Introduction

THE BUDGETARY PROCESS AND DEFENSE POLICY.

Thomas K. Finletter, who among many other services to the nation was Secretary of the Air Force from 1950 to 1953, has said, "The annual Defense budget is normally the most important foreign policy document of any year." This statement underscores the fact that the Defense budget (unlike the budgets of most other government departments in which the annual appropriation takes care of housekeeping expenses) determines strategy by providing or limiting the forces -- the personnel and the hardware -- with which strategy can be implemented. And, of course, foreign policy is, in turn, limited by the military strategy that can be provided to support it.

The annual Defense budget is at once the expression of current defense policy and the framework within which defense administration must move. It not only determines the general size of the armed forces but specifies their exact content and even location, for the annual appropriations are broken down into the most minute detail, with little flexibility of transfer of funds from one item to another. Every major military decision in the Pentagon must be fitted into appropriation bills for past or current Fiscal Years or, if this is impossible, must be the basis for appropriation requests in future Fiscal Years. No matter what the organization charts say, those who control the allocation of funds control national defense policy.*

In a set of brief readings it would be futile to attempt to create defense budget experts. But it is possible (a) to show how the budget process operates and (b) to develop some sophistication in translating a defense budget into the realities of military force and strategic capability.

The basic document in the readings which follow is a description of "The Budgetary Process and Defense Policy" prepared by a former student in this Seminar who has had long experience in the Department of Defense. This is no more exciting than a blueprint -- and no less important for one who wishes to understand the working of a machine. Thus, it is not exciting at all and very important indeed. It should be read and re-read with care before the Seminar session on the Budget Process.

We then offer some reflections on the defense budget excerpted from "U.S. Defense Policies Since World War II," *House Doc., No 100*, 85th Cong., 1st Sess. (November, 1956).

*As this paper is being written the country is in the throes of the crisis over the launching of two Soviet earth-satellites and all that they imply in terms of Soviet lead in the missile field. The President has appointed President James R. Killian of MIT as his Special Assistant for Science and Technology, and the Secretary of Defense has designated Mr. William M. Holaday his Director of Guided Missiles. But the *New York Times* comments (17 Nov. 1957, p. E-7), "It remains to be seen, however, whether Mr. Holaday will have all the authority of the Secretary of Defense in directing the missile programs. For instance, he will not have control over the missile budgets, and it is fiscal control that holds the key to direction of any military program. The apportioning of funds will still rest in the hands of the Secretary of Defense and his comptroller."

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Next are reproduced the text and summary figures, relating to
Defense from the President's budget message for the current (1958) fiscal
year. Bear in mind that these are only summary figures on very broad
lines; the actual Defense budget goes into meticulous detail.

Finally, since every government organism must express itself in
terms of power in a man (despite our homilies about "governments of law
and not of men"), we give you a competent journalistic analysis of "The
Mystery Man of the Pentagon" who has held the enormously powerful position
of Comptroller under the Secretary of Defense since the National Security
Act of 1947 -- a record of continuity approaching that of the British
Senior Civil Service.

The foregoing readings are designed to be used in connection with
**Problems in the Budgetary Process** (Harvard Defense Policy Seminar, Serial
96, 21 November 1956) which deals with (1) how much the American economy
can stand in defense expenditures, p. 1, (2) proposals for a functional
or program budget, p. 20, (3) proposals for improving the mechanics of
the budget process, p. 23, and (4) getting more defense per dollar, p.
25. Serial 96 also contains a bibliography at the end.

It is assumed that students will read chapters XI and XII on the
Defense budget in Arthur Smithies, *The Budgetary Process in the United
States* (1955). Students will also find it worthwhile to consult Frederick
C. Mosher, *Program Budgeting: Theory and Practice* (1954), and other items
listed in the bibliography of Serial 96.

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# I. THE ROLE OF THE BUDGET.

