Defense spending to decrease over next decade; procurement and RDT&E to be hit hard

By John Keller

SPRINGFIELD, Va. - The U.S. defense budget will decline from a peak of $680 billion to $535 billion over the next decade-a drop of 21.3 percent-according to the Government Electronics & Information Technology Association’s (GEIA) annual 10-year forecast for defense spending.

This decline includes a projected sharp drop in congressional supplemental spending to support the global war on terrorism. The defense supplemental this fiscal year is expected to be $197 billion, yet supplemental spending should decrease to $44 billion by 2018, GEIA analysts say. The Iraq War is expected to wind down over the next several years, but troops still could be engaged on a relatively small scale by the end of the forecast period.

When congressional supplementals are removed from projections, the base defense budget actually increases slightly over the next 10 years from $483 billion in fiscal 2008 to $491 billion in 2018, after a projected base-budget peak of $500 billion in 2009, the GEIA says. This represents a miniscule increase of 0.17 percent-or essentially a flat rate of growth.

“The base budget will be strong, yet flat over the next 10 years,” says Stephen Hellyar, senior manager of strategic planning and market analysis for General Dynamics C4 Systems in Scottsdale, Ariz., and one of the analysts who helped put together the GEIA forecast.

The GEIA released its annual 10-year forecast of defense spending last month at the organization’s Vision conference in Springfield, Va.

It is the sharp projected drop in congressional supplemental spending that should be of primary concern to U.S. defense contractors, GEIA analysts say. The military services have come to rely on the supplemental budget. The Army, particularly, depends on supplementals for a large portion of its operations, maintenance, procurement, and even some short-term research and development.

This supplemental budget has provided a growing supply of money for defense contractors during the Iraq War, and contractors must start planning now to adjust to supplemental decreases, which should drop to $70 billion in fiscal 2011 and should decrease gradually down to $44 billion in 2017 and 2018, GEIA analysts say.

Another big concern to defense contractors will be the projected 29 percent drop in U.S. defense procurement and research over the next 10 years. From fiscal 2008 to 2018, spending for procurement, as well as research, development, test, and engineering (RDT&E), should drop from $228 billion this year to $162 billion in 2018. Federal fiscal year 2008 began last Oct. 1.

Procurement and RDT&E-the so-called “investment accounts”-contain the lion’s share of U.S. defense spending for electronics, electro-optics, and other advanced technologies. Among the reasons for expected cuts in procurement and RDT&E are anticipated political pressures to increase non-defense spending in the decade ahead, as well as increases in the defense budget for operations and sustainment, which is rising at rates higher than inflation, GEIA analysts say.

Operations and sustainment accounts include costs for military salaries, clothing, medical expenses, ammunition, food, and fuel. Most experts are anticipating an increase in the number of military personnel over the next several years. Each new soldier in the field must be fed, clothed, and armed, and these costs will add up, analysts say.

Spending for military procurement, including congressional supplementals, should decrease from $151 billion this year to $110 billion in 2018-a drop of 27.2 percent, or a combined annual shrinkage rate of 3.1 percent.

Defense RDT&E spending, meanwhile, should decrease from $77 billion this year to $52 billion in 2018-a decrease of 32.4 percent, or a combined annual shrinkage rate of 3.9 percent, GEIA analysts say. Real effects from cuts in research should be kept to a minimum because of increases in previous years during the Bush Administration, analysts say.

It is the expected drop in procurement spending that particularly concerns GEIA analysts, who warn that over the next decade the U.S. Department of Defense could face a potential shortfall of $300 billion that is necessary fully to replace and repair equipment that was engaged in the global war on terrorism.

Furthermore, the added battlefield equipment rushed to the field during the wars in Iraq and Afghanistan must be maintained over the long term-whether the U.S. is involved in battlefield operations or not-which will add in future years to the military’s operations and sustainment budget, analysts say.

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