Defense Spending in Historical Context: A New Reagan-esque Buildup?

November 8, 2017 | Katherine Blakeley

Shifts in the international security environment, as well as calls by the Trump administration for a “historic” defense increase, have led analysts, Congressional leaders, and senior Pentagon officials to hope for or expect a defense buildup commensurate with the Reagan-era buildup of FY 1979–FY 1985. Secretary of Defense James Mattis and House Armed Services Committee Chairman Mac Thornberry (R-TX) have called for, at a minimum, sustained 5 percent annual increases to the defense budget above the FY 2018 request.[1] Chairman of the Joint Chiefs of Staff Joseph Dunford stated in testimony that the capabilities to support the forthcoming National Defense Strategy would require the defense budget to grow by between 3 and 7 percent annually through FY 2023. Even so, this increased level of funding would not allow the military to increase the size of the force.[2] Analysts are banking on 4–6 percent annual growth in procurement funding, down from more aggressive expectations of high single-digit or low double-digit growth espoused shortly after the election in 2016.[3] Although there are some important parallels between the early 1980s and today, there are also some critical differences that make an equivalent defense buildup less likely to occur.

First, defense spending is shaped by the perceived demands of our national security in a shifting and challenging international security environment filtered through political considerations; it should not be an arbitrary round number or percent of GDP. The Reagan-era buildup occurred in against the background of broad bipartisan perception of an increasingly unfavorable U.S. position in its bipolar strategic competition with the USSR. By contrast, national security practitioners and policymakers have only recently begun to recognize the current shift from the unipolar security environment of the post-Cold War era to an era of renewed competition with Russia and China, as well as other challenges to the U.S.-led international order, and there is as yet no consensus as to its key features.[4]

Accordingly, there is not yet a shared understanding of the types of military strategies and capabilities that will be most important to the United States in this increasingly challenging environment. Decisions about what investments in military capabilities may be needed (for example, a more robust U.S. military and allied presence in Eastern Europe with heavy brigades, ground-based fires, greater airpower, and capabilities to operate in a high-end contested combat environment) or the appropriate balance between high- and low-end capabilities in the Air Force and Navy, and therefore the level of defense spending that may be required, should be grounded in a clear vision of the international security environment, U.S. objectives, and the role of our allies and partners. Additionally, this epochal shift in the international security environment demands a corresponding focus on longer-term thinking about U.S. strategy, capabilities, and defense budgets, struggling against the tyranny of immediacy imposed by national security crises, domestic political calculations, and near-term bureaucratic victories in the budget process.

Secondly, the contemporary defense spending budgetary landscape is very different than it was during the Reagan-era buildup. The rapidly increasing defense budgets of FY 1979–FY 1985 were financed predominantly through deficit spending, as the Reagan administration cut taxes in 1981, decreasing revenues in both absolute and relative terms (see Figure 9-1).[5] The rapid growth of the deficit and rising outlays led to the enactment of the Gramm-Rudman-Hollings Balanced Budget Act of 1985. This law, the grandfather of the current Budget Control Act of 2011, imposed caps on overall discretionary spending levels in an attempt to reduce the federal deficit. The Gramm-Rudman-Hollings Act effectively halted the Reagan administration’s defense buildup, and defense spending contracted rapidly after the FY 1985 high water mark. By contrast, the contemporary BCA is already in force, and has placed caps on defense and non-defense spending through FY 2021 that are enforced by the sequester mechanism borrowed from the Gramm-Rudman-Hollings Act, smothering a prospective defense buildup. Although Congress has reached a bipartisan deal to amend the defense caps each year since FY 2013, the average amount of so-called sequester relief has been $18 billion in FY 2018 dollars, reflecting the narrow boundaries for compromise between the fiscal hawks, mainline Republicans, and Democrats. Without an agreement to substantially raise or eliminate the BCA caps, any growth in defense spending will be far below a comparable buildup in either total amounts or rate of growth.

Figure 9-1: Federal Receipts, Outlays, and Surplus or Deficit, FY77–FY18

Source: OMB, Historical Tables, Budget of the United States Government, Fiscal Year 2018 (Washington, DC: Government Printing Office, 2017), Table 1.3, “Summary of Receipts, Outlays, and Surpluses or Deficits (-) in Current Dollars, Constant (FY 2009) Dollars, and as Percentages of GDP: 1940–2022,” available at https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/budget/fy2018/hist01z3.xls. Calculations by CSBA.