The defense budget process serves three major objectives: First, it is the chief tool for *policy and program control* by Congress over the President, by the President over the Department of Defense, and by the DoD over the three military departments. Second, it is the chief tool for *review* of current and past operations by Congress and the President (through the Budget Bureau) over the DoD, and by the DoD over the military departments, in order to detect and, where possible, to correct, waste and inefficiency. Third, it has served as a tool used by Congress and the President for *economic stabilization*.

The final budget decision reacts on the policy and program objectives which it is designed to serve. Force-level objectives, which are the starting point for defense budget estimates, are ultimately re-determined by Congressional appropriations.

# II. EXECUTIVE BUDGET MAKING.

## A. Staff Advisory Agencies.

Advice on defense budgeting matters goes to the President through a variety of staff agencies. Their relative influence is determined chiefly by the President's predilections.

1. The *National Security Council* consists of the President, the Vice President, the Secretaries of State and Defense, and the Director of the Office of Defense Mobilization. The Secretary of the Treasury and the Director of the Bureau of the Budget may also attend, as do others, at the President's request. Their presence emphasizes the fact that the NSC gets into budgetary decisions, as well as initial policy and force-level decisions.

2. The *Bureau of the Budget* is the staff agency of the President charged with preparing the federal budget which is submitted to Congress.

3. The *Department of Defense* is both a defense adviser to the President and the main claimant for defense funds. This puts the Defense Secretary in an awkward position. Other Secretaries of Executive Departments, whose budgets are relatively small in relation to the total Federal budget, can act solely as their Departments' claimants. The Secretary of Defense, on the other hand, has to worry about costs and taxation and borrowing, since his budget is about two-thirds of the federal total. For this reason, the defense budget is a favorite target for cuts aimed at budget balancing and economic stabilization. If the Secretary of Defense acts solely as a staff adviser to the President, he may lose the loyalty of his military department secretaries and his Department staff.

4. Mr. George M. Humphrey, *Secretary of the Treasury*, 1953-1957, played a much more decisive role in shaping the defense budget than did his predecessors. In fact, his personal view of what the country could

stand economically appears to have chiefly determined the size of the defense budget. This estimate has been very personal -- not traceable to his own staff advice.

5. The Council of Economic Advisers is the professional trio designed to assess U.S. economic capacities. In the Eisenhower administrations it has not been very influential in advising the President on what size budget the country can stand; the job has been performed by Mr. Humphrey. In fact at one Cabinet meeting Mr. Arthur Burns, its chairman, reportedly testified that a $5 billion boost in military spending would help rather than hurt the economy.

6. The White House Staff has a substantial but intangible role in the process.

B. The Budget Process in the Defense Department (see Chart p.14a).

1. Legal Framework.

The Budget and Accounting Act of 1921, and the Budgetary and Accounting Procedures Act of 1950 prescribe that the President shall present his budget message to the Congress within the first fifteen days of each session of Congress, allowing nearly six months for its consideration of requests prior to the beginning of the fiscal year in which the funds are to be used. Each executive department must submit its budget request to the BoB in the fall of the previous year at a date prescribed by BoB, to provide time for BoB and Presidential review of the departmental requests. In the Defense Department, where budget requests are necessarily prepared at the military department level or below, a still earlier deadline must be set for submission of the requests from estimating agencies, to provide time for review by the military departments and the DoD. Recently, some time has been gained by conducting part of the DoD and BoB review concurrently.

2. The Budget Cycle.

Present military budgeting procedures are based on the premise that it is necessary and possible to define clearcut objectives which can be successively translated into programs and budgets by more or less mechanical procedures. Schematically, the process may be diagrammed as follows:

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This theory of budget development is subject to a number of theoretical and practical objections which will become apparent as we examine it in greater detail.

