FEDERAL BUDGET POLICY AND DEFENSE STRATEGY

Dennis S. Ippolito

February 15, 1996
ii

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iii

FOREWORD

Defense policy and strategy will, inevitably, be affected by

fiscal constraints. Army leadership struggles daily with the tradeoffs

that have to be made when balancing the needs of today's readiness

against the cost of tomorrow's modernization. The decisions that are

made are difficult, and not without long-range consequences, central

to the nation's security.

In a broader sense, it is the fiscal health of the nation overall

that will determine the scale and scope of U.S. security policy--and

the Army’s budget--as we enter the 21st century. U.S. political

leaders have engaged in a watershed struggle to bring the Federal

budget into balance. It is all too clear that the process will be

painful, less so how that pain will be distributed. In the following

essay, defense economist Dennis S. Ippolito dissects Federal budget

practices over the past several decades, with a particular focus on

sources and trends in our national deficit spending syndrome.

Underlying his message is an unsettling truth, that no matter how the

current debate over balancing the budget turns out, future cases for

the Army Budget are going to have to be made in an even more

challenging spending environment as discretionary spending margins

shrink.

Army professionals, now more than ever, need to be articulate

advocates of landpower for the 21st century. But before articulate and

reasoned arguments can be made for the kind of force that will ensure

that the nation does, indeed, build and maintain the world’s best Army

(or Navy, Air Force, or Marine Corps), one must take into account the

realities of the Federal budget.

RICHARD H. WITHERSPOON

Colonel, U.S. Army

Director, Strategic Studies Institute
iv

BIOGRAPHICAL SKETCH OF THE AUTHOR

DENNIS S. IPPOLITO is the Eugene McElvaney Professor of Political

Science and former chairman of the Department of Political Science at

Southern Methodist University. Prior to joining the faculty at SMU in

1982, he taught at the University of Virginia and at Emory University.

Professor Ippolito's recent books on the Federal budget include Budget

Policy and the Future of Defense and Uncertain Legacies, Federal

Budget Policy from Roosevelt through Reagan.
v

SUMMARY

The debate over future U.S. defense strategy is not easily

separated from misunderstandings and confusion about Federal budget

policy. In particular, some defense analysts now contend that the

capabilities required under the 1993 Department of Defense Bottom-Up

Review are too costly. The deficit control efforts that appear certain

to constrain Federal spending for an indefinite period, they argue,

mandate a less demanding and less expensive strategic option.

The realities of budget policy trends, however, are more complex

than this argument acknowledges. The structural deficit problem that

policymakers are struggling to solve has, in fact, very little to do

with discretionary spending, whether for defense or for nondefense

programs. Instead, the key to serious deficit reduction is found in

entitlement policy cutbacks, primarily in retirement and health

programs. Unless the extremely high rates of growth embedded in

existing entitlements are dramatically reduced, structural deficits

cannot be controlled.

Over the past three decades, the budgetary and economic

significance of defense budgets has greatly diminished. Today, the

Federal budget is dominated by mandatory spending programs, primarily

entitlements, and these programs will absorb even larger shares of

future budgets. Thus, strategic compromises that reduce defense budget

requirements cannot have more than a marginal impact on deficit

control. The damage to important, enduring military capabilities,

however, could be extremely serious and, given the declining

flexibility in spending policy, difficult to reverse. The purpose of

this monograph, then, is to provide an accurate fiscal perspective for

a critically important strategic policy debate.
1

FEDERAL BUDGET POLICY AND DEFENSE STRATEGY

INTRODUCTION

It is neither unexpected nor unprecedented that the debate over

U.S. defense policy is being dominated by fiscal constraints.

Maintaining an acceptable balance between budgetary and strategic

considerations was difficult during the Cold War, when the

geopolitical environment and concomitant threats to U.S. interests

were reasonably predictable.1

 The contrasting uncertainties of the

post-Cold War era obviously complicate the already formidable task of

shaping a strategic consensus that will not be compromised by

nondefense budgetary pressures.

The Department of Defense's Bottom-Up Review (BUR), which was

made public on September 1, 1993, defines future U.S. defense strategy

and requirements.2 Criticism of its strategic assumptions and

especially its potential costs is beginning to escalate in conjunction

with the rising tensions between the executive branch and the Congress

over Federal budget policy. Perhaps the most important strategic

controversy at hand focuses on the BUR's assumption that U.S. forces

must have the capabilities to conduct two "major regional conflicts"

at roughly the same time. For many defense experts, the likelihood is

remote that these capabilities would ever be needed, and there is

related uncertainty about the less abstract issue of whether currently

planned forces would be able to support so robust a strategy.3

These strategic issues cannot be easily separated from the fiscal

limits being imposed on defense. Assuming that planned forces can

adequately support official strategy, can projected budgets maintain

these forces at prudent levels of readiness and modernization? Here,

the overwhelming consensus is that funding will prove to be

inadequate, although the size and seriousness of budgetary shortfalls

 are disputed.4

The purpose of this analysis is to clarify the budgetary context

within which defense funding is determined, so that the strategic

policy debate can proceed in a more informed and rational manner.

Federal budget policy is likely to undergo a profound transformation,

if the executive branch and the Congress succeed in balancing the

budget over the next decade. As this transformation evolves, defense

spending will become increasingly vulnerable to deficit-reduction

initiatives, thereby enhancing the appeal of less challenging and less

costly strategic options.5

There is, then, a distinct danger that budgetary pressures will

force strategic compromises and risks that are unwise and, in fact,

unnecessary. The inescapable reality, from the standpoint of budget

policy, is that defense spending cutbacks can contribute very little

to the Herculean tasks of bringing the budget into balance and,

thereafter, keeping it in balance. The "drivers" of past, current, and

future deficits are Federal health and retirement entitlements, whose

growth rates under current policy are not sustainable, even if

draconian reductions are imposed on other types of spending. It is

simply not feasible for defense or nondefense discretionary programs
2

to yield savings that will appreciably alter the long-term deficit

dynamic associated with entitlement spending growth.

Indeed, what seems likely to occur if defense strategy is scaled

down solely in order to reduce defense budget demands over the next

decade is that defense will find itself in precisely the same

predicament thereafter. Eliminating structural budget deficits will

require large and repeated downward adjustments in spending policy for

the foreseeable future. But until Federal entitlement policy is

fundamentally changed, defense will be facing a recurring sequence of

budget-driven strategic accommodations.

The defense policy debate should proceed from a clear

understanding of nondefense budget policy trends. The first element in

this understanding is retrospective--how defense budgets have affected

spending control and deficit growth over the past several decades. The

second element involves the relationship between the defense and

nondefense discretionary spending limits imposed during the 1990s and

the structural deficit reductions achieved during this period. The

third element is a prospective examination of the long-term budget

trends that create structural deficit problems and of the spending

policy reductions upon which budget balance ultimately depends.

