsunami is about to hit the defense budget,” composed of smaller war supplemental spending measures and shrinkage in the base Defense Department budget “in response to deficit pressures.”
Defense News obtained a copy of the report.
TechAmerica predicts “low real growth” in fiscal 2012 and 2013 for annual U.S. defense budgets, followed by “real decline” in the next three fiscal years, and then flat budgets through 2021.
The high-tech industry trade association sees annual U.S. defense budgets staying at about the same level as this year’s Pentagon’s request of $545 billion until 2013, and then falling to $488 billion by 2016, according to the report.
All calculations are in constant FY-11 dollars.
U.S. Defense Secretary Robert Gates has said the White House has promised 1 percent real growth for the DoD annual topline in 2012. In contrast to its own estimates, TechAmerica projects that if Gates’ plan is enacted, that 1 percent annual real growth would give DoD a topline of $581 billion in 2016 and $611 billion by 2021, according to the report.
Within the base budget, the trade association projects procurement coffers will shrink from $108 billion in 2011 to $102 billion in 2016, before sliding to $92 billion in 2021. The group sees Pentagon R&D accounts slipping to $51 billion in 2016, down from $77 billion in 2011. R&D would fall to $46 billion by 2021, according to TechAmerica.
Operations and maintenance spending would drop from $198 billion this fiscal year to $193 billion in 2021, hitting $183 billion in 2016.
What will this mean for U.S. defense firms?
“Expect a smaller, less robust defense industrial base” that will experience “unprecedented stress on ‘core’ defense businesses,” says the TechAmerica report. The group sees some industry “contraction, but without the post-Cold War consolidation.”
The industry association predicts “prices and profits will be challenged in a tighter overhead and award-fee environment.” The report states DoD buying policies will place higher “emphasis on value, affordability, and bringing more activities ‘in-house’.”
The Pentagon also will look more toward fixed-price contracts. To this end, DoD brass have said they will only use such arrangements when appropriate; industry worries about using fixed-price deals in place of cost-plus arrangements during the design-and-development phases of major programs.
Speaking Oct. 19 in Washington, Northrop Grumman CEO and President Wes Bush acknowledged the Pentagon leaders’ position of using fixed-price “when appropriate,” adding that he expects industry and “the implementation side of the Pentagon” will have many discussions about the implications of the DoD’s intention to use more fixed-price contracts.
Meantime, TechAmerica predicts the coming “defense drawdown” will make for a “difficult overall climate for the second tier, suppliers, and small businesses.”
DoD investment accounts will be raided to cover ever-growing “operations and support” (O&S) bills - everything from maintenance of aging combat equipment to personnel costs like pay and health care, TechAmerica predicts. O&S expenses now account for 60 percent of the base budget, and the report warns they will “continue the historic trend of growing faster than inflation.”
The report notes Gates’ efficiencies initiative - designed to free up $101 billion and shift those monies to hardware accounts - “may eventually force harder investment choices. ... In this environment, defense investment will be squeezed.”
The trade association predicts the current level of focus on Afghanistan and other irregular wars will continue for several more years, meaning “more resources will go to Army and [Marine Corps] ground forces (also conventional combat ops, peacekeeping, and civil support).
“Absent a near-peer competitor,” TechAmerica says, “expect resource pressure” on the U.S. Navy and Air Force.
For war-spending bills, also called “overseas contingency operations” (OCO), the association sees those dropping from the fiscal 2011 level of $159 billion to $46 billion after U.S. forces are out of Iraq. It forecasts a $122 billion supplemental for fiscal 2012, followed by $102 billion in 2013. The figure then will plunge to $69 billion in 2014 and $58 billion in 2015.
OCOs are expected to shrink to $41 billion in 2016 before falling steadily to $31 billion in 2021, according to the trade group.
Within the war-funding measures, DoD will put less into hardware accounts. Such investment coffers will fall from $28 billion in 2011 to $21 billion in 2012, states the association. By 2016, the department will seek only $8 billion for such accounts and only $5 billion in 2021, the group projects.
Though the group predicts some OCO funds will be shifted to the base budget, it predicts all “savings will not be ‘plowed back’ into base budget.”
How will the U.S. military presence in Afghanistan evolve over the next few months? TechAmerica has a forecast for that, too, predicting America’s footprint there peaked last month at 100,000 troops. The group sees the administration conducting another Afghanistan-Pakistan policy review in December, leading to the start of an American drawdown in the fourth quarter of this fiscal year.
By 2014 or 2016, Washington is likely to begin a process under which the U.S. military’s end-strength will shrink by about 120,000 personnel, TechAmerica predicts. Those reductions are seen coming from active and non-active ranks.