The theoretical chronology of the process for the Fiscal Year 1957 budget is about as follows:

<table><tr><td>Jul 54 - Oct 54</td><td>JCS development of objectives, force-levels, and war plans.</td></tr><tr><td>Nov 54 - Jan 55</td><td>Military Department development of war plans and programs.</td></tr><tr><td>Feb 55 - Jul 55</td><td>Development of Budget estimates in the field</td></tr><tr><td>(Feb 55 - May 55)</td><td>(Program revision to reflect Presidential decision on the previous year's budget request.)</td></tr><tr><td>Jun 55 - Aug 55</td><td>Military Department review (and incorporation of revision as necessary.)</td></tr><tr><td>Aug 55 - Nov 55</td><td>DoD and BoB review.</td></tr><tr><td>Dec 55</td><td>Preparation of President's budget.</td></tr><tr><td>Jan 56 - Jun 56</td><td>Congressional consideration of President's budget.</td></tr><tr><td>Jul 56 - Jun 57</td><td>Obligation of funds (may continue for several additional years in case of continuing appropriations.)</td></tr></table>

Each budget cycle takes about two years up to the time the funds are appropriated, and from one to three or more years to carry out the actions for which the funds are spent. Of the first two years of budget development, about six months are spent in making programs; six months in translating the programs into budget estimates; six months in Executive review; and six months in Congressional review.

### 3. Overlap between Cycles.

There is considerable interaction between the overlapping cycles for successive fiscal years. Executive and Congressional decisions on the previous years' budgets may invalidate objectives, force-levels, programs, and budgets for the following year, by making their attainment impossible within the time available. The major decision points are at the completion of Executive and Congressional reviews. These decisions must somehow be reflected in the following as well as in the current, cycle. The effect of these decisions is shown schematically by the arrows in the following diagram:

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4. Initial Guidance.

Theoretically, the process should start with policy guidance by the President and the National Security Council. In order to allow time for subsequent operations, this guidance is needed about two years before the start of the budget year, up to five or more years before completion of the actions controlled by the budget. This guidance must define the tasks which the military forces must be prepared to perform, both in deterring war and in fighting it if necessary. Thus it involves a forecast of international conditions for several years ahead, as well as tentative judgements about U.S. reactions to those conditions, in the light of our foreign policy objectives.

Obviously, making such long range forecasts is extremely difficult. At this point in the cycle, Congressional action on the budget for the second preceding fiscal year has just been completed, and Executive review of the preceding fiscal year's budget is about to start. To date, neither Presidential nor NSC guidance has been provided at this stage of the cycle.

In default of guidance from the President and the NSC, the task of providing initial guidance falls to the JCS. They have for several years attempted to provide guidance at this stage, but have not been able to agree on the guidance to be provided. Thus the job is usually defaulted again to the individual military departments. The staff work done by the Joint Staff and the service staffs in attempting to develop joint guidance is useful to the military departments in developing unilateral guidance; but in the absence of JCS agreement, it is not binding, and each department is free to set its own objectives.

The guidance finally provided at the military department level is in the form of force-level decisions, which define the combat forces sought; and broad strategic guidance for use in developing war and mobilization plans, which define support requirements to be attained.

5. War and Mobilization Plans.

Based on the force levels and policy objectives developed by each military department, the individual departments prepare war and mobilization plans which spell out how the projected forces would be used if war occurred. The purpose of this is to determine the size and composition of the supporting forces, the reserve forces, and the reserve stocks of material needed to supplement and support the combat forces. The war and mobilization plans are related to an assumed D-Day one or two years after the start of the budget year, since that is the

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time at which the funds requested will be largely translated into equipment delivered, bases built, men trained, and organizations manned and equipped.

The ratio of combat to support forces may vary widely, depending on the character of the contemplated wartime operations. A large part of the support forces which would be needed in wartime are not needed to support peacetime operations, and are included in the peacetime force only to meet anticipated wartime needs. Similarly, judgements about the probable character of a future war may greatly alter the needed ratio between forces-in-being and civilian components -- the Reserve and National Guard.

The force-level decision defines the combat forces, and the war plan defines the support requirements, which must be attained with the funds to be requested in the budget estimate, plus those available from prior years. The next step is to prepare a program, which is a schedule of the actions necessary to proceed from the current status to the status defined by the projected force level, with the supporting forces and equipment defined by the war and mobilization plans.

## 6. The Program.

Developing the program is the most difficult and complex operation performed in any of the military departments. It involves the active participation of every staff office and field command. In the Air Force, for instance, the program is expressed in primary program documents covering about 6,000 pages of printed material, with many times this amount of secondary and supplementary programs prepared by the field commands. The program defines the rate at which every function and activity proceeds from its current status to the projected future status, by monthly or quarterly periods over a span of two-and-a-half to four years. Development of the program, including preparation of these documents, takes about three or four months.

Some time during the preparation of the program, a Presidential-Budget Bureau decision is made on the program and budget for the fiscal year preceding the one for which the program is being developed. Generally this decision involves a substantial change in the program from earlier departmental budget requests. The decision alters the starting point for the following fiscal year, and may thus necessitate substantial changes in the program which is being prepared, even if the objective is not changed. Depending on the exact timing of the decision, and on the magnitude of the change, such changes are either incorporated into the program by brute force methods, or a new "quickie" program cycle is undertaken to reflect the necessary revisions. If the change is not major, it may be ignored for the moment and the revision of the program deferred to a later stage in the cycle. This may be done by running a second program cycle concurrently with the preparation of the budget estimate. If this is done, the results of this second cycle would be used as a basis for adjustments in the budget estimates during the departmental review.

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7. Revision of the Program.

In February or March, about 16 months preceding the
beginning of the budget year, the Defense Department Comptroller generally
issues a "Call for Estimates". This document serves primarily to pro-
vide technical direction on the timing and format of the budget submissions,
but sometimes contains more or less detailed policy and program guidance.
Obviously, this guidance is not received by the military department in
time for orderly incorporation into the programming process; at this time
the program is completed and the budget preparation process is well under-
way. Various expedients have been adopted to incorporate it. On some
occasions, an attempt is made to revise the detailed departmental programs
to make them consistent. On other occasions, preparation of the budget
estimate is continued without interruption, and an attempt is made to
incorporate the changed guidance during the departmental review. Neither
expedient has been satisfactory. Presumably it is impossible to issue this
guidance at an earlier date, because of the necessity of reflecting the
President's decision on the budget request for the previous year.

8. From Program to Budget.

The next step in the process is the translation of the program
into estimates of the obligation and expenditure of funds which will be
required to support it. This operation proceeds in several different ways,
depending on the appropriation area. The major appropriation areas are:

1. Pay and allowances of military personnel.

2. Operation and maintenance.

3. Procurement of major equipment.

4. Construction.

5. Research and development.

There are several other smaller appropriation areas which need not be dis-
cussed here.

a) Estimating funds required for *pay and allowances* of military personnel is the easiest part of the budget preparation job. Military personnel are controlled numerically rather than financially. One of the most voluminous of the program documents specifies the number of military personnel allowed for the operation of each activity in each monthly or quarterly period from the present through the end of the budget year, down to the last man. Generally these numbers are broken down by grade. It is a comparatively simple matter to multiply the number of men in each grade by the basic pay scale and add the products to obtain the total basic pay. Complications do arise in estimating family and longevity allowances, retirement pay, and the like, which require actuarial projections of the number of men likely to get married,

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have children, die, retire, or resign; but these are relatively easy problems compared to those involved in other program and budget areas. The main job in this area is the preparation of the basic program defining the number of men to be allowed each activity.

b) **Calculating the operation and maintenance** appropriation, by contrast, is the most complicated and difficult of all. The operation and maintenance appropriation contains a wide variety of items: pay and travel of civilian personnel; procurement of supplies (including fuel) and equipment (except the major items covered under major procurement); maintenance and repair of all equipment and facilities; distribution of supplies and equipment; utilities and miscellaneous contractual services; and many other activities.