By assessing defense funding within this analytical framework, it

should be possible to divorce, or at least to insulate, the critically

important strategic debate from misperceptions and confusion about the

Federal budget. In the end, defense planners may determine that

existing strategy is unnecessarily demanding. This decision, however,

should proceed from a rigorous analysis of risk and reversibility,

rather than from politically expedient efforts to gain short-sighted

and evanescent savings.

DEFENSE SPENDING IN PERSPECTIVE

Over the past half-century, the United States has devoted a large

share of its budgetary resources (and its wealth) to defense. Since

this commitment produced a remarkably decisive, if largely

unanticipated, victory in the Cold War, it is difficult to make the

case that past military burdens were unnecessary and unjustified.

Nevertheless, defense critics have complained that the scale and

longevity of Cold War defense commitments entailed enormous sacrifices

in economic growth, budget deficits, and unmet domestic needs.6

 Their

usual conclusion is that post-Cold War defense budget cutbacks can and

should redress these sacrifices.

Defense spending critiques ignore, however, actual budget policy

trends. The economic and budgetary burdens associated with defense

have been decreasing very substantially for quite some time. The

economic weight of defense (usually calculated as the percentage of

gross domestic product [GDP] accounted for by defense spending) is

currently at its lowest level since the post-World War II

demobilization.7 Further, the defense budget share is lower than at any

time since before World War II.8

 Perhaps most relevant for the present

problem of budget balance, the "explosion" in Federal deficit and debt

levels has paralleled the shifting composition of the Federal budget
3

away from defense and toward nondefense spending programs.

Defense and the Economy.

Immediately after World War II, the United States engaged in a

massive demobilization, one that Cohen states "does indeed fit the

stereotype of precipitate shrinkage of the military that we so often

hear about . . . ."9

 By 1950, however, the Truman administration had

launched a comprehensive defense buildup that went well beyond the

immediate needs of the Korean War. Three years later, the defense-GDP

share stood at 14.5 percent (compared to the World War II peak of

nearly 40 percent), more than triple the levels of the late 1940s.

After the Korean War, defense spending remained elevated, averaging

over 10 percent of GDP annually in the Eisenhower administration's

peacetime budgets over the fiscal 1955-61 period.10

Despite the overriding priority assigned to defense during the

1950s, there were recognized imbalances between defense funding and

strategic planning requirements. For a time, defense proponents in

Congress gave only reluctant support to Truman's defense buildup

because of their deep anxiety over its economic impact. George H.

Mahon, chairman of the House Appropriations Subcommittee on Defense,

acknowledged that his committee's 1950 appropriations bill funded only

one-fourth the complete readiness estimate prepared by the Joint

Chiefs of Staff, but he argued that "nothing would please a potential

enemy better than to have us bankrupt our country and destroy our

economy by maintaining over a period of years complete readiness."11

Later that year, the Senate Appropriations Committee's report on the

House-passed measure called for additional cuts, declaring that "a

nation which exhausts itself in enervating overpreparation . . . may

well fall prey to a cunning and patient enemy who fully realizes the

debilitating influences of a war-geared economy over a long period of

time."12

When the Eisenhower administration took office, concerns about

the economic impact of defense commitments became even more

pronounced. Early in his presidency, Dwight D. Eisenhower delivered a

national radio address, in which he cautioned against "an unbearable

security burden leading to economic disaster."13 His administration's

"New Look," Eisenhower explained, embodied a less costly defense

program that the nation could sustain "for a long and indefinite

period of time."14 Despite Eisenhower's "new concept for planning and

financing our national security program,"15 the budgetary limits

imposed on defense throughout his tenure forced compromises in the New

Look program, and these compromises were often attacked by

congressional Democrats. In the 1960 presidential campaign, the

Democratic Party platform alleged that a "missile gap, space gap,

limited-war gap" had resulted from "essential programs now slowed

down, terminated, suspended, or neglected for lack of budgetary

support."16

Whatever the substantive merits of the Democratic critique, the

budgetary attack turned out to be clearly unfounded. While the Kennedy

administration initially boosted defense spending levels, its longterm budget planning was actually predicated upon steep cuts in
4

defense that would fund new and expanded domestic programs.17 Under the

Johnson administration, defense transfers to domestic purposes were

slowed by the Vietnam buildup, but the broader effort to lessen the

defense burden was successful. The defense-GDP share had, in fact,

entered an extended period of decline by the time Eisenhower left

office (Figure 1). Less than two decades later, defense had dropped

below 5 percent of GDP, and, after climbing to 6.5 percent at the

height of the Reagan buildup, the downward trend commenced once again.

In FY 2000, the defense-GDP share is expected to be approximately 3

percent, about one-sixth of the projected nondefense level.
5

The economic impact of defense budgets is no longer significant,

but the downtrend in defense has been obscured by a countervailing

expansion in nondefense spending. While defense budgets have fallen by

more than 60 percent compared to defense-GDP levels during the late

1950s, total Federal spending versus GDP is almost 25 percent higher.

Federal outlays are well above 20 percent of GDP today, even though

defense is at its lowest point since the late 1940s.

In retrospect, it is understandable that the economic

implications of a massive, indefinite defense commitment generated so

much concern during the 1950s. For Eisenhower, the containment of

defense budgets appeared to be absolutely necessary, given their

disproportionate economic and budgetary weight, and strategic accommodations and compromises could legitimately be justified in terms of 

economic policy. The fiscal situation of the post-Cold War era is not

at all analogous. Given the extremely modest economic burden

associated with defense, economic policy arguments for strategic

cutbacks have largely evaporated.

Defense and the Budget.

As Figure 2 illustrates, there have been several massive shifts

in the composition of the Federal budget during the era of modern

budget policy. The defense budget share, which had dropped below 20

percent under the New Deal, soared to almost 90 percent during World

War II. The defense and nondefense shares then were transposed after

World War II and, once again, during the Korean War. Since the mid1950s, the defense share of total outlays has moved downward fairly

steadily, while the nondefense share has climbed toward, and recently

above, the peak levels it enjoyed during the New Deal.

It has been quite some time, then, since defense spending

dominated the Federal budget. In addition, the post-Korea shift to a

budget monopolized by nondefense spending is striking in its duration

and in its seeming irreversibility. The Vietnam War and the Reagan

defense buildup of the 1980s slowed, but did not alter, the reshaping

of Federal budget policy away from defense and toward nondefense

purposes. Moreover, the relative size of the Federal budget has

increased significantly, as this compositional transformation has

occurred.

