Analysts predict Pentagon budget crunch in years ahead

The coming fiscal year will prove bountiful for military contractors, with plenty of money added to the Pentagon's rapidly growing budget and few cuts to key investment programs. But with a nearly $500 billion deficit looming, budget analysts warn that defense spending is likely to decline over the next decade.

The deficit may not have much impact on the Pentagon's fiscal 2005 budget request, but with continued government borrowing and interest rates expected to rise, mounting pressure to rein in federal spending could lead to fewer defense dollars in the next several years, according to Stanley Collender, a budget analyst and senior vice president at Fleishman-Hillard.

"At some point there will start to be pressure to do something about the deficit again," Collender told reporters during a press briefing today, adding that military planners and defense contractors should not get too comfortable. "I would be concerned about where the spending cuts are going to come, and whether or not it's going to force a complete examination of the U.S. military strategy."

Defense spending will increase to $401.7 billion in fiscal 2005, a growth rate of 6 to 7 percent over last year. But Collender, who also writes a column for GovExec.com, reminded his audience that when the 1985 Gramm-Rudman-Hollings Act was implemented in an effort to end deficit spending, "the department budget that took the biggest hit was not domestic -- it was defense."

Between fiscal 2000 and 2004, the defense budget increased $85 billion in regular appropriations, and last year's spending represented a 17 percent increase over fiscal 2000. In addition, the Bush administration has requested $168 billion in supplemental spending since the Sept. 11, 2001, terrorist attacks. If the president asks for another supplemental spending package in fiscal 2005, anticipated to add another $50 billion to the Pentagon's top-line, defense spending will grow 37 percent over fiscal 2000.

This year the Pentagon is expected to request roughly $75 billion in investment funds -- $2 billion less than projected in its long-term spending plan, according to Steven Kosiak, director of budget studies at the Center for Strategic and Budgetary Assessments, which sponsored the briefing. Lawmakers in fiscal 2004 added roughly $2 billion to the Pentagon's procurement accounts, and are likely to do so again in 2005, Kosiak said.

But even if the Pentagon dodges the deficit bullet this year, other pressures on procurement spending are likely to arise, Kosiak said. Lawmakers are poised to add billions in new entitlements for military personnel, including concurrent receipt of veterans' benefits and health care for reservists.

In addition, the Pentagon announced Wednesday a temporary measure to increase military end-strength by 30,000 troops over the next several years, a move that could be funded in part by money appropriated in the most recent fiscal 2004 emergency supplemental. But many lawmakers would like to see such an increase made permanent. These and other quality-of-life changes could place significant financial burden on the Defense Department, increasing its annual top-line by billions, Kosiak said, as the military historically has been quick to remedy rising operations and maintenance costs by raiding its own modernization accounts.