The estimate of civilian personnel requirements is of course interrelated with the estimate of military personnel requirements, since there are many jobs which can be performed by either military or civilian personnel. The civilian personnel are not subject to quite as rigid numerical control as are the military personnel, but are controlled primarily by allotment of funds for payment of salaries. The estimates of civilian personnel requirements are generally prepared in the field, down to base level, while the military personnel requirements are largely prepared in Washington.

The toughest part of the operation and maintenance budget is estimating requirements for about 2 million different items of supply and equipment -- all except the few thousand covered under major procurement. The first part of the job is to summarize the existing inventories, which are always out of balance with requirements because of rapid program changes, past errors in predicting usage rates, and other factors. This is a monumental job in itself, considering the world wide distribution of most of the items. The next job is to relate each item to one or more programmed activities, and compute consumption rates per unit of activity. This is generally done by relating past recorded consumption experience to past activity. There is generally some central point which has world wide responsibility for each class of items, called a supply-demand control point. These computations are generally done centrally at these points.

Parts of the operation and maintenance estimate, especially local procurement, contractual services, utilities, and civilian personnel, are generally estimated at each individual operating base. To make this possible, the program must specify the planned activity rates for each individual base. This portion of the budget is a relatively small part of the dollar total, but is a time-consuming operation.

Preparation of the budget estimate for operation and maintenance generally requires 5 or 6 months, and is probably the limiting factor on the speed of the whole budget estimating process.

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c) Major procurement is the third large appropriation area. It covers only a few thousand major items, such as aircraft, guided missiles, ships, tanks and guns, in contrast to the millions covered under operation and maintenance. It also includes spare parts for new equipment items, on which there is little operating experience from which to derive consumption rates. Such "initial" spare parts requirements amount to several billions of dollars annually for aircraft alone. The major equipment items included in this appropriation are in general programmed, costed, and defended in the budget estimate on an individual item basis, in contrast to the items in the operation and maintenance appropriation, which are generally presented in terms of aggregates.

The chief problem in the major procurement area is one of scheduling production, rather than computing requirements; the funds needed depend on the rate at which the items can be produced, which often can only be determined after negotiation with prospective producers, and is often not in close agreement with the computed requirements.

d) Construction is an equally complicated area because it necessarily involves programming for each individual operating location. In the case of airbases, which are the largest part of the construction program, the problem is further complicated by the close interrelations between the characteristics of the base and the equipment which is to operate from it. Thus the construction program cannot be developed until the major procurement schedules are developed, and the individual models and series of aircraft are allocated to individual operating bases. Changes in either the aircraft production program or the base construction program react on the other; and of course also on the program for personnel and organizations which operate the aircraft and the base. Construction programming is further complicated by political considerations, which influence base location; and by the fact that no funds can be requested for construction until legislation has been enacted authorizing a particular type of construction at a particular location.

e) Research and Development is an obviously difficult area in which to prepare programs and budget estimates, but it has a less direct influence on other program areas, since changes in the research and development program do not ordinarily affect the operating program until after the end of the period for which the budget is being prepared.

## 9. Re-Determination of Force Levels.

It was noted earlier that when the objectives and force levels were initially decided, neither the President nor the Congress had completed consideration of the budget estimate for the preceding year. Presidential consideration is normally completed at the end of the calendar year, six months prior to the beginning of the fiscal year. Congressional consideration should normally be completed some six months later, shortly before the beginning of the fiscal year for which funds are being requested. Thus at the time the initial departmental budget estimate is completed, it is possible for the President, the National Security Council, and the Budget Bureau to turn their attention to guidance for the following year, based on fairly firm decisions about the program and budget for the current year.

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Either during departmental budget preparation or immediately thereafter, there is generally an NSC-Presidential decision on force levels for the budget year, followed or accompanied by a Budget Bureau-Presidential decision on the maximum size of budget which the Defense Department will be permitted to request. Generally the budget ceiling decision is made without knowledge of the size of the budget requests being prepared by the military departments, since these estimates are generally not complete at the time. If these decisions are substantially at variance with the objectives and force levels initially determined by the military departments, major adjustments in the programs and budget estimates have to be made in a very short period of time. These adjustments are generally made by "brute force" methods during the next stage, the departmental review.

