Defense expenditures have been in steady decline
throughout the 1990s, a trend that can be expected to continue
unless budget priorities are changed substantially. Between 1990
and 1997, defense outlays dropped from $300.1 billion to $271.6
billion, a reduction of 26 percent in real terms and almost 10
percent in nominal terms. This Center for Data Analysis study shows
that if the current pattern of budget priorities continues, the
downward trend in defense would result in the virtual elimination
of defense spending. To avoid this, there will need to be
substantial changes in budget priorities.
budget debates of the past two years suggest that Congress intends
budget priorities to remain relatively fixed in the foreseeable
future. If this is so, the Balanced Budget Act of 1997 (BBA of
1997) provides a reasonable indication of future federal revenue
and spending priorities. A framework for future budgets appears
that is shaped by four guiding principles:
The federal budget will remain
balanced. Last year Congress and the Clinton Administration
agreed on a plan that would balance the federal unified budget by
fiscal year 2002. Better-than-expected economic growth, however,
has led both the Congressional Budget Office (CBO) and the Office
of Management and Budget (OMB) to forecast a balanced budget by
fiscal year 1999 if no further changes are made in current law (see
President's most recent budget takes this accelerated path to
balance into consideration, and the budget produced by Congress is
likely to do the same.
Overall tax rates will not be increased
and may be reduced. Last year's budget agreement resulted in a
modest reduction in the level of taxation for selected groups,
while maintaining the promise of a balanced budget. Current
projections are that existing tax rates will result in revenue
increases for each of the next five years (fiscal years 1999-2003)
Entitlement and non-defense
discretionary outlays will continue to grow at rates higher than
the inflation rate. Entitlement expenditures have grown rapidly
during the 1990s. In fact, outlays for federal entitlement
programs, including Medicare and Social Security, have risen from
$605.2 billion in 1990 to $880.1 billion in 1997. This is an
average annual growth rate of 5.5 percent, which is well in excess
of a no-real-growth path.2
(See .) This rapid increase in entitlement outlays has been
financed in part by new public debt. In 1990, outlays for interest
payments were $184.2 billion. By 1997, they had grown to $244
billion, an increase of 32 percent (see ). This increase reflects the fact that while deficits
have come down over the course of the 1990s, the national debt has
continued to increase and currently stands at $5.5 trillion.
Non-defense discretionary spending--all spending programs other
than entitlements, interest on the debt, and defense--has grown
steadily during the 1990s at about a 5 percent annual rate of
growth (see ).
Defense spending will be reduced in
terms of current, non-inflation-adjusted dollars. Defense
outlays were $300.1 billion in 1990. In 1997, they were $271.6
billion. This 9.5 percent reduction in current dollar terms
represents a 26 percent reduction in real terms between 1990 and
1997 (see ).
pattern of federal spending also can be seen by examining the
percentage of total federal expenditures that is dedicated to each
function of the government. This view indicates that entitlements
were the highest priority of the federal government during the
1990s. Spending on entitlement programs (primarily Social Security
and Medicare) was consistently greater than defense and non-defense
discretionary spending combined. The second priority has been
non-defense discretionary spending, which started the decade at a
lower level than defense spending but surpassed defense spending in
1995. The lowest priority of the federal government has been
defense (see ).
budgets during the 1990s, reinforced by the BBA of 1997, thus
follow a pattern. Specifically, the budget is brought into balance.
The level of taxation stabilizes, even while revenues increase. On
the spending side, expenditures on entitlements and non-defense
discretionary spending grow at more than the rate of inflation. The
budget for national defense is the only major spending category
that decreases in both nominal and real terms. If left unchanged,
these policies will have serious consequences for America's
national defense (see ).
fiscal trends of the 1990s, as reinforced by the BBA of 1997, can
help analysts project future levels of federal government revenues
and spending. To produce this projection, fiscal priorities and
current trends must be expressed as assumptions regarding budgetary
decision-making. Heritage analysts have incorporated the following
six assumptions into a model that projects annual revenues and
The budget is brought into balance in
fiscal 1999 and remains balanced thereafter. This is a
conservative estimate, and does not allow for reductions in the
national debt or changes in the social insurance trust funds beyond
the levels currently forecast by the trustees of these
funds.3 Any surpluses
generated under current law are assumed to be applied
proportionally to all types of federal spending, including
The national debt stabilizes after
fiscal 1999. Because the federal government maintains a
balanced budget (but does not run a budget surplus), the national
debt remains constant. However, the federal government must
continue to service this debt by making annual interest payments.
The level of these interest payments is determined by
market-established interest rates. Heritage analysts used interest
rates and annual levels of federal debt service used in the WEFA
long-term U.S. macroeconomic model and released by WEFA in
Overall tax rates are not increased.
While tax rates remain constant, total revenues rise as the
economy, and thus the tax base, grows. This is a conservative
assumption because many in Congress, and even the President, have
talked about reducing taxes through either wholesale reform of the
tax system or targeted cuts.
Spending on federal entitlement
programs, including Social Security and Medicare, is kept at
current law levels. This assumption implies that any shortfall
in the Social Security and Medicare trust funds will be covered
through payments out of general revenues.4 President Clinton, in his 1998
State of the Union Address, stated his intention to use current and
future budget surpluses on funding financial shortfalls in the
Social Security trust funds.
Non-defense discretionary spending
increases over the next 21 years at the level estimated by
WEFA. Specifically, WEFA assumes an annual growth rate of about
5 percent, or about the same rate of increase as during the 1990s,
and slightly greater than inflation over the same period.