There has been a second and related change in the shape of the

budget, with the displacement of discretionary spending by

nondiscretionary, or mandatory, spending.18 In the early 1960s, total

discretionary spending (defense and nondefense) absorbed about 70

percent of the Federal budget. By the end of this decade, entitlements

and other mandatory spending, including net interest, will account for

over 70 percent of total outlays. The expanding budgetary impact of

nondiscretionary spending has resulted primarily from extremely high

rates of increase in retirement and healthcare entitlements. Social

Security, Medicare, and Medicaid, which today account for

approximately 70 percent of all entitlement spending and 40 percent of

the budget, represented less than 50 percent of entitlement spending

and less than 15 percent of the budget three decades ago.19
6

The long-term growth of the Federal budget, then, has been

concentrated in nondiscretionary spending programs, particularly

several large entitlements. This relationship, like the accompanying

reversal in defense and nondefense budget shares, has been notable for

its resistance to change, with even the Reagan defense buildup failing

to arrest the decline in the discretionary budget share. Under Reagan,

defense outlays more than doubled in current dollars, and real defense

spending rose by about 50 percent (Table 1). Contrary to widespread

criticisms at the time, the Reagan defense program was not being

financed by massive domestic cutbacks. Instead, real spending for

nondiscretionary domestic programs increased by about one-third, and

the nondiscretionary budget share continued to move upward.

The budgetary tradeoff to defense that did occur during the 1980s

came at the expense of discretionary domestic spending, which dropped,

in constant dollars, by about 10 percent. A different tradeoff had
7

taken place during the 1970s, when a 30 percent reduction in real

defense spending helped to finance a 50 percent rise in discretionary

domestic outlays. Yet, over the entire period, the total discretionary

spending budget share was dropping by more than one-third, which helps

to explain why the competition between defense and discretionary

domestic programs became so intense.

Many of the misconceptions about the Reagan era, and about
8

defense spending more generally, result from using discretionary

domestic programs as a surrogate for domestic budget priorities. The

appropriate and accurate measure of domestic program support

necessarily includes all domestic programs, discretionary and

nondiscretionary, and this comprehensive measurement makes clear that

domestic program support has overwhelmed defense on every dimension--

real spending growth, budget shares, and GDP shares--for an extended

period of time. The political balance of power in the executive branch

and the Congress has affected, and doubtless will continue to affect,

how the competition between defense and nondefense discretionary

programs is resolved. Indeed, this competition has defined much of the

annual appropriations agenda for the past quarter-century.20 The

appropriations process, however, controls a shrinking share of the

budget, and appropriations outcomes cannot alter the structural change

in the Federal budget resulting from the transfer of budgetary support

from defense to domestic purposes and from discretionary to

nondiscretionary programs.

Defense, Deficits, and Debt.

During World War II, defense spending absorbed most of the

budget, and wartime deficits totaled nearly $200 billion (or $1.6

trillion in constant FY 1987 dollars). By the end of the war, the

publicly-held Federal debt exceeded 110 percent of GDP. For the next

two decades, while the defense budget share was quite large, peacetime

deficits were extremely low, the publicly-held debt declined in real

terms, and its relative size (measured against GDP) dropped by more

than one-half. Since the 1960s, by contrast, deficits have become

chronic, their size has risen sharply, and the growth in publicly-held

debt has outstripped economic growth. Over this latter period, defense

spending has declined against all of the relevant indicators--GDP

shares, budget shares, and real spending growth.

A useful perspective on the long-term deficit trend, and its

underlying causes, is provided by the constant dollar comparisons in

Table 2. As noted above, defense spending during World War II

generated extremely large deficits. For the entire decade of the

1940s, real spending for defense averaged $290 billion annually, or

about three-fourths of total spending. Net deficits for 1940-49

(deficits minus surpluses) averaged just under $160 billion annually

in constant dollars. Clearly, the substantial deficit and debt

accumulations of the 1940s were caused by wartime defense spending.

This direct relationship between defense, deficits, and debt did

not persist. During the 1950s, real defense spending averaged $245

billion annually (or approximately two-thirds of total annual

spending), but average deficits were less than $10 billion. Real

defense spending then declined, as did the defense share of total

spending, but peacetime deficits eventually reached unprecedented

levels. During the 1990s, with constant dollar spending for defense

averaging about $215 billion annually (near to the lowest level since

before World War II), and the defense share of total spending at less

than 20 percent (again the lowest level since before World War II),

the estimated real dollar deficits will be the highest of any decade

in modern times. As Table 2 makes quite clear, deficit growth is
9

directly tied to nondefense spending, which has risen faster than

budget receipts and, of course, more than offset the decline in

defense.

For approximately two decades after the end of World War II,

defense and, to a lesser extent, nondefense discretionary spending

were indispensable elements in efforts to control spending and balance

budgets. Nondiscretionary spending programs then became the principal

sources of budget growth and the key to deficit control.

Unfortunately, the deficit-control efforts of the early 1990s

deliberately ignored this new reality, and the inevitable result is

deteriorating structural deficit control accompanied by a growing

distortion in spending policy.

DEFENSE SPENDING AND DEFICIT REDUCTION

By the end of the Reagan presidency, the defense budget's

prospects for continued real growth were dim, but a much more profound

shift in policy was soon to occur. The centrality the defense budget
10

had enjoyed under Reagan was certainly undercut by the dissolution of

the Warsaw Pact in 1990 and the breakup of the Soviet Union the

following year, but the end of the Cold War also paralleled a growing

consensus among policymakers that defense policy should be

subordinated to deficit control. In 1990, the Bush administration and

the Congress completed action on an Omnibus Budget Reconciliation Act

containing an estimated $500 billion in deficit reduction for fiscal

years 1991-95. Three years later, the Clinton administration and the

Congress enacted the Omnibus Budget Reconciliation Act of 1993, which

contained another $500 billion in estimated deficit savings through

spending cuts and tax increases.

The Bush and Clinton deficit-reduction agreements were similar in

important respects. Neither made substantial changes in entitlement

programs but instead relied heavily upon revenue increases and tight

discretionary spending controls, with the latter requiring heavy real

cuts in defense. The widely-shared belief that defense spending and

tax cuts had produced the large deficits of the 1980s was not, in

fact, entirely accurate, and the misdiagnosis has been evident in the

persistence and growth of standardized-employment, or structural,

budget deficits.21 In January 1990, well before the 1990 budget

agreement was formulated, the Congres- sional Budget Office estimated

that standardized- employment deficits for fiscal years 1991-95 would

average $120 billion annually.22 For the second half of the decade,

after two major tax increases and steadily declining defense budgets,

average standardized- employment deficits are being projected at well

over $200 billion annually.23

Without the 1990 and 1993 budget acts, structural deficits would,

of course, be much larger. Nevertheless, it is important to recognize

that deficit reduction on the spending side of the budget has to this

point been confined largely to defense. As a consequence, budget

balance has not been achieved and, indeed, could never have been

achieved. The shortcomings of the Bush and Clinton deficit-reduction

efforts therefore need to be clearly understood in assessing future

attempts to balance the budget.