## 10. Review and Revision of Budget Estimates.

a) **Military Department Review** of the budget estimates generally begins as soon as the estimates for any appropriation area are completed, and some time before the completion of estimates in all areas. The departmental reviews are designed to detect and eliminate padding which may have been included in estimates made by subordinate units, and to see that the estimates for different functional areas are consistent. Also, at this stage, there is an effort to weigh the objectives of the program against the cost, and to make such adjustments in both program and budget as seem desirable, to the extent they are possible without complete recomputation. Finally, it is generally necessary at this stage to make more or less major revisions in both program and budget by "brute force" methods to reflect revised force levels and budget ceilings imposed by the President, the NSC, and the Budget Bureau. Such "quick and dirty" revisions are likely to result in serious imbalances among inter-related program and budget areas.

The departmental reviews are generally conducted by part-time budget advisory committees, comprising senior members of each major subdivision of the military staff, plus one or more representatives of the civilian secretary of the department. In some years, representatives of the Department of Defense and the Budget Bureau have been invited to participate in the departmental reviews in order to save time in the subsequent reviews, but this practice has not generally proved satisfactory.

b) **Department of Defense and Bureau of the Budget Reviews** follow the departmental budget reviews. These may be conducted serially, or they may be concurrent in whole or in part. These two reviews are similar in their objectives (but unlike the departmental reviews) and so are sometimes combined successfully. The departmental reviews are in the main program-oriented; that is, their primary purpose is to review the program objectives in relations to costs as estimated in the budget, to insure that the program is sound and worth what it costs, and to insure that the parts of the program and budget are mutually consistent and will accomplish the objectives.

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The DoD and BoB reviews are in the main fiscal-oriented; that is, their primary purpose is to reduce the amount of the budget estimate, without giving the appearance of sacrificing the objectives of the program. They could hardly be otherwise since reviewers are generally under direction to reduce the estimate below some predetermined figure.

Thus the review process often degenerates into a kind of game, in which the review staff search for inconsistencies among related programs which will give them an excuse for cutting all related activities down to the level of the most limiting activity, and thus effect cuts without taking on themselves the onus of cutting the program. This tactic in turn is likely to induce departmental representatives who are defending the budget to withhold information whenever possible without actually misrepresenting the facts.

The DoD and BoB reviews often result in heavy slashes. In fact this is where most major cuts are made. Thus the military departments must completely revise their programs and budget estimates between December, when the BoB review ends, and February or March, when Congress opens hearings. It is a piecemeal, "quick and dirty" operation. And it takes place simultaneously with the peak workload on estimates for the following year. It is not quite so bad when the major revisions follow DoD reviews in August or September. But there is never time to do a reasonably accurate job. (In one recent year the Air Force program and budget were completely revised seven times.)

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### III. Congressional Budget Review.

#### A. Congressional Committees Involved.

1. The Armed Services Committees have the power to authorize force levels and construction programs and determine defense policy objectives. Their authorizations do not insure that funds will be appropriated or action programmed, but they do set ceilings on the program for which the Appropriations Committees may allocate funds, and which programmed actions may not exceed.

2. The Appropriations Committees theoretically are concerned with the relationship of force objectives to cost, i.e., deciding how much it will cost to attain the objectives defined by the Armed Services Committees. By their power of the purse they set the ceilings under which the administration may build forces, often quite independently of the Armed Services Committees. Hence they can force program cuts but not, effectively, enlargements. (In 1949 the Congress appropriated funds to finance a 58-wing air force, but President Truman impounded the funds because he planned only a 48-wing force.)

3. The Government Operations Committees theoretically carry on continuing and broad review of operations inside the executive departments, hunting out waste and inefficiency. In fact they have not usually performed this function. On the other hand, some 70% of the Appropriations Committees' hearings are devoted to such questions of efficiency rather than to broad objectives and economic capacities.

