Inflation emerges as key debate in defense spending

Inflation has emerged as a central factor as Congress prepares to negotiate how much money it should appropriate to the Department of Defense in fiscal year 2023.

Republicans argue that the proposed budget doesn’t do enough to counter inflation, which in February hit an annual rate of 7.9 percent as measured by the Consumer Price Index (CPI). Liberal lawmakers, however, argue that inflation is being used by some defense contractors to inflate the prices of goods provided to the agency.

Pentagon officials told Congress that the agency doesn’t measure the impacts of inflation by the CPI, but instead uses a measure based on gross domestic product. Either way, the agency acknowledges that it was wrong in its estimates on inflation, but still feels that it can fulfill its top priorities with its proposed topline.

“This is a robust budget,” Defense Secretary Lloyd Austin told the Senate Armed Services committee last week.

“We certainly want to have the buying power to get the things that we need, but this budget gives us what we need to get the operational capabilities,” he added.

The Pentagon is asking for a budget of $773 billion for fiscal year 2023, a 4 percent ($30.7 billion) increase over what was enacted for fiscal year 2022.

Republicans have slammed the budget from the Biden administration for not keeping up with the record inflation America is experiencing.

In testimony to Congress, Austin, Joint Chiefs of Staff Chairman Gen. Mark Milley, and Pentagon Comptroller Michael McCord seemed to acknowledge the point.

In response to a question on April 5 from Rep. Mo Brooks (R-Ala.), Milley said that the Pentagon’s budget request assumes an annual inflation rate of 2.2 percent which he said was “obviously incorrect.”

McCord then interjected to say that the department has never viewed the CPI as “relevant to what we do.” Two days later in separate testimony, he told the Senate Armed Services Committee that the agency uses the GDP deflator to measure the impacts of inflation.

Whereas the CPI measures the change in prices paid by consumers, the GDP deflator measures the impact of inflation in the prices of goods and services produced in the United States, including exports.

For 2022, the Pentagon assumed that the GDP deflator would rise to 4 percent, and that next year it would lower to 2.2 percent.

Todd Harrison, a defense budget analyst at the Center for Strategic and International Studies, noted that the Pentagon made its assumptions about inflation back in November

“You’re trying to predict the future. So, everyone has to have some humility in this,” Harrison said. “But at the same time, they’ve got to acknowledge that they did make a prediction and a lot of things depend on the accuracy of that prediction.” