Defense spending: Is the ride over?

Dec. 1, 2005
The last few years have been an amazing time to be in the defense business-particularly for those providing technology items such as computers, networking, optoelectronics, and sensors.

The last few years have been an amazing time to be in the defense business-particularly for those providing technology items such as computers, networking, optoelectronics, and sensors. Defense spending, including supplementals, increased by 36 percent in that time, and technology projects were among the biggest recipients.

Yet this ride most likely is coming to an end, according to all current indications, as well as to the historical trends. It’s a virtual certainty that U.S. defense spending over the last decade is peaking in fiscal year 2006, which began Oct. 1, and will begin a slow downward slide at least through 2016.

This anticipated decline in military spending does not, however, mean that U.S. military commitments are on the wane-much to the contrary, in fact. The global war on terror shows no signs of letting up, due not so much to a lack of U.S. military competence, but to a determined, resourceful, and ruthless enemy.

It’s likely that U.S. forces will be fighting the followers of Radical Islam for years to come, despite anticipated declines in military spending, which will continue to stretch U.S. fighting forces to the limit.

The problem in coming years is a lack of enough money to go around. Mandatory federal spending for Social Security, Medicare, and other entitlements, plus growing interest payments on the national debt, is squeezing the amount available for defense, federal highways, agriculture, and the like.

The bottom line: defense spending cannot continue increasing the way it has since 2001. We’re seeing right now the best that defense spending is going to be in the foreseeable future.

Spending levels at the U.S. Department of Defense (DOD) should see a $98.6 billion decline over the next decade-a drop of nearly 20 percent during the period, or about 2 percent each year, say analysts at the Government Electronics & Information Technology Association (GEIA).

Spending cuts will hit technology areas of the DOD budget as well. Money for command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) programs should drop from $69.7 billion in 2006 to $59.2 billion in 2016-a decline of 15 percent over the next 10 years, the GEIA says. These numbers are in constant dollars, which accounts for inflation.

The GEIA’s C4ISR predictions include non-platform-related electronics and communications spending. The organization has stopped issuing predictions about the electronics content of the DOD budget, as it had in the past, because of decreasing confidence in those numbers.

Spending for information technology (IT), conversely, is expected to rise from $30.1 billion in 2006 to $34.6 billion in 2016, an increase during the decade of 13 percent. These figures, however, are in non-inflation-adjusted 2006 dollars. The actual decade-long trend in IT spending could be flat, GEIA experts warn.

There it is: flat or declining spending predicted not just for DOD across the board, but also for defense technology.

These projected declines in DOD spending contrast sharply with spending increases over the last 10 years.

In 2006 dollars, DOD appropriations, including supplementals, rose from $329.9 billion in 1996 to $517.5 billion in 2006, which represents an increase of $187.6 billion, or 36.25 percent over 10 years-roughly 3.6 percent each year, with the biggest increases coming in 2003 and 2004.

DOD procurement and research, development, test, and evaluation (RDT&E) spending combined, meanwhile, rose from $90.9 billion in 1996 to $162.7 billion in 2006, which represents an increase of $71.8 billion, or 44.13 percent over 10 years-roughly 4.4 percent each year.

DOD procurement alone rose from $49.6 billion in 1996 to $89.3 billion in 2006, which is an increase of $39.7 billion, or 44.45 percent over 10 years, or roughly 4.4 percent each year, while RDT&E spending alone rose from $41.3 billion in 1996 to $73.4 billion in 2006, an increase of $32.1 billion, or 43.73 percent over 10 years-roughly 4.3 percent each year.

We should remember these numbers the next time anyone starts grousing about declining defense dollars, because we’re going to hear a lot of complaining over the next several years.

Over the long term, those in the defense industry also should remember that military spending goes in cycles. We’ve seen this clearly since the end of World War II, when U.S. defense spending in inflation-adjusted dollars was at an all-time high.

Over the last 60 years, U.S. defense spending has seen four major spikes, each followed by a substantial dip. The first spike was World War II, the second was the Korean War, the third was the Vietnam War, and the fourth was the Reagan defense buildup in the mid 1980s.

In inflation-adjusted dollars, the 1945 World War II defense spending spike of about $650 billion in (what 1945 defense spending would cost in 2006 dollars) dropped sharply in 1949 to a post-war low of about $150 billion-a precipitous drop of about 76 percent in four years.

The next defense spending spike came in 1952 at the height of the Korean War, and coincidentally the first year a Republican was in the White House in 20 years, when inflation-adjusted spending reached about $530 billion, an increase of about 72 percent from the 1949 low .

That spike dropped quickly to an inflation-adjusted $301 billion in 1955-a three-year drop of 43 percent. The Cold War by 1955 was in full swing, with scientists designing a wide range of strategic bombers and other nuclear forces.

The next spike occurred in 1968 with the Vietnam War, when inflation-adjusted defense spending rose to about $460 billion-an increase of about 34 percent over 13 years. From 1968 defense spending slid to an inflation-adjusted $310 billion in 1975-a decrease of 32 percent over seven years.

The next spike in 1984 corresponded with the Reagan defense buildup when spending rose to an inflation-adjusted $500 billion. That level slid to an inflation-adjusted $320 billion in 1997.

Now we sit atop the latest spike, represented by anticipated 2006 spending levels of $517.5 billion including supplemental spending for military operations in Iraq and Afghanistan-perhaps equal to the peak of the Reagan buildup in 1984.

By doing the math and looking at history, we can see that defense spending is about to take a dive. What we don’t know-yet-is how far this next downward cycle will take us, and when.

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John Keller
Editor in Chief

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