Tuesday, May 12, 2009

Military spending is projected to fall to its lowest level as a percentage of gross domestic product since Bill Clinton was president, budget documents released Monday show. But unlike in the 1990s, when a post-Soviet “peace dividend” helped usher in a period of budget surpluses, the current cuts will barely dent the massive deficits foreseen long into the future.

The White House said that military spending, measured as a percentage of GDP, will drop to 3.1 percent in 2019, the lowest level since 2001. Yet the government’s red ink this fiscal year was estimated to reach a record $1.84 trillion, nearly $100 billion more than its previous projection.

“The peace dividend cannot bridge the deficit gap,” said Diane Lim Rogers of the nonpartisan Concord Coalition, which advocates fiscal restraint. “We have so many other spending needs and wants … that the situation is much worse” than a decade ago.

During the 1990s, when the military’s share of GDP shrank by an amount comparable to Mr. Obama’s projections, publicly held debt declined by hundreds of billions of dollars. Deficits evolved into surpluses, and the share of that debt owned by foreigners plummeted. None of that will happen this time, even if the economy expands according to the scenario disclosed by the White House on Monday.

Defense spending, measured as a share of GDP, will fall from 4.8 percent in 2009 to 3.1 percent in 2019, the administration estimates. However, publicly held debt, which totaled $5.8 trillion at the end of fiscal 2008, will exceed $16 trillion by 2019.

Just since September, the Congressional Budget Office’s (CBO) base-line revenue projections over 10 years collapsed by $3.3 trillion because of the deep recession, which has resulted in the evaporation of trillions of dollars in wealth and income, Ms. Rogers said. That will have a long-lasting effect on revenues, she said.

“Compared to the 1990s, we are in the opposite situation,” Ms. Rogers said. “Then, the revenue surprise was positive because of the booming economy. Now the revenue surprise is negative.”

Making matters worse, the president “has not shown a willingness to address tough choices on entitlements and revenue requirements,” she said.

In 1992, when the nominal budget deficit had reached a then-record $290 billion, defense spending made up 4.8 percent of GDP, just as it does today. By 2000, defense spending was down to 3 percent of GDP, and the government achieved a $236 billion surplus. A deficit equal to 4.7 percent of GDP in 1992 had evolved into a surplus of 2.4 percent eight years later.

Publicly held debt declined from $3.8 trillion in 1997 to $3.3 trillion in 2001. Between 1999 and 2001, the share of that debt held by foreigners dropped from 35 percent to 30 percent. After deficits racked up during the Bush administration, foreigners owned 48 percent of the publicly held debt at the end of fiscal 2008.

Today, the nation must dig out of a much deeper fiscal hole than in 1992, said Stan Collender, a longtime budget analyst who is a partner at Qorvis Communications.

The Obama administration inherited a 2009 budget deficit of $1.2 trillion, the CBO estimated in January.

The economic-stimulus package, other Democratic spending measures, a deepening recession and plunging tax revenues have raised the 2009 deficit to $1.84 trillion, or 12.9 percent of GDP, the administration announced Monday.

Mr. Collender said that as defense spending declines from 4.8 percent of GDP today to 3.1 percent in 2019, the deficit, according to the Obama fiscal plan, will fall from 12.9 percent of GDP in 2009 to 3.4 percent 10 years later. In other words, the peace dividend will contribute to deficit reduction, Mr. Collender said, but it cannot generate a surplus because today’s deficit hole is so much deeper.

Defense spending in 2019 would make up the smallest share of GDP, 3.1 percent, since the 1999-2001 period, when it totaled 3 percent.

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