The Bush Defense Program.

George Bush campaigned for the presidency in 1988, pledged to

continuity in both tax policy and defense policy. In fact, Bush argued

that real defense spending had to be increased in order to support

strategic force modernization and a conventional force buildup.24

Shortly after taking office, however, Bush proposed a temporary

defense spending freeze "in light of the compelling need to reduce the

deficit . . . ."25 One year later, with the economy moving into

recession and deficit projections steadily worsening, the Bush

administration initiated negotiations with the Congress on a multiyear

deficit-reduction agreement that would raise taxes and cut defense.

The Omnibus Budget Reconciliation Act of 1990 contained important

new controls governing spending and revenue policy. Multiyear annual

appropriations caps were established for discretionary spending, while

for nondiscretionary spending programs and for revenues, changes in

current policy were required to be deficit-neutral.26 These controls
11

divided spending into two growth tracks. The discretionary track was

effectively flat, with the total discretionary spending ceiling set at

$521 billion in FY 1991 and rising only minimally to $541 billion in

FY 1995.27 Over this same period, the entitlement track would climb by

an estimated $200 billion.28 In addition, the Congress could not,

except under emergency conditions, raise discretionary spending above

the appropriations ceiling, but entitlement spending could exceed

projected levels so long as the increase resulted from unanticipated

factors (such as demographic and economic causes or technical

estimating errors).

The 1990 budget agreement did provide limited protection for

defense by setting, for its first 3 years, a separate appropriations

cap for defense budget authority, with Congress prohibited from

transferring any of the designated defense funding to nondefense

discretionary spending. There was nevertheless an agreed-upon defense

transfer, since the defense appropriations cap was decreased each

year, while nondefense discretionary spending was allowed to grow by

as much as 10 percent over the fiscal year 1991-93 period.29 The Bush

administration also unveiled in 1990 its conceptual framework for

post-Cold War defense planning. In August, President Bush announced

that active forces would be reduced by 25 percent over 5 years and

reconfigured to respond primarily to major regional contingencies,

rather than to the fading Soviet threat in Europe. Over the next

several months, while U.S. forces were successfully prosecuting the

Persian Gulf War, the Department of Defense was developing a scaleddown Future Years Defense Plan to accommodate the administration's

budgetary and strategic changes. The resulting "Base Force" projected

an active-duty force level of 1.65 million by FY 1995, with a force

structure geared to concurrent regional war capabilities.30

The projected defense spending reductions under the Base Force

program were substantial. The Congressional Budget Office, in

reviewing the administration's FY 1992 budget requests, estimated that

real defense spending would drop by more than $175 billion in budget

authority over 5 years and by nearly $160 billion in outlays over the

same period.31 One year later, in response to election-year pressures

to reduce spending even more, Bush proposed an additional $50 billion

in cuts from his defense program.32

The 1990 budget agreement has been criticized as a major

political blunder on the part of the Bush administration, since it

violated the "no new taxes" pledge George Bush had taken in 1988. The

agreement was even more clearly a budget policy failure, since the

Bush administration gained no real concessions from the Congress on

nondefense spending policy. The Democratic- led Congress successfully

protected all existing entitlements, and it also won expanded

discretionary domestic spending margins. When the Bush presidency

ended after one term, spending policy was more skewed toward

entitlements, while structural deficits were growing larger and

larger. And under the incoming Clinton administration's budget

program, defense was the prime target for a second round of deficit

reduction.

The Clinton Defense Program.
12

While defense spending had been a salient issue in presidential

campaigns during the 1970s and 1980s, partisan and ideological

differences over defense were carefully muted in 1992. With each of

the major candidates proposing defense cuts, and the electorate's

attention fixed upon economic recovery, defense policy received little

if any serious discussion. For its part, the Clinton campaign claimed

that $60 billion in defense cuts could be achieved over 5 years

without sacrificing the primary military capabilities of the Base

Force.33

Less than one month after taking office, the Clinton 

administration presented its long-term budget program, which proposed

to double the defense budget cuts Bill Clinton had called for during

his campaign. While this change was unaccompanied by any defense

policy justification, it was part of a coherent budget strategy. In

order to achieve additional deficit reduction, the administration was

recommending that discretionary spending limits be extended through FY

1998. With these extended limits in place, President Clinton's

domestic program initiatives could not be financed without stepped-up

defense transfers. Thus, the defense budget proposals of February 1993

were aimed at expanding the post-Cold War "peace dividend" by

sufficient amounts to support the Clinton administration's domestic

policy program.34

For nearly 6 months, as the House and Senate revised major

portions of the Clinton budget package, the defense spending levels

initially proposed by the administration went unchallenged. On March

27, 1993, the Department of Defense submitted an FY 1994 budget that

included the first installment of accelerated defense cuts, but the

Department's review of how reduced budgets and strategy were to be

integrated was not completed until September. Finally, when the 1993

Bottom-Up-Review was unveiled, the principal military capabilities for

which the Base Force had been designed--most prominently the

concurrent major regional war contingency--were affirmed, albeit with

the stipulation that these capabilities could be achieved with a

smaller and less costly force.

Defense supporters in Congress almost immediately charged that

the administration's defense program was seriously underfunded,

although a more immediate concern for many was that the Congress would

fail to appropriate even the reduced budget levels being recommended

by the administration. In February 1994, the Department of Defense

conceded that the multiyear defense shortfall could be as high as $20

billion, but no programmatic or budgetary adjustments were proposed.35

In December 1994, after the Republican party had gained control of the

House and Senate, the administration announced that defense

underfunding was closer to $50 billion and introduced a $25.9 billion

Defense Funding Initiative to redress a portion of the potential

imbalance.

Despite this adjustment, concerns about underfunding have

persisted, with the Congressional Budget Office reporting in January

1995 that cumulative budgetary shortfalls under the Clinton program

could reach $100 billion by 1999.36 When the 104th Congress convened,
13

prominent Republican leaders in both chambers promised to end defense

transfers to domestic programs and to press for defense budget

increases above the Clinton program.37 These pro-defense sentiments

were overcome, however, by countervailing pressures to balance the

budget and to cut taxes. When the Republican plan to balance the

budget was announced in the spring of 1995, the underfunding dilemma

remained.

The Republican party's balanced-budget initiative did force the

Clinton administration to revise its own budget program, with the

President announcing, on June 13, 1995, a 10-year, $1.1 trillion plan

to bring the budget into balance in FY 2005. Like the Republican

balanced-budget proposal, the administration's deficit-reduction

package included nearly $200 billion in additional discretionary

spending savings. Both plans exempted defense from any new cuts, which

meant that heavy reductions would have to be imposed on nondefense

programs. In order to enforce these cuts, the FY 1996 congressional

budget resolution contained separate appropriations caps for defense

and nondefense programs for fiscal years 1996-98.

