Correcting the Course of Future Defense Spending

Correcting the Course of Future Defense Spending
AP Photo/Charles Dharapak, File
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A new President is going to take office in a just a few weeks, and the Washington Post is worried that his promises to repair the state of our national defense is going to make the deficit worse.  Given that the total debt over the past eight years grew roughly equal to the entire debt accumulated in the first 220 years of our nation’s history, this is an odd focus for the Post.

In a recent editorial discussing the newly nominated director of the Office of Management and Budget (Congressman Mick Mulvaney of South Carolina), the Washington Post urges the new administration to inform OMB of the need to raise more “revenue” to pay for what they anticipate to be calls for more defense spending.

In the view of the Post, “. . . achieving fiscal stability necessarily involves increased revenue as opposed to the spending-cuts-only orthodoxy” which they believe dominates the thinking of the current Congressional majority.

To support their view, the Post explains that the nominated OMB Director argued in 2015 that any Pentagon spending increases had to then be “offset with spending cuts” including in other defense programs. That probably will not be what is proposed next year.

And also like Mulvaney, the Post opposes putting new defense funding into the “overseas contingency” fund, expenditures which due to accounting gimmicks do not count toward the budget caps. 

How to solve this problem? To add to defense spending, the Post says we have little choice but to raise more revenue “to meet the country’s defense responsibilities.” Moreover, the Post assumes tax revenue currently collected by the U.S. Treasury can only be pushed upward significantly through tax rate increases and not accelerated economic growth. 

The FY2017 estimate is we will spend $619 billion on both DoD and defense-related DOE programs, while all other U.S. government expenditures would run $3.4 trillion. This latter number is close to the revenue now being collected by Uncle Sam--CBO says revenue in FY2017 will be $3.421 trillion.

So, the thinking goes, if you want to spend more than $3.4 trillion, you should raise tax rates to pay for it, so you do not add to the accumulated debt now owed by Uncle Sam.

But given that one of the most critical constitutional requirements is that the country’s leaders “provide for the common defense,” it is ironic that the Congress and new administration are being pushed by the Post to raise tax revenue not to pay for $3.4 trillion in current non-defense spending, but to pay for the approximately 15 percent of the Federal budget now being spent on defense.

Why not for accounting purposes automatically reserve each year the first $619-700 billion in revenue for defense over a five-year period? Defense could thus be treated as entitlements are, as mandatory vice discretionary spending, and each year we would simply debate what the changes should be over a certain baseline.

Our allies will be reassured and our adversaries would realize we were serious about national security. Defense would also be saved the dramatic swings in defense allocations that often lead to waste and inefficiencies.

It is not as if defense spending has recently been on an upward trajectory. In real terms since 2012, defense budgets are down a cumulative $1.3 trillion even though simultaneously the annual federal budget has increased by $500 billion, from $3.54 to $4.03 trillion.  

Revenue, too, did increase over that same period by upwards of $1.2 trillion to reach between $3.4-6 trillion, (depending on how the current fiscal year comes out). This will still leave a projected deficit of $400-$600 billion, and although a dramatic reduction from the $1.4 trillion deficit of 2011, still very high by historical standards and certainly unsustainable.

While the 2011 House budget resolution—the first of the newly elected Republican majority—proposed that defense spending should grow to $654 billion annually by FY2017, in fact, defense spending climbed to only $619 billion a year. However, that growth was due primarily to overseas counterterrorism military deployments even as readiness and modernization in the base budget suffered serious erosion.

As noted, the coming annual fiscal year deficit will range from $365 billion to $590 billion, depending on whether the economy remains weak or gets stronger and what final spending numbers are agreed upon. CBO adjusted their recent estimates downward projecting that annual growth in revenue will reach only $160 billion.

As such, defense spending is obviously not the key factor in lower than expected revenue and a growing annual debt. Revenue estimates are down not because tax rates are too low or defense spending too high but because economic growth is anemic. 

For example, the annual deficit over the past five years still declined by nearly $1 trillion even with a weak economic recovery. Revenue did go up, and some limited categories of spending were capped. Imagine what revenue a stronger economy would produce.

In the Bush 43 administration, for example, even with lower tax rates, average annual revenue growth during the recovery was higher (2003-7) compared to the current recovery (2009-16).  From 2003-7 revenue climbed $212 billion a year on average, as the economy recovered from 9-11 and the 2000-2 recession. In FY2005 alone, revenue surged $270 billion.

However, since 2011 revenue has grown by an average of only $193 billion a year as historically low economic growth prevailed. This despite higher tax rates and an economy some 38 percent bigger in size compared to 2004.

Although the deficit certainly remains worrisome, it could be significantly curtailed if nondefense, and entitlement spending is further limited, and revenue is enhanced through higher economic growth and tax reform.

For example, Congress has already significantly cut projected spending. The administration proposed to spend $4.147 trillion this year, (FY2017) but the House passed a resolution calling for spending $3.882 trillion, a reduction of $265 billion. And CBO, the Congressional Budget Office, estimates the US government will spend $3.9 trillion, which is still a reduction in spending as proposed by the administration of roughly one-quarter of a trillion dollars.

Add to this three additional revenue enhancers that are on the table. First, adopting House Budget Committee Chairman Price’s new health care reform bill would cut spending by $100 billion a year according to CBO. Second, just eliminating by half the annual fraud identified by GAO in Medicare, Medicaid, the EITC and CTC, reduces “expenditures”—largely to criminal gangs—by some $65 billion annually. And third, tax reform could readily enhance economic growth and thus annual revenue growth by tens of billions more.

Thus with greater economic growth, tax reform, fraud prevention and lowered non-defense spending, at least half a trillion dollars in budget space opens up. And we have not even included possible welfare and entitlement reform.

Many analysts expect for FY2017 at least an initial $30 billion supplemental increase in defense spending, but which will grow over the next five-year defense plan to between $80-$100 billion annually (with defense reform and management efficiencies providing some 15-20 percent of that number).

In short, three measures: 1. Tax reform that generates economic growth, 2. Restraint in non-essential government spending, and 3. Fraud prevention could produce budget space for more defense spending some 500-1000 percent greater than needed to keep the deficit from worsening.

These are the facts we should bring to the attention of the new OMB Director.

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