Pentagon Fires at Budget Targets That Can’t Be Hit: Peter Orszag

Jan. 11 (Bloomberg) -- At some point in every negotiation over fiscal policy, once the high-minded speeches and other pleasantries have been delivered, the disagreeable details poison the atmosphere. Everyone is in favor of tax and entitlement reform, after all, until they see the specifics.

The reaction to the cost-cutting strategy that Defense Secretary Leon Panetta revealed last week suggests this is about to happen with regard to Pentagon spending.

Let me be very clear: Substantial efficiencies can and should be wrung from the defense budget, and Panetta’s approach has many attractive features. But the strategy he sketched out -- most of the details have yet to be provided -- reveals the underlying tensions that arise whenever significant defense cuts are promised.

Officially, we have committed to about $1 trillion in defense savings over the next decade, split roughly evenly between the reductions called for by the debt-limit deal in August and the additional ones triggered by the failure of the supercommittee in November. The Panetta strategy is aimed at delivering only the first half of this $1 trillion.

In the abstract, reducing defense costs seems pretty simple: Just cut back on some of the really expensive equipment. The cost of building the F-35 fighter, for example, has been estimated at more than $100 million per plane. The new littoral combat ship, designed to operate in coastal regions, is projected to cost about $600 million per ship.

Weapons and Soldiers

The fancy weapons systems that seem like low-hanging fruit, however, don’t add up to anything close to enough to hit the budget targets Panetta is aiming for -- even if there were enough votes in Congress to cancel the new jets and ships. To save that much money, you need to reduce the number of U.S. troops.

To see why, look at the defense budget for 2016. Before the most recent reductions were enacted, the Congressional Budget Office had estimated that the Defense Department’s plans would lead to $594 billion in defense spending in 2016. Acquisitions, including the cost of developing and buying expensive weapons systems, were estimated at $210 billion, or just over a third of the total. To save $50 billion to $100 billion a year -- which is what’s needed to reach the promised 10-year targets -- from this part of the budget alone is not plausible.

Most defense spending goes to personnel and operations costs, which are based on the number of troops we have. For 2016, the CBO projected these to cost more than $350 billion, or about $170,000 per active-duty military person. When it comes to cutting the defense budget, this is where the rubber hits the road.

The Panetta plan, according to reports, would reduce the number of troops in the Army from 570,000 to 490,000, and in the Marines from a bit over 200,000 to 175,000. Personnel levels for the Air Force and Navy would be held roughly steady. Michael O’Hanlon, a Brookings Institution scholar who is a leading expert on the U.S. defense budget, says such reductions are prudent, and would save about $150 billion over 10 years.

That’s only about a third to a sixth of the needed spending cuts, which raises questions about where the rest of the money will come from. But even these proposed force reductions are generating a furious backlash. Retired Major General Robert H. Scales wrote in the Washington Post that they show “a degree of a-historicism that exceeds that of any post-World War II administration.”

Unrealistic Budget Cuts

Clearly, troop reductions are a harder sell even than weapons cuts -- which is saying something. And that’s true even assuming that, over the next decade, we don’t face any new national-security risk, which would undermine any nascent support for fiscal constraint. So no wise person should bet that the promised defense-spending reductions will in the end be fully implemented.

What’s also interesting is that the budget cuts needed in areas outside defense are, if anything, even steeper and thus even less realistic. As Richard Kogan of the Center on Budget and Policy Priorities has noted, if the cuts are actually made, by the end of this decade, non-defense discretionary spending would wind up at its lowest share of gross domestic product since 1930. I wouldn’t bet on that, either.

All of which suggests that both political parties have locked into inadequate revenue levels for the next decade. As a result, they are forced to count on spending cuts much larger than what, in the end, they are likely to implement -- in some cases, much larger than what they should implement.

So the game is to feign concern about medium-term deficits by promising big discretionary spending cuts in the future, without saying exactly which programs would be reduced. Once the specifics are revealed, though, it’s extremely unlikely the promises will become reality.

Secretary Panetta knows all this. I wish him well in overcoming the odds.

(Peter Orszag is vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration. The opinions expressed are his own.)

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