The projected congressional defense budget levels now in place,

however, are not very different from the Clinton administration's

(Table 3). For fiscal years 1996-2000, congressional budget authority

and outlay levels are slightly higher--approximately $30 billion in

budget authority and outlays over the 5-year period.38 For the last 2

years of the congressional plan, fiscal years 2001 and 2002, the

Clinton program is actually higher (by about $15 billion in outlays).39

In sum, the differences over the next 7 years between the Republican

and Clinton administration defense programs are very small--perhaps

$15-20 billion in cumulative budgets of approximately $1.9 trillion--

and certainly nowhere near the upper-end estimates of defense

underfunding.

Although following the 1994 elections defense funding has

marginally increased, the impact has been considerably less than many

anticipated. At least for the short term, defense transfers to

domestic programs have ended, but with discretionary spending margins

becoming much narrower over time, defense could be extremely

vulnerable to revived transfer pressures. The broader lesson to be

drawn from the 1995 budget policy debate is that serious deficit

reduction, and especially budget balance, will make it very difficult

to raise defense budgets appreciably, even if the political

environment remains favorable to defense. And this difficulty is

rooted in the spending dynamic of entitlement programs.

THE BALANCED BUDGET PROBLEM

Despite apparent progress in lowering deficits over the past few

years, the structural deficit problem remains severe. For fiscal years

1991-95, annual deficits declined by over $100 billion, and the FY

1995 deficit of $176 billion was 2.5 percent of GDP, the lowest level

in 15 years. Under current policy, however, future deficits will grow

rather than decrease, because the underlying mismatch between spending

and revenue becomes more pronounced over time.
14

Measuring Structural Deficits.

In assessing the deficit problem, it is necessary to distinguish

between structural or policy-based deficits and transitory or cyclical

deficits. The latter are temporary, arising from downturns in the

economic cycle or from natural disasters and other emergencies, and

are largely self-correcting. During the late 1980s and early 1990s,

for example, deposit insurance costs associated with savings and loan

insolvencies made deficits much higher. These costs have now

diminished greatly, and asset sales from these failed institutions are

actually reducing current deficits.

For policymakers, the real challenge is posed by structural

deficits--the gaps between spending and revenue levels that remain

when the economy is doing well (and when temporary factors, such as

deposit insurance costs, are excluded). According to the Congressional

Budget Office, structural deficits are large and growing, averaging

approximately $220 billion, or about 2.7 percent of GDP, for fiscal

years 1996-2000.40 Since these estimates assume that discretionary

spending will continue to decline in real terms, the structural

deficit increases are clearly a function of differential growth rates

in revenues and nondiscretionary spending. Baseline revenues are

expected to increase by over $280 billion between fiscal years 1996

and 2000. With no growth in discretionary outlays, projected deficits

still become larger, because nondiscretionary spending, plus interest,

will increase outlays by an estimated $335 billion.41

The Revenue Policy Solution.
15

This structural deficit gap must be eliminated under any

balanced-budget plan, and despite the vast differences between the

congressional Republican and Clinton administration plans, there is

one very important similarity. Neither plan calls for an upward

adjustment in baseline revenue levels. Both the administration and the

congressional Republican leadership have proposed tax cuts that would

reduce, by different amounts, baseline revenue levels.42 While the

Republican tax-cut program is larger than the administration's, the

Congress' FY 1996 budget resolution precludes any tax reductions at

all unless reconciliation legislation is enacted that provides

sufficient spending savings to insure a balanced budget in 2002.43

Furthermore, even full implementation of the Republican tax cuts would

reduce baseline revenues only slightly.

Thus, with revenues almost certain to remain at or below 19

percent of GDP for the foreseeable future, revenue-based reductions in

the structural deficit are, in effect, precluded. As shown in Table 4,

revenue levels, unlike spending levels, have fluctuated very little

over the past several decades, which suggests an enduring consensus

among policymakers about politically acceptable and economically

positive levels of taxation. Unless this consensus erodes, which seems

unlikely, the revenue side of the budget can be treated as a constant

in the balanced-budget equation. Accordingly, the entire burden of

deficit reduction falls on the spending side of the budget.

The Spending Policy Solution.

With 10-year projections of baseline outlays exceeding revenues

by an average of 2.7 percent of GDP annually, the spending reductions

needed to eliminate deficits are quite large.44 In 2002, the

congressional Republicans' target date for a balanced budget, the

spending-revenue differential is over $250 billion. In 2005, President

Clinton's preferred date, baseline spending would have to be reduced

by nearly $300 billion in order to match projected revenues.

How spending reductions of this magnitude are to be achieved

represents the real crux of the balanced-budget debate. Discretionary

spending programs can and will contribute heavily to deficit

reduction, but potentially available discretionary savings are, by

common agreement, grossly inadequate to bring about budget balance.

Adequate savings can only be realized by abruptly slowing the

projected rate of increase in nondiscretionary spending, and since

Federal healthcare and retirement entitlements are the principal

sources of nondiscretionary spending growth, the prospects for

balanced budgets are tightly bound to major alterations in these

programs.

The spending policy solution to the structural deficit problem is

reasonably straightforward. The revenue ceiling discussed earlier

limits total spending to a maximum of 19 percent of GDP. By 2005,

discretionary spending would drop from its current 7.8 percent of GDP

to an estimated 4.9 percent if present outlay levels remain frozen.45

If the reduced discretionary caps contained in the FY 1996 Republican
16

budget plan are extended through 2005, there would be a greater

decline, to perhaps 4.5 percent.46 The expected range of the

discretionary spending path is therefore at about 4.5-5.0 percent of

GDP. Net interest outlays are notoriously difficult to project over

the course of a decade, but the most optimistic estimates now

available cluster around three percent of GDP. A minimum level for

discretionary spending and for interest in 2005 is thus around 7.5-8.0

percent, which, at balanced-budget levels, leaves a GDP margin of

approximately 11-11.5 percent to accommodate all nondiscretionary

spending.

This margin cannot accommodate existing entitlements,

particularly healthcare entitlements. Under current policy, Medicare

and Medicaid expenditures rise from 3.8 percent of GDP in 1995 to 6.0

percent in 2005.47 By 2005, projected Social Security, Medicare, and

Medicaid outlays account for nearly 11 percent of GDP. All other

entitlements, including those serving the poor, are expected to total

3-3.5 percent of GDP in 2005, about the same level as currently. Thus,
17

one way to maintain existing Social Security, Medicare, and Medicaid

policy and to balance the budget is to eliminate all other

entitlements. Since this option is unrealistic, the spending policy

solution to deficit control is ultimately contingent upon immediate

and sustained deceleration in the rate of growth for large, rapidly

expanding entitlements. Over the next 10 years, this contingency is

specifically tied to Medicare and Medicaid. For the longer term, as

demographic trends swell the size of the retired population, even

tighter controls on retirement as well as health care entitlements

become necessary.

