FPI Fact Sheet: Defense Budget 101

January 22, 2015

The Constitution clearly states that it is the exclusive and mandatory responsibility of the federal government “to provide for the common defence.” Whereas most federal powers are discretionary, defense is mandatory. The Constitution reserves for Congress “the power to raise and support armies” and “to provide and maintain a navy.” As it prepares to receive the president’s budget request for Fiscal Year 2016 (FY16), the Congress ought to consider carefully whether the funds requested by the president are sufficient to discharge its constitutional obligations. To assist Congress, the Foreign Policy Initiative has prepared this introduction to the defense budget, with an emphasis on the fundamental question “How much is enough?

Three Basic Ways of Measuring the Defense Budget

There are three basic ways of measuring whether the defense budget has grown larger or smaller from year to year. The first is simply to adjust for inflation and compare the number of constant dollars spent on the military. The second is to measure defense spending as a percentage of the overall federal budget. The third is to measure defense spending as a percentage of national income, known as Gross Domestic Product (GDP).

In constant dollars, the defense budget has fallen sharply over the past five years after growing significantly in the aftermath of 9/11. Congress provides the Department of Defense with a “base budget” as well as supplemental wartime funding. Supplemental funding is often referred to as OCO funding, a name derived from the acronym for “overseas contingency operations.” In 2008, the total defense budget reached its high point of $760 billion; for 2015, the total will be slightly less than $560 billion, a reduction of 26 percent. The principal cause of this reduction has been the drawdown from Iraq and Afghanistan, which reduced OCO funding by almost 70 percent from its peak of $211 billion per year. At the same time, however, the base budget has fallen by $78 billion, or 13.6 percent.

Measuring the defense budget as a share of the federal budget indicates the extent to which defense spending is a government priority.  Sixty years ago, the federal government spent more than 60 cents of every dollar on the military, whereas today it spends a fourth as much—approximately one-sixth of the budget. After the war in Vietnam, defense spending fell below 30 percent of the government’s total. Under President Reagan, defense spending climbed from 23 to 28 percent of the budget, before dropping to 16 percent shortly after the end of the Cold War. This figure rose again to 20 percent after 9/11, but is now back at 16 and headed lower. The White House projects that military spending will consume only 12 percent of the budget in the year after President Obama leaves office. The force behind this long-term trend is the inexorable growth of entitlement spending, which rose from 25 percent of the budget in 1975 to 48 percent today. According to the Congressional Budget Office (CBO), it will consume 53 percent of the budget ten years from now.

Measuring the defense budget in terms of national income (GDP) helps to gauge the affordability of military spending. Typically, the entire federal budget consumes around 20 percent of GDP. At its peak in 2009, federal spending reached 24.4 percent of GDP.  In terms of GDP, defense spending reached its peak in the 1950s, when it accounted for about 9 percent of national income. In the 1980s, President Reagan’s buildup increased the defense budget from 5 percent to 6 percent of GDP. That figure had fallen below 3 percent before the attacks of 9/11. It then rose as high as 4.7 percent before falling back to 3.5 percent today. The White House projects that it will fall as low as 2.6 percent in 2019. In contrast, major entitlements consumed 10 percent of GDP in 2013, up from 4.8 percent in 1974.

What Our Partners and Adversaries Spend

Whereas America’s principal allies publish reliable information about their defense budgets, its adversaries largely conceal their spending. According to the best independent estimate, China spent $188 billion on its military in 2013, a 600 percent increase from just 15 years earlier. Meanwhile Russia spent $88 billion, compared to $20 billion just 15 years earlier. Iranian spending has been much more stable, hovering around $10 billion, while there is no credible estimate of North Korean expenditure.

While America’s principal adversaries have rapidly increased their military spending, its European allies have spent the same amount or less, after adjusting for inflation. As a percentage of GDP, European defense spending has fallen sharply. In 2014, the members of NATO sought to reverse this trend with a non-binding commitment to spend at least 2 percent of GDP on defense. Besides the US, only the UK, Greece and Estonia have met this target.

In Asia, the defense budgets of America’s allies are growing in real terms, but falling as a percentage of GDP. Adjusting for inflation, Japan, South Korea and India have all invested more in defense, while Taiwan’s budget has fallen slightly. Still, none of their defense budgets have kept pace with GDP.

Comparing the US with its Allies and Adversaries

The United States spends as much on defense each year as the next top ten countries combined. For some, this amounts to evidence that American spending is excessive. Sen. Cory Booker (D-NJ) cited this comparison to demonstrate that the United States can defend itself effectively while spending less. Former Sen. Alan Simpson (R-WY), co-chairman of President Obama’s deficit reduction commission, made the same point to support his assertion that a substantial portion of military spending is wasteful or inefficient.

The proper amount to spend is, of course, a matter of debate. Generally, several other factors tend to inform a comprehensive assessment. The first is the nature of American strategy. Under both Democratic and Republican leadership, the United States has chosen to play the role of global leader. In the words of President Obama’s national security strategy, “global security depends upon strong and responsible American leadership.” This choice has major implications for defense spending, since the United States lies thousands of miles from the location of potential conflicts. To project power across such distances, the United States employs capabilities like aircraft carriers and forward deployed forces. In contrast, America’s adversaries tend to focus on regional objectives. Russia seeks to dominate its neighbors. China seeks exclusive control of nearby waters and the reintegration of Taiwan. Meanwhile, the United States has chosen to build a force capable of preventing such aggression regardless of where it takes place.

