America's imprudent and unsustainable fiscal path: fiscal challenges confronting DoD will necessitate better acquisition outcomes

Defense AT&L, March-April, 2006 by David M. Walker

A fiscal and financial crunch is coming. It's not a matter of if, but to what extent and at what time. The government is on a "burning platform," and the status quo way of doing business is unacceptable.

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This article provides Defense AT & L readers my broad perspective of where the country is and where we are headed from a financial and fiscal standpoint. I also outline some of the other challenges that the nation faces because our fiscal and financial crunch overarches everything. There will ultimately be a ripple effect on every department, agency, program, and policy in the federal government.

High-Risk Areas

We have large and growing structural deficits in the out-years. We have rising public expectations for results. We also have a number of trends and challenges that face us as a nation and our position in the world that don't have geopolitical boundaries--whether you're combating terrorism, whether you're fighting infectious diseases, whether you're promoting clean air and water, or whether you're trying to assure stable capital markets. We have to be able to partner more internationally as well as domestically--partner for progress between governments, between the public sector, private sector, and not-for-profit sector.

We have additional resource demands due to Iraq, Afghanistan, incremental homeland security costs, and recent natural disasters. We also have a range of government performance, accountability, and high-risk areas. Figure 1 shows the Government Accountability Office's latest high-risk list. These programs represent areas at greater risk of fraud, waste, abuse, and mismanagement; and others at risk of not achieving their mission. DoD is prominently represented--14 of 25 areas. DoD has some of the best people, both in uniform as well as civilians. The total force of civilian, military, and contractor communities is very capable--an absolutely awesome power. DoD is No. 1 in the world in fighting and winning armed conflicts--it's an A . But in my opinion, DoD is a D (rated on a curve and giving the benefit of the doubt) on economy, efficiency, transparency, and accountability.

Wants vs. Needs

Business transformation within DoD has been a challenge since 1947, and a number of things are going to have to be done fundamentally differently in order to get DoD to where it needs to be. For every dollar that DoD spends today on a want is a dollar it will not have for a need tomorrow--because the crunch is coming.

Let me give you a little bit of a financial perspective so you can put this in context. In 1964, almost half the federal budget was for defense. If you fast forward 40 years to 2004, it was down to 20 percent. The 2005 numbers haven't been released yet. Where did the money go? It went from defense to Social Security, Medicare, and Medicaid. That trend cannot continue.

In 1964, 7 percent of the federal budget was for interest. The same was true in 2004. Today, however, the interest portion of the budget is escalating rapidly because we're adding debt at or near record rates and interest rates will go up. We are very fortunate that the Chinese, the Japanese, and other countries save a lot, because we don't. Right now, what they're doing is loaning us their excess savings, which means that they end up holding an increasing piece of our nation's mortgage--and that could have serious implications for our future economic and national security.

In 1964, two thirds of the budget was discretionary spending decided by Congress each year. In 2004, discretionary spending went down to 39 percent. Stated differently, 61 percent of the federal budget was on autopilot in 2004, and that percentage is growing every year. It should come as no surprise that defense is in discretionary programs such as homeland security, the judicial system, education, transportation, the environment, and the GAO. These are all important expenditures, some of which are in the Constitution of the United States. Yet, these items that are deemed to be mandatory spending are squeezing out discretionary spending. The past cannot be a prologue.

Figure 2 shows the bottom line numbers in 2004/2005. You need to add 9 zeros to each of these numbers to get a sense for what they really look like. In 2004 we ran a $412,000,000,000 unified budget deficit. But that's really misleading because we spent every dime of the Social Security and Medicare surplus on other government operating expenses. We ran an operating deficit of $567 billion. Now of that $567 billion, only a little over a $100 billion had anything to do with Iraq, Afghanistan, and incremental Homeland Security costs. (By incremental I mean post-9/11 costs. Before 9/11, we had the Coast Guard, the Border Patrol, Customs Service, and the Secret Service.)

We haven't been in a recession since November of 2001. We had the strongest economic growth rate of any industrialized nation in 2004/2005. How to justify deficits of that size? The answer is you can't. It's fundamentally imprudent. We are mortgaging our kids' and our grand-kids' future. They're going to pay a big price unless somebody starts doing something different--and soon.