The budgetary case for entitlement controls is unavoid-able, 

since both short-term and long-term structural deficits are

entitlement driven. It is equally clear, moreover, that all

entitlements are not equally responsible for past, current, and future

deficit growth. For a number of entitlement programs, current policy

already insures a diminishing budgetary impact. For Social Security,

Medicare, and Medicaid, by comparison, current policy translates into

an increasing, and ultimately unsupport- able, budgetary impact.

The policy options for dealing with excessive entitlement growth

are well known and include benefit reductions, means-testing, and

taxation of income and in-kind benefits.48 The benefit-reduction and

means-testing approaches have been incorporated, to a limited extent,

into the Medicare and Medicaid reform proposals advanced by

congressional Republicans in 1995. Benefit taxation has already been

applied to Social Security, and recent discussions about recalculating

cost-of-living adjustments (COLAs) in Social Security have emphasized

the importance of controlling automatic benefit growth. (It should

also be noted that COLA recalculation would boost revenues by reducing

inflation adjustments in tax brackets, personal exemptions, and

standard deductions.49) While a comprehensive spending-control program

for demograph-ically-driven entitlements appears inevitable,

policymakers seem reluctant to implement major changes until the

entitlement financing crisis becomes considerably more acute. From the

standpoint of practical politics, this reluctance may be

understandable, but the price of delay is a serious, and perhaps

irreversible, distortion in budget policy that poses a direct danger

to long-term defense funding.

The "Unbalanced" Balanced Budget.

Among the various balanced-budget proposals unveiled in 1995, the

congressional Republican plan is by far the most ambitious in

attacking entitlement growth.50 Its policy and economic assumptions

also appear to be less optimistic than the Clinton administration's,

which, according to the Congressional Budget Office, could actually

leave a deficit of over $200 billion in place by 2005.51 By comparison,

the spending cuts in the Republican plan would, if fully implemented,

achieve balance in 2002.52 These cuts, which total more than $1.2

trillion over 7 years, include over $450 billion in baseline savings

in the Medicare and Medicaid programs, along with an additional $175

billion in other entitlement savings.

Nevertheless, even the Republican program fails to impose a
18

sustainable balance on spending policy. In 1990, the ratio of

mandatory spending to discretionary spending was 60-40. The present

ratio is about 2-1. By 2002, assuming that all the mandatory spending

cutbacks in the Republican budget program are enacted, only about onefourth of the budget would be available to support discretionary

programs. Such a rapidly contracting discretionary budget share

translates into sharply reduced real spending levels. Since 1990, real

 spending for defense has dropped by 35 percent, and, if defense is

supported at maximum levels for the next 7 years, it will decrease by

an additional 17 percent. Whether these maximum levels can be

protected against domestic transfer pressures is problematic, since

nondefense discretionary spending must shrink by over 30 percent in

real terms by 2002 to meet the discretionary appropriations caps.53

The explosive partisan disputes over Medicare and Medicaid during

1995 have obscured an important budgetary distinction. If entitlement

policy remains unchanged, baseline mandatory spending would increase

by an estimated $440 billion from 1996-2002, with over one-half of

this increase concentrated in Medicare and Medicaid.54 If the most

ambitious of the entitlement policy changes now pending were to be

implemented, entitlement spending would still increase by nearly $300

billion, with over $100 billion of this increase accounted for by

Medicare and Medicaid.55 But discretionary appropriations limits are

very different; they would actually cut total discretionary spending

by as much as $20 billion from 1996-2002, not just reduce the rate of

growth in defense and nondefense programs. In addition, with

discretionary spending having been tightly controlled for the past

several years, total discretionary outlays in 2002 will likely be

about the same as in 1990. Entitlement spending, by comparison, will

have increased by $500-750 billion over this period.

The potential policy effects of such unbalanced spending trends,

it is fair to say, have not been seriously analyzed. The defense (and

nondefense) spending levels now being projected do not reflect policy

agreements or policy choices. Instead, annual appropriations decisions

will finally determine how defense and nondefense programs are to be

accommodated within a declining discretionary baseline, and the

composition of future Congresses will dictate, among other things,

whether domestic programs in fact absorb larger reductions than

defense. Because the discretionary caps are so tight, and also as a

consequence of the protracted discretionary shrinkage that has already

occurred, it is probable that a "fairness" critique against defense

will be mounted by domestic program advocates at some point.

But even if defense were to survive these critiques, the fiscal

pressures distorting spending policy will not abate once the budget is

brought into balance. Instead, the GDP share for entitlements will

continue to move upward, even with strict limits on health care cost

growth. Around 2010, when Social Security begins an extended period of

extremely rapid expansion, total entitlement spending will accelerate

accordingly.56 Without significant cutbacks in Federal retirement and

health care programs, entitlement spending could reach 20 percent of

GDP by 2030.57

This long-term fiscal path of entitlement spending is, according
19

to the President's Bipartisan Commission on Entitlement and Tax

Reform, "not sustainable."58 Medicare's Public Trustees have warned

that the program's hospital insurance trust fund may be depleted by

2001, with subsequent imbalances between spending and revenues growing

larger each year.59 The Social Security program is, for the time being,

more stable, but benefits will exceed dedicated revenues in less than

20 years, and current projections show the supporting trust funds

being exhausted by 2029.60 One recent study concluded that, as a "selfcontained program, Social Security suffers from long-term actuarial

deficits . . . [and] in the broader context of the Federal budget,

reform is inevitable."61 From the discrete perspective of individual

programs, then, long-term viability depends upon legislative

retrenchments that go well beyond any entitlement changes presently

being contemplated. In particular, a full-scale revamping of Social

Security and Medicare will be needed to contain the demographic and

economic forces that are generating higher and higher rates of growth,

but the timetable for such action looks to be well into the future.

In the meantime, the remainder of the budget will be absorbing

increasingly heavy reductions, as if the policy consequences were

irrelevant. To the contrary, the looming policy cutbacks in

discretionary domestic programs are unprecedented in the era of modern

budget policy. Nondefense programs that during the supposedly lean

years of the Reagan defense buildup averaged over 4 percent of GDP

will have perhaps half that amount available by 2005. For defense, the

immediate fiscal prospects are supposedly not as bleak, but the policy

risks are, if anything, much starker. The United States has a national

military strategy that must be supported, but defense budgets have

been set, and continue to be set, independent of that strategy. For

the Clinton administration in 1993, defense requirements were

subordinated to deficit reduction and to domestic policy initiatives.