Another important consideration is the relative cost of generating military power. Travelers know that the cost of a meal or a pair of shoes tends to be much lower in less-developed countries. For that reason, China can pay its troops much less than America does. Furthermore, most Chinese troops are conscripts, whereas the United States relies on an all-volunteer force, the recruiting of which requires a competitive pay and benefits.

Broadly speaking, a comparison of what different countries spend on defense must address differences in economic conditions, geography, and military strategy in order to be useful.

What is Sequestration? How Much Does it Cut Defense Spending?

The Budget Control Act of 2011 (BCA) put in place two mechanisms to control discretionary spending. First, it placed a cap on annual discretionary spending for each year from 2012 through 2021. Second, it set up a Joint Select Committee on Deficit Reduction, which it instructed to find a way to cut deficit spending by an additional $1.2 trillion over a period of ten years. If the Committee did not do that, then a two-stage process to reduce spending would begin. First, an even lower set of discretionary spending caps would go into effect. If Congress brought annual spending below this second set of caps, no further action would be necessary. However, if Congress breached those caps in any given year, the White House Office of Management and Budget (OMB) would have to cancel (or sequester) a portion of the spending for each discretionary program in order to force spending below the mandated caps.

Strictly speaking, sequestration only refers to the process whereby OMB makes automatic reductions in the event that Congress breaches the lower set of spending caps. Since the spending bills for 2014 and 2015 respected the BCA’s second, lower set of spending caps, no sequestration was necessary. However, many use the word sequestration to describe the current situation, in which Congress must respect the lower set of BCA caps or contend with automatic reductions. Many also refer to the lower set of BCA caps as sequestration caps or sequestration-level caps.

$487 Billion of Defense Cuts, Then $495 Billion More

The first set of BCA caps, which took effect in 2012, cut the defense budget by $487 billion over ten years relative to the president’s budget request for that year. When the president submits his budget request each year, it includes a projection of Pentagon spending that reaches ten years into the future. In effect, the BCA employed the president’s 2012 projection as a baseline against which to measure its savings.

When the Joint Committee failed to agree on how to reduce the deficit by an additional $1.2 trillion, the BCA’s sequestration-level caps went into effect. This required Congress to cut defense spending by an additional $55 billion per year for nine years (or $495 billion), relative to the baseline. Together, the two sets of caps mandated a total cut of $982 billion, a figure often rounded up to $1 trillion.  It is worth noting these cuts followed a plan by then-Secretary of Defense Robert Gates to cut Pentagon spending by $78 billion over five years in order to stave off further reductions.

In 2013, a series of legislative fixes and extenuating circumstances created room for an additional $20 billion of defense spending. Most importantly, Congress delayed the onset of sequestration by two months, from January to March, which gave the Pentagon back $12 billion. Later in the year, the Ryan-Murray budget deal raised the sequestration-level spending caps slightly for 2014 and 2015, yielding an additional $22 billion for defense in 2014 and another $10 billion in 2015. These changes helped smooth the Pentagon’s adjustment to the new budget reality, yet they barely affect the magnitude of the overall change.

How Much Is Enough?

Determining the right amount to spend on defense is a matter of judgment, not science. One can measure the defense budget in terms of constant dollars or as a percentage of government spending, but this only illustrates the extent to which defense spending has changed over time, not whether the amount of spending was optimal at any given time. One can compare the U.S. defense budget to that of its allies and adversaries, but there is no correct ratio to govern their relationship.

A methodical assessment of how much to spend on defense should begin with U.S. strategy, which identifies the country’s objectives and outlines the methods for achieving them. Next, it is essential to consider the threats to American security. A greater or lesser tolerance for risk should also inform discussions of military spending. Many other factors, such as technological developments and economic conditions, are also relevant. As such, the purpose of this fact sheet is not to settle the debate, but to provide the foundation for a more rigorous discussion of an issue that is poorly understood yet crucial to providing for the common defense.

Key Sources

OMB maintains a spreadsheet which conveniently displays defense spending since 1940 in constant dollars and as a percentage of both government spending and GDP. It also includes projected spending for the next five years.

CBO also publishes projections of government spending as well as historical budget data.

The Stockholm International Peace Research Institute (SIPRI) compiles publicly available data on global military budgets. It also works to estimate the military spending of China, Russia, and other countries that do not share credible data.

The Congressional Research Service (CRS) has published responses to Frequently Asked Questions about sequestration and a report describing the impact of the BCA on discretionary spending.

The Department of Defense published a report in April 2014 that estimated the impact of sequestration-level funding over FY 2016 – FY 2019.

The office of the comptroller publishes documentation of the defense budget. Ten year productions may be found in Table 1-12 of the DOD Green Book.

Mission Statement

The Foreign Policy Initiative seeks to promote an active U.S. foreign policy committed to robust support for democratic allies, human rights, a strong American military equipped to meet the challenges of the 21st century, and strengthening America’s global economic competitiveness.
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