4. The Ways & Means and the Finance Committees wield an indirect but potent influence. Their determination of the revenues, coupled with a general devotion to balanced budgets, tends to create a "psychic ceiling" on the funds appropriated by the Appropriations Committees. The Foreign Relations and Foreign Affairs Committees also play an indirect role as they consider foreign commitments.

#### B. Nature of Congressional Decision-Making.

As previously noted, the budget offered to Congress has generally just emerged from the "quick and dirty" treatment. Inevitably it contains inconsistencies. The Appropriations Committees and their staffs proceed to probe for them, while Departmental witnesses try to rationalize them when discovered. Most Congressional attention is focused on past history and minor detail. The key questions of policies, objectives and programs are seldom really explored.

Moreover, the categories in which the budget is presented are of no help in deciphering its program-and-policy-meaning. Estimates for Operation and Maintenance, Major Procurement, Research & Development, Construction, and Military Personnel throw little light on the key questions: maintenance of existing forces vs. creation of more forces; strategic air vs. air defense; procuring for existing forces vs. procuring reserve stock for mobilization. And though the budget controls the program over several

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years' time, it does not clearly disclose the relationship of total
available funds, including prior years' appropriations, to the total
program over the period affected. It emphasizes a single fiscal year,
thereby obscuring policy issues in their proper time perspective.

However, presentation of the budget in its present form allows
Congress to perform the review function exhaustively. Congressmen
insist upon, and budgeters provide, cost figures in great detail.
Broad judgments of the wisdom of spending $5 billion for the Strategic
Air Force are not tackled but $100,000 for a motor pool on a 5,000-man
military base is a manageable question. It can be compared with last
year's, or other bases', motor pools. The result is a concentration on
means and a neglect of ends. (At a recent hearing, a senior congressman
insisted on learning the number of rolls of toilet paper provided in the
Air Force's request for Operation and Maintenance funds.)

The overall result satisfies no one. There is no definite program
which the budget request clearly supports. Detailed justifications are
riddled with inconsistencies which can't be corrected in time. No one
can say with conviction that the budget reflects a desirable course of
action. Because inconsistencies crop up, some Congressmen apparently
learn to mistrust all the estimates.

Moreover, administrators spend so much time reprogramming and
revising budgets that they can't do a good job of management once the
budget is approved. Resulting deficiencies make reviewers increasingly
critical, so they demand more and more detail. Consequently management
suffers still more.

### C. Impact of Congressional Budgetary Decisions

Congress influences defense policy and programs principally through
its control over "new obligatory authority," or "appropriations." These
are the units in which the budget is customarily expressed. It means
authority to let contracts for future delivery of goods and services.
In contrast, "expenditures" means payments made for goods received or
services performed.

Most appropriations are for a single fiscal year. This means that
they must be obligated within the year for which the appropriation is
made. If not obligated in that year, they lapse and return to the
Treasury. The actual expenditure of funds from such appropriations
must be completed within two years after the end of the fiscal year
for which they were appropriated.

But appropriations for research and development, and for pro-
curement of long lead-time equipment items, are generally "no-year"
appropriations. They remain available for obligation indefinitely,
despite the fact that the Constitution prescribed that monies to
"raise and support armies" cannot remain available for more than two
years. The provision has been interpreted not to apply to Navies and
Air Forces, or to "equipping" armies. This gives planners considerable
flexibility, but it is far from unlimited. Unless more funds are sub-
stantially obligated inside the fiscal year in which they were appropriated,
Congress is likely to rescind the unobligated balances.

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Those funds obligated for personal services are usually spent almost immediately after they are obligated. But a large part of the total defense budget goes into those long lead-time items such as aircraft, guided missiles, tanks, big guns and ships. Because these lead times largely control the whole defense program, the budget by controlling new obligating authority for a single fiscal year actually limits the program for several years ahead.