For congressional Republicans in 1995, defense needs are again being

slighted, albeit to the goal of a balanced budget and tax cuts.

Ignored in each instance has been the threat to discretionary programs

inherent in "unbalanced" spending policy.

CONCLUSION

The Federal budget's problems yield no easy solutions. Whether

the budget is actually balanced by 2002 or 2005, or structural

deficits merely reduced, the entitlement programs that the Federal

Government has established will leave less and less room to fund other

programs. The longer the delay in controlling long-term entitlement

growth, the greater will be the cost in essential government

functions, and especially in defense.

There are, of course, various proposals for less demanding and

less costly military strategies, but many of these display a curious

naivete about budget policy.62 A recent Brookings Institution study,

for example, calls for abandoning simultaneous regional war

capabilities and cutting back on supporting "force structure,

operations, and weapons acquisition policy," in order to achieve

defense savings of $20 billion annually by the end of the decade.63

The United States would have to relinquish a "certain amount of its

overwhelming advantage," but the sacrifice actually would be modest--
20

only "about half of defense's ‘fair share' contribution toward

balancing the overall Federal budget by 2002 . . ."64 One would assume

that a "fair share" argument would take into account the defense

budget's prior, unique contributions to deficit control over the past

30 years, but the more serious shortcoming of the Brookings study is

the failure to acknowledge that its reduced defense levels (or any of

the other so-called "moderate options") cannot be maintained unless an

adequate margin for discretionary spending is preserved.

Defense can, in fact, be supported at adequate levels under

existing strategy, without abandoning balanced budgets or other

desirable goals. Existing underfunding gaps can be closed, over the

short term, by preventing downward adjustments in revenue policy and

subsequently by the timely implementation of entitlement reforms.

Before a reasonably coherent military strategy, and its supporting

capabilities, is discarded for admittedly riskier alternatives, these

budgetary tradeoffs should be carefully weighed.

The necessity for a decidedly prudent approach to defense

planning is underscored by the fact that, 10 or 15 years from now, the

Federal budget will have even less flexibility, because so much

spending will be absorbed by mandatory entitlements and interest

payments. The budget policy reversals that helped to fund defense

buildups during World War II, Korea, and, to a lesser extent, the

1980s, will not be possible with such narrow discretionary spending

margins. If policymakers today acquiesce to riskier defense

capabilities, they will simply be exacerbating the potential problems

arising from diminished budget reversibility. In effect, somewhat

higher levels of risk can be tolerated if future budgets can readily

accommodate required buildups. But when budget reversibility is

already low, and certain to diminish still further, the risk

associated with planned capabilities should be minimized.

During the Cold War, Presidents Truman, Eisenhower, and Reagan

fought to protect the nation's strategic interests against competing

budgetary needs. A post-Cold War defense strategy, now in its nascent

stage, faces the same competition. The Bush and Clinton

administrations, along with Democratic- and Republican-controlled

Congresses, have firmly endorsed current strategy. It is now incumbent

on political leadership, especially in the executive branch, to extend

this strategic consensus to the debate on Federal budget policy.

ENDNOTES

1. Complaints about the subordination of strategic policy debates

and oversight to budgetary decisionmaking are long-standing,

particularly, but not exclusively, among congressional analysts. See,

for example, Barry M. Blechman, The Politics of National Security,

Congress and U.S. Defense Policy, New York: Oxford University Press,

1990, pp. 23-43; Paul Stockton, "Beyond Micromanagement: Congressional

Budgeting for a Post-Cold War Military," Political Science Quarterly,

Vol. 110, Summer 1995, pp. 233-259.

2. The Clinton administration's first National Security Strategy

Report, of which the Bottom-Up-Review was a major component, was not
21

published until June 1994. For a concise evaluation of its formulation

and content, see Don M. Snider, The National Security Strategy:

Documenting Strategic Vision, Carlisle Barracks, PA: U.S. Army War

College, Strategic Studies Institute, 1995, pp. 10-14.

3. National Journal, Vol. 26, September 17, 1994, pp. 2126-2130.

4. The range of estimates here is enormous. The Clinton

administration has acknowledged short-term multi-year funding

inadequacies of approximately $50 billion. Its December 1994 Defense

Funding Initiative added over $25 billion to FY 1996-2001 defense

budget authority planning levels in order to reduce the shortfall,

with the remainder to be addressed through program changes and

reductions and through revised economic assumptions. The Congressional

Budget Office and the General Accounting Office have estimated

underfunding of the BUR at $50-$150 billion for the Department of

Defense's FY 1996-2001 Future Years Defense Program. The largest gap,

$253 billion over 5 years, has been jointly reported by the Center for

Strategic and International Studies and the Strategic Planning

Corporation, Defense News, January 30-February 5, 1995, p. 12.

5. As one recent study stated, part of the justification for "a

significantly different strategic rationale" is "simple frugality . .

. less expensive ways to pursue the goals of deterring regional war,

conducting global military deployments, and enhancing nuclear safety."

Michael O'Hanlon, Defense Planning for the Late 1990s, Washington: The

Brookings Institution, 1995, p. 5.

6. One of the broadest and most prominently publicized critiques,

issued at the height of the Reagan defense buildup, maintained that

the United States was in decline because of the "global overstretch"

embodied in its military spending. Paul Kennedy, The Rise and Fall of

the Great Powers, New York: Random House, 1987.

7. Over the fiscal year 1945-1948 period, defense outlays dropped

from 39.1 percent of GDP to 3.7 percent. The latter represents the low

point for defense during the Cold War era. By the end of this decade,

however, defense spending is expected to drop below three percent of

GDP. Historical Tables, Budget of the United States Government, Fiscal

Year 1996, Washington: GPO, 1995, pp. 82-88.

8. The defense share of the budget for FY 1995 is currently

estimated at 17.6 percent, which is the smallest share since before

World War II. A continued decline, to less than 15 percent, is

projected over the next several years. Ibid., pp. 82-88.

9. Eliot A. Cohen, Making Do With Less, Or Coping With Upton's

Ghost, Carlisle Barracks, PA: U.S. Army War College, Strategic Studies

Institute, 1995, p. 4.

