Defense industry upbeat; military spending to stay healthy over next decade

FALLS CHURCH, Va., 19 Oct. 2006. Key leaders of the U.S. defense industry are upbeat about continued prospects for healthy military spending after predictions were released yesterday that U.S. defense spending will grow to an annual $609.4 billion over the next decade.

Oct 19th, 2006

By John Keller

FALLS CHURCH, Va., 19 Oct. 2006. Key leaders of the U.S. defense industry are upbeat about continued prospects for healthy military spending after predictions were released yesterday that U.S. defense spending will grow to an annual $609.4 billion over the next decade.

The topline budget for the U.S. Department of Defense (DOD), "in real buying power, is the highest now since the Korean War," says Cecil Black, one of the chief experts for market assessments and forecasts at the Boeing Co. office in Washington.

Black made his comments Oct. 18 at the 2006 Vision Conference of the Government Electronics and Information Technology Association (GEIA), where the association unveiled its latest influential 10-year forecast of U.S. defense spending.

Overall, the projected long global war on terrorism "will result in a very strong defense topline compared to the 1990s," GEIA analysts say in the association's latest forecast.

Planned expenditures at the Pentagon during the 2007 federal fiscal year, which began Oct. 1, is $439.3 billion, which represents nearly a 6.5 percent increase over the $410.8 billion that Congress enacted for fiscal year 2006 ending Sept. 30, Black pointed out in his DOD topline budget forecast presentation. These numbers do not include defense supplemental spending.

Black and his team of DOD topline budget analysts -- which includes members from General Dynamics, Northrop Grumman, BAE Systems, DRS Technologies, and Lockheed Martin -- say the regular DOD budget will grow from $439.3 billion this year to $576.1 in 2017, while DOD supplemental budgets will decrease from $130 billion this year to $33.3 billion in 2017 as U.S. military involvement overseas gradually starts to decrease in 2008.

Broken down by activity, GEIA experts say military procurement will grow from $105.8 billion this year to $119.1 billion in 2017 -- an increase of 1.2 percent. Likewise, military operations and maintenance is expected to grow from $229.6 billion to $241 billion over the next decade -- an increase of 0.5 percent -- while the military research and development budget is expected to decline by 0.7 percent, from $76.1 billion this year to $70.9 billion in 2017. Military personnel costs over the period are expected to grow from $133.3 billion this year to $158.7 billion in 2017.

By service, the Army budget is projected to decline slightly from $176.1 billion to $170.7 billion over the next decade, while the Navy budget will grow from $145 billion to $171.2 billion, the Air Force budget will grow from $145.6 billion to $169.4 billion, and the defense agencies budget -- which includes the U.S. Defense Advanced Research Projects Agency (DARPA) -- will grow slightly from $97.4 billion to $98 billion.

Army spending is to peak in 2008, then decline until 2011 due to decreased supplemental spending, and then resume growing due to continued inflation, GEIA analysts say. Supplemental spending is in place primarily to pay for continuing military operations in Iraq and Afghanistan.

The anticipated drop in military research and development spending will reflect the transition of several large research programs into procurement and deployment, such as the F-35 Joint Strike Fighter and the U.S. Army Future Combat System, Black says.

Military research and development spending in 2006 was the highest in history -- even higher than during the Reagan defense buildup of the 1980s when measured in constant dollars, or "real buying power," GEIA experts point out.

While the defense budget appears to be on an upswing while measured in today's dollars, the real buying power of the defense budget actually may be poised for a slight decline over the next decade, GEIA experts say. The measure of "current dollars" does not account for future inflation, unlike the measure of "constant dollars," which represents real buying power.

Adjusting for future inflation, the DOD budget plus supplementals in real buying power is expected to decline over the next decade from $565.6 billion to $473.6 billion in 2017, which represents a decline of nearly 16.3 percent. Black and his team point out, however, that the projected 2017 budget, in real buying power, still will exceed the 2002 defense budget by 19 percent.

The overall DOD budget in constant dollars without supplemental spending, however, is expected to increase from $435.6 billion to $447.6 billion over the next decade, which represents an increase in real buying power of nearly 2.7 percent.

The so-called "investment accounts" of procurement and research are the sections of the DOD budget that contain the most spending for electronics and opto-electronics, and pressure is building to reduce spending in those accounts.

The reasons for this involve rising spending for military personnel -- even though the number of uniformed members of the military is in decline -- rising spending for operations and maintenance to support the continuing global war on terror, and rising federal spending for "non-discretionary" accounts such as Medicare, Medicaid, and Social Security.

Current-dollar spending for procurement is expected to grow from $105.8 billion this year to $119.1 billion in 2017, yet constant-dollar real-buying-power spending for procurement is expected to decline over the next decade from $105.8 billion to $96.7 billion -- a drop of 8.6 percent.

Procurement typically pays for deployed platforms and equipment, such as ships, aircraft, armored vehicles, satellites, and radio systems.

Meanwhile, the prospects for military research and development are even less optimistic. Current-dollar spending for research is expected to decline from $76.1 billion this year to $70.9 billion in 2017, yet constant-dollar real-buying-power spending for research will decline from $76.1 billion this year to $57.6 billion in 2017 -- a drop of 24.3 percent.

The research budget typically pays for developing new technologies, weapons systems, equipment, and platforms, such as advanced fighter aircraft, new surface ships and submarines, and communications systems.

For more information contact the GEIA online at www.geia.org.

More in Home