Because of the differences between long lead-time items and personnel payments, annual budget figures for appropriation and expenditure may diverge considerably when the program is expanding or contracting rapidly. This is illustrated by the following data for three recent years (in billions of dollars):

<table><thead><tr><th></th><th>FY 1951</th><th>FY 1953</th><th>FY 1955</th></tr></thead><tbody><tr><td>Appropriations</td><td>83</td><td>80</td><td>56</td></tr><tr><td>Expenditures</td><td>44</td><td>74</td><td>66</td></tr></tbody></table>

(These figures are for the whole US budget, but the gaps between appropriations and expenditures almost all result from the big defense program build-up during that time.) At the outset of the build-up heavy appropriations were made for the long lead-time items, covering programmed deliveries over a period of several years. By 1955 equipment for the enlarged forces would almost all have been contracted for, even if not yet delivered, and appropriations would be primarily for current expenses and replacement of equipment. But expenditures payment for equipment ordered earlier remains near the peak level.

## IV. THE BUDGET AS A TOOL FOR ECONOMIC STABILIZATION

As mentioned before, defense budgets are a favorite target for economic stabilization measures. They represent about two-thirds of all federal spending; and a large part of the remainder consists of "fixed charges" such as interest on the national debt and veterans benefits.

Economic "stabilization" measures are usually thought of as synonymous with a balanced federal budget. This tends to mean cuts in defense spending -- cuts whose impact is immediately felt.

Economists generally agree that economic stabilization as practiced by governments should involve deficit spending in deflationary times, and a budget surplus in inflationary times. They also tend to agree that it is hard to calculate the optimum size of the federal budget within a margin of some $10 billion. But in recent practice, the administration has identified "stabilization" with a balanced federal budget. This fetish may actually militate against effective programming. For while the attention of military planners is on the relation between appropriations and expenditures, the public mind centers on the relation between expenditures and receipts.

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There is quite a difference, as this shows (in billions of dollars; estimates at beginning of year):

<table><thead><tr><th></th><th>1951</th><th>1953</th><th>1955</th></tr></thead><tbody><tr><td>Appropriations</td><td>83</td><td>80</td><td>56</td></tr><tr><td>Expenditures</td><td>44</td><td>74</td><td>66</td></tr><tr><td>Receipts</td><td>48</td><td>65</td><td>63</td></tr></tbody></table>

Recent economic stabilization measures have in fact largely taken the form of slashes in defense spending. To be effective in reducing expenditures quickly, these slashes have to be in areas where the impact is immediate rather than distant. Cuts in personnel, for example, result in immediate cuts in expenditures. They can easily be characterized as elimination of waste and inefficiency, and no intention of changing the program need to be admitted. This may be true; but such cuts are likely to cause waste, by unbalancing the program in relation to the big, long-range, financial categories -- procurement of long lead-time items, research and development, and construction.

On the other hand, slashes in the long-range categories also may have an immediate impact on the program, though they are less satisfactory as stabilization measures. Cuts in future contracts may induce an immediate slowdown in current production, as manufacturers try to maintain a stable level of output. Contracts can also be cancelled altogether, and thereby gain immediate reductions in federal spending; but this will usually involve substantial cancellation fees paid to contractors.

There are other techniques which force immediate reductions in spending. The discovery of one mismanaged construction project can be made an excuse for holding up others. This blocks the entire program, though this may not be the intention. Or the government can delay paying its bills, by holding up deliveries, or making loans instead of progress payments on contracts. By this technique expenditures carry over into the next fiscal year. Such activity may amount to hundreds of millions of dollars in a single year.

In general, the defense budget is an unsatisfactory tool for economic stabilization because there is a necessary long lag between any program change and the resulting change in rate of expenditure, for the bulk of the program is built around the inherent physical development, and construction activities for which most funds are spent.

The other side of the coin is that changes made in the name of economic stabilization ignore the dynamics of a good, and thrifty, defense program. The motives clash.