10. For these years, Eisenhower's recommended defense budgets

totaled $289.6 billion in new obligational authority. Congress enacted

new authority of $287.6 billion. See Dennis S. Ippolito, Uncertain

Legacies, Federal Budget Policy from Roosevelt through Reagan,

Charlottesville, VA: University Press of Virginia, 1990, p. 106.
22

11. Congressional Record, Vol. 95, April 4, 1949, pp. 4427-4428.

12. Congress and the Nation, 1945-1964, Washington: Congressional Quarterly, 1965, p. 254.

13. Congressional Record, Vol. 99, May 20, 1953, p. 5180.

14. Ibid.

15. See Budget of the United States Government, Fiscal Year 1955, Washington: GPO, 1954, p. M38.

16. National Party Conventions, 1831-1992, Washington: Congressional Quarterly, 1995, p. 104.

17. The FY 1965 defense budget was nearly 10 percent below FY

1964 spending, measured in current dollars. In constant dollars, FY

1965 defense outlays were the lowest since before the Korean War and

far below those registered under Eisenhower. The fiscal year at that

time ran from July 1-June 30. The FY 1965 budget was submitted to

Congress during January 1964, and executive branch planning of that

document extended back to early 1963.

18. Discretionary outlays are determined through the annual

appropriations process. Current and future spending thus require

legislative action. Nondiscretionary or mandatory programs, such as

entitlements, typically do not require annual appropriations. If

annual appropriations are required, the amounts are determined by

program requirements, not appropriations decisions.

19. Of course, appreciable outlays for Medicaid and Medicare were

not registered until the late 1960s. Their subsequent growth, in terms

of budgetary effects, has thus taken place over a relatively short

period.

20. See, for example, Ippolito, Uncertain Legacies, pp. 219-227.

21. Standardized-employment deficits are the levels "of the

federal budget deficit that would occur under current law if the

economy was operating at potential GDP. It provides a measure of

underlying fiscal policy by removing the influence of cyclical factors

from the budget deficit." The Economic and Budget Outlook: Fiscal

Years 1996-2000, Washington: GPO, 1995, p. 118.

22. The Economic and Budget Outlook: Fiscal Years 1991-1995,

Washington: GPO, 1990, p. 5.

23. The Economic and Budget Outlook: Fiscal Years 1996-2000, p.

xvi. This assumes that discretionary spending caps are not adjusted

for inflation after 1998.

24. Congressional Quarterly Almanac, 1988, Washington: Congressional Quarterly, 1989, pp. 74A-75A.
23

25. Congressional Quarterly Almanac, 1989, Washington: Congressional Quarterly, 1990, p. 12C.

26. For an explanation of these procedures (termed PAYGO or payas-you-go), see The Economic and Budget Outlook: Fiscal Years 1992-

1996, Washington: GPO, 1991, pp. 90-96.

27. Ibid., p. 82.

28. Ibid., p. 91.

29. Ibid., p. 82.

30. An Analysis of the President's Budgetary Proposals for Fiscal

Year 1992, Washington: GPO, 1991, pp. 62-84.

31. Ibid., p. 63.

32. The FY 1993 budget contained outlay reductions below the FY

1992 budget of an estimated $27.1 billion over 5 years. The estimated

budget authority reduction was $43.1 billion over the same period. An

additional $7.7 billion in rescissions was also requested for FY 1992

and prior year budget authority. The total budget authority reduction

was over $50 billion.

33. The Clinton campaign essentially adopted a "Force C" option

that had been developed by House Armed Services Committee chairman Les

Aspin early in 1992. The Force C option proposed that the Base Force

active-duty personnel level be reduced by 217,000 and that force

structure be revised as well. Force C did provide, however, for two

major regional contingencies. Its savings from the FY 1993 Bush

program were estimated at $48 billion for fiscal years 1993-97.

34. See The Economic and Budget Outlook: Fiscal Years 1993-1997,

Washington: GPO, 1992, pp. 52-54.

35. Defense News, February 7-13, 1994, p. 44.

36. Congressional Quarterly Weekly Report, Vol. 53, January 14,

1995, pp. 166.

37. Ibid., pp. 166-170.

38. Exact comparisons here are difficult, because of slightly

different formats and estimating procedures. See Defense Budget

Project, June 16, 1995, p. 5; Congressional Quarterly Weekly Report,

Vol. 53, July 1, 1995, pp. 1906-1907.

39. The outlay levels in the Clinton program total $556 billion

for fiscal years 2001-2002, compared to $540 billion for the

Republican balanced-budget plan.

40. The Economic and Budget Outlook: An Update, Washington: GPO,

1995, p. 20.
24

41. Ibid., pp. 22-25.

42. For an equivalent period, fiscal years 1996-2002, the

proposed Clinton tax cuts total $105 billion, and the Republican cuts

total $245. Congressional Quarterly Weekly Report, Vol. 53, June 17,

1995, pp. 1718.

43. The Economic and Budget Outlook: An Update, p. 40.

44. Ibid., p. 25.

45. Ibid.

46. Assuming that the FY 2002 levels for discretionary spending

are frozen. Ibid., p. 38.

47. Ibid., p. 27.

48. See Reducing Entitlement Spending, Washington: GPO, 1994.

49. A one percentage point adjustment (i.e., reduction) in the

consumer price index (CPI) inflation measure used for spending and tax

indexing would save an estimated $281 billion over 7 years.

Congressional Quarterly Weekly Report, Vol. 53, September 30, 1995,

pp. 2974.

50. The Clinton program, for example, contains a little more than

half the Medicare and Medicaid cuts in the Republican budget program,

and the other mandatory spending reductions are only about one-fifth

as great when calculated over the same fiscal year period.

Congressional Quarterly Weekly Report, Vol. 53, June 17, 1995, pp.

1715-1720.

51. The Economic and Budget Outlook: An Update, pp. 27-28.

52. Ibid., p. 36.

53. Ibid., pp. 36-37.

54. Ibid., p. 26.

55. Ibid., pp. 36-37.

56. See Interim Report to the President, Washington: Bipartisan

Commission on Entitlement and Tax Reform, 1994, pp. 7, 19.

57. Ibid., p. 7.

58. Ibid.

59. Ibid., pp. 16-17.

60. Ibid., pp. 18-19.

61. C. Eugene Steuerle and Jon M. Bakija, Retooling Social
25

Security for the 21st Century, Washington: The Urban Institute Press,

1994, p. 65.

62. For a listing of several recent proposals, see O'Hanlon,

Defense Planning for the Late 1990s, p. 33. The "Aspin options" are

examined in Dennis S. Ippolito, Budget Policy and the Future of

Defense, Washington: Institute for National Strategic Studies/National

Defense University Press, 1994, pp. 84-97.

63. O'Hanlon, Defense Planning for the Late 1990s, p. 32.

64. Ibid., pp. 40, 135.
U.S. ARMY WAR COLLEGE

Major General Richard A. Chilcoat

Commandant

*****

STRATEGIC STUDIES INSTITUTE

Director

Colonel Richard H. Witherspoon

Director of Research

Dr. Earl H. Tilford, Jr.

Author

Dr. Dennis S. Ippolito

Director of Publications and Production

Mrs. Marianne P. Cowling

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Composition

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Cover Artist

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