Inflation will heavily impact the Pentagon’s spending options, with billions on the line, according to a new white paper by NDIA. (Graphic by Lee Ferran)
WASHINGTON — If left unaddressed, the Pentagon will start to feel an estimated $110 billion loss in buying power in the coming years as it copes with this year’s record-setting inflation, a problem that will materialize in growing maintenance backlogs and generally leaving the US less prepared for conflict, a defense trade group is warning.
“Inflation is particularly disruptive to our national defense because the long budget and acquisition processes [the Defense Department] uses prevents timely adjustments for inflation,” according to a new white paper published today by the National Defense Industrial Association. “Absent relief, it will undermine the readiness of our forces, the quality of life for our service members, and the timely deployment of modern weapon systems to our warfighters.”
The paper’s authors, John Whitley, David Norquist and Lisa Disbrow, all of whom have held comptroller positions within the Pentagon in Democratic and Republican administrations, conclude that the fiscal 2023 defense budget must total $815 billion just to outpace inflation — that’s without considering the 3 percent to 5 percent increase defense hawks routinely advocate for to improve the military’s capabilities.
That figure represents a $42 billion boost compared to President Joe Biden’s budget submission. The key congressional committees have published draft budget legislation including DoD toplines ranging from $762 billion to $839 billion to $847 billion; their respective bills are in varying phases of the legislative process.
The report says lost buying power caused by inflation “will either appear as reduced quantities and maintenance backlogs or cost overruns and schedule delays. […] When all impacts are combined (including over $20 billion in execution impacts for FY 2023), the total inflation loss for FY 2021 to FY 2023 is over $110 billion.”
Further, the white paper authors write that if the Pentagon begins fiscal 2023 under a continuing resolution — a situation that has become nearly inevitable given the polarization on Capitol Hill combined with mid-term elections on the horizon — that DOD will lose “about $6 billion in buying power every month on the CR as it endures the compounded effect of three years surging inflation.”
“We learned in 2016 that recovering from artificial cuts is more expensive than getting it right in the first place,” Norquist, NDIA’s president and CEO who previously served as DOD comptroller and deputy defense secretary during the Trump administration, told Breaking Defense in an interview today. Norquist was referring to the sequestration the Pentagon experienced during the Obama administration, and then-Defense Secretary Jim Mattis’ subsequent attempts early on during the Trump administration to catch up on backlogged maintenance.
“Whether it’s ship maintenance or facility maintenance or repair,” he added. It’s the “same thing with catching up on shortfalls in munitions… One of the lessons we’ve learned in the past is it’s better to stay on top of things than to fall behind and try and recover.”
OP ED: How the Pentagon’s bad inflation math made a hollow budget
The white paper also says it will take several years to fully understand the scope of the impact the higher-than-anticipated inflation will have on the Pentagon.
For example, the Defense Department uses different kinds of contracts depending on what is being purchased. In certain cases, a contract is “fixed price,” meaning if something causes the price of materials to skyrocket, then the vendor eats the cost. Meanwhile other contracts dictate that the Pentagon must absorb any unexpected cost increases.
And while some number of deals include “escalation clauses,” those contracts assume only 2 percent inflation “and we already know those numbers are wrong and those contracts go out several more years. So, it affects contracts in the past and it affects contracts awarded now going into the future,” according to Norquist.
NDIA’s white paper comes a day after the Pentagon announced its own initiatives to help suppliers cope with inflation, including advising the military departments that contractors can request “Extraordinary Contract Relief” for inflation-related price hikes. In previewing that announcement, Bill LaPlante said last week the Pentagon wanted to provide greater flexibility for adjustments.
“I’m worried about the small supplier who signed a firm, fixed-price contract. It’s got 50 employees, and all of a sudden is dealing with 11 percent inflation,” said Bill LaPlante, the Pentagon’s acquisition executive. “How do we deal with that company? We don’t want those companies to go out of business.”
