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A Larger Deficit and National Security Spending August 27, 2009

Posted by Rebecca Williams in Analysis.
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OMB released its Mid-Session Review (MSR) earlier this week, which updates the administration’s economic forecast and budget projections.  The MSR projected a smaller 2009 deficit than was believed in May, totaling $1.58 trillion or 11.2 percent of GDP, down from the previous projection of $1.84 trillion, or 12.9 percent.  The projected lower deficit principally reflects the removal of a placeholder for further financial stabilization efforts.  This is, nonetheless, the highest federal budget deficit as a percentage of GDP since World War II.

The MSR also reported that out-year deficits were larger than previously projected.  With continued deficit spending, the revised economic outlook now projects that all of what the federal government will spend on debt servicing in the mid-term will be attributable to interest, not principal.  Like credit card debt, when interest accumulates it gets more difficult to pay off the balance.  In just ten years, annual interest payments are projected to reach $774 billion, or 3.4 percent of GDP.

What does this mean for national security spending?  Should deficit reduction re-emerge as a political priority, as was the case a little over a decade ago, sizable increases in the defense budget will be more difficult to realize.  Defense Secretary Gates has routinely pointed out that with a discretionary base budget of over half a trillion dollars, it is unreasonable to think that the defense budget should continue to grow at the same rate that it has been over the last few years.  However, there has been a real appetite for defense spending, with the defense budget more than doubling since FY 2001.  The sobering budget and economic outlook only bolsters Gates’ position.  The trend of increased forces, expanded military missions, and ballooning defense budgets becomes more unsettling when the deficit is also mounting, paid for by borrowing, financed in significant part by other nations.

On the international affairs side, the Federal Government’s long-term financial outlook is not good news.  Since the late 1980s, the broad Cold-War political consensus which underpinned U.S. international affairs spending has eroded.  As a result, support for foreign assistance programs and diplomatic activities were secondary to the deficit reduction imperatives of the 1990s.  Should this dynamic resurface, the Obama Administration’s commitment to double foreign development assistance by 2015 will be, at the very least, challenged.

As the US faces significant long term fiscal challenges posed by rising health care costs and an aging population, the future configuration of national security spending is uncertain.  But, it is important that changes reflect a balanced look at our national security, ensuring that both the military and our diplomatic and foreign assistance tools are adequately funded

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