Defense will receive all the funds
remaining under projected revenues after interest on the debt,
entitlement outlays, and non-defense discretionary outlays are set
according to the assumptions described above. This assumption
reflects the current consensus on budget policies, in which defense
is the only account where nominal and real reductions in spending
are deemed acceptable.
on the assumptions described above, Heritage Foundation analysts
used the WEFA Mark XI macroeconomic model to estimate annual
expenditures for interest on the national debt, entitlements,
non-defense discretionary spending, and defense for the next 21
years. In order to meet our assumption of continuously balanced
budgets, any difference between revenues and outlays is met in
every case by reducing federal outlays for national defense.
number of WEFA forecasts were used to project various aspects of
federal spending, such as interest payments on the federal debt.
However, it is important to note that Heritage economists
constructed the projection of defense spending contained in this
study; it does not come from a formal simulation of the WEFA U.S.
model. "Simulating" the WEFA model would have meant changing
federal spending levels and allowing the model to calculate new
values for, say, interest payments on the federal debt. The reason
such a "run" or simulation of the model was not performed is that
the reduction in defense spending implicit in current budget
priorities is so severe as to be outside the parameters of the WEFA
model, making the results of a dynamic simulation highly suspect.
Defense projections in this study, therefore, are static estimates,
but good first approximations of the likely outcome of adhering to
current law policies. (For a complete description of the analysis,
see the Technical Appendix.) If a fully dynamic analysis could be
undertaken, however, it is likely that a deficit would appear and
that it would worsen over the forecast range. Therefore, if defense
spending continued to be a "residual"--or the difference between
total revenues and all other non-defense spending--it would reach
zero more rapidly, and thus prior to the year 2020.
Long-Term Result: The Defense Budget Eventually Would Be Crowded
Out Entirely by Other Priorities.
Holding today's fiscal policy constant,
using the assumptions noted, produces the following results:
Interest payments on the national debt
increase. By the end of the 21-year period, these payments will
approach $450 billion annually, or 10 percent of the federal
Entitlement expenditures increase sharply
between 1998 and 2020, rising to $3 trillion in fiscal year 2020,
or 66 percent of the federal budget.
Non-defense discretionary spending also
increases, but at a more modest rate than entitlements. By 2020,
non-defense discretionary spending is at $1.1 trillion, or 24
percent of the federal budget.
Defense spending gradually declines over
the 21-year period until no money is available for this basic
function of government in the year 2020 (see ).
Note: It is important to recognize
that this projection is not a prediction that the defense budget
actually will go to zero by 2020. Rather, it is designed to show
that this will be the "default" outcome if current and future
administrations and Congresses hold to existing budget policies.
Avoiding this result would require a significant shift in budget
priorities. In effect, this projection is similar to several
projections indicating that, under current policies, Medicare and
Social Security eventually will be unable to pay benefits. In these
cases, as in defense, it is inconceivable that Congress would allow
this to happen. What all such projections provide is a warning that
policy changes are needed.
--Baker Spring is a Senior
Policy Analyst in The Kathryn and Shelby Cullom Davis International
Studies Center at The Heritage Foundation.
--John S. Barry, during the preparation
of this study, was a Policy Analyst in Economics at The Heritage
This budget analysis makes use of the Mark XI
Quarterly Macroeconomic Model created and maintained by WEFA
Inc.5 Specifically, Heritage
analysts used WEFA's September 1997 U.S. long-term forecast of over
1,600 economic variables for the period 1998-2020, including more
than 25 variables that measure federal tax and spending
WEFA model is maintained to forecast the most probable economic
conditions given historical trends, public policy, and likely
policy changes. Therefore, in its September long-term forecast,
WEFA assumes that payroll taxes earmarked for the Medicare Hospital
Insurance (HI) trust fund will be increased 136 basis points by
2020 (evenly split between employers and employees). WEFA also
assumes that payroll taxes earmarked for the Old-Age and Survivors
Insurance (OASI) and Disability Insurance (DI) trust funds will be
increased 348 basis points (evenly split between employers and
employees) by the year 2020. In both cases, the increase in tax
rates is phased in beginning in 2002. In other words, WEFA diverges
slightly from current law in order to forecast the most likely
economic outlook over the next 21 years.
However, this analysis depends on current
law to determine what would happen to defense spending if no reform
of entitlements is enacted and the commitment to a balanced budget
is maintained. Therefore, Heritage analysts reset all payroll tax
rates to their current law level. In light of these changes and
others discussed above, Heritage analysts made very limited use of
the WEFA model. Specifically, Heritage analysts excluded all
stochastic variables in the WEFA model except those relating to the
federal government's taxing and spending policies. That is, the
analysis assumes no change in current law with respect to federal
taxation and entitlement programs. Non-defense discretionary
spending is maintained at the level forecast in the WEFA September
long-term forecast. Interest payments on the debt (the level of
which is held constant after 1999) are assumed to respond to
WEFA-forecast interest rates.
Therefore, the analysis in this study can
be considered "static" because it does not assume any macroeconomic
response to a change in current-law federal tax and spending
priorities. In other words, relevant data were extracted from the
WEFA model for calculation in a Heritage-created spreadsheet model.
Specifically, Heritage analysts decreased defense spending to
accommodate (i.e., eliminate) forecast budget deficits. Thus, it is
assumed that Congress and the President maintain a balanced budget
policy by reducing only defense spending.