Third, total DoD budgets have exceeded those of the Reagan-era defense buildup since FY 2003, prompting some to ask why even higher defense spending is justified and what we’re collectively getting from our national spending on defense. In an annual Gallup survey for 2017, 31 percent of Americans surveyed felt that the U.S. was spending “too much” on defense.[6] The FY 2018 DoD budget request of $647 billion (including base, OCO, and mandatory spending) is $65 billion, or 11 percent, more than the $581 billion defense budget at the peak of the Reagan buildup. Even excluding Overseas Contingency Operations funding, the base defense budget request still matches or exceeds the average funding levels of the Reagan-era buildup after adjusting for inflation. The FY 2018 base budget request of $582 billion (including both discretionary and mandatory spending) is slightly higher than the peak of the Reagan buildup of $581 billion in FY 1985 and $59 billion, or 11 percent, more than the average DoD budget of $523 billion during the Reagan Administration.

DoD’s largest total budget, at $796 billion, was in FY 2010 during the height of the wars in Iraq and Afghanistan. It included $610 billion in base defense spending—$29 billion more than the $581 billon at the peak of the Reagan-era buildup—as well as an additional $186 billion in OCO funding. Defense spending declined rapidly following the drawdown of deployed forces in Iraq and Afghanistan and the imposition of caps on base discretionary defense spending by the Budget Control Act (BCA) of 2011. Despite the decline, total national defense funding at the bottom of the drawdown in FY 2015 was $628.9 billion, $32 billion more than the $596.9 billion spent on national defense during the peak of the Reagan-era defense buildup, after adjusting for inflation. The base defense budget in FY 2015, at $534 billion, was $11 billion or 2 percent more than the average base defense budget level during the Reagan-era buildup, although it remained below the peak base budget of $581 billion in FY 1985 by $47 billion (see Figure 9-2).

Figure 9-2: Total DOD Base and OCO Spending, FY48–FY18

Source: OUSD (Comptroller), National Defense Budget Estimates for FY 2018, FY 2018 Greenbook (Washington, DC: DoD, June 2017). Calculations by CSBA.

Overall, the share of defense spending as a percentage of GDP has declined steadily since the end of the Korean War. The U.S. national GDP grew from $2.27 trillion in FY 1948 to an estimated $20.0 trillion in FY 2018 in constant dollars—a cumulative annual growth rate (CAGR) of 3.2 percent. Over the same time period, defense spending has risen from $102 billion in FY 1948 to a requested $646 billion in FY 2018 for a CAGR of 2.7 percent (see Figure 9-4 and Figure 9-5). Although total defense spending over the past 15 years has reached historic highs in absolute terms, it represents a historically low percentage of GDP. Although not useful for gauging the necessity of defense spending, defense spending as a percentage of GDP or as a percentage of overall federal spending can be a useful yardstick in discussing the relative affordability of spending on defense—or any other federal program. Spending a lower percentage of GDP on defense indicates that national security consumes a relatively small proportion of overall national economic activity, compared to the FY1979–FY 1985 defense buildup. Similarly, defense spending’s relatively low share of federal spending in historical terms indicates that more money could be allocated to defense, if the political will to do so existed.

Funding for the Department of Defense peaked at 30 percent of federal spending in FY 1983–FY 1985, when it was equivalent to 6.7 percent of GDP (see Figure 9-3). In FY 2017, defense outlays were $581 billion, higher than outlays during the peak of the FY 1979–FY1985 buildup, but defense spending was a much lower 14 percent of federal spending and 3 percent of GDP. From an overall affordability perspective, the nation could increase spending on national defense considerably in dollar terms, while remaining below past proportions of defense spending as a share of GDP or federal spending. Spending the equivalent of 6.7 percent of GDP on the Department of Defense in FY 2018 would result in a DoD budget of $1,341 billion, while allocating 30 percent of federal spending to the DoD would result in a budget of $1,228 billion. This would be an increase of $459 to $534 billion over the total FY 2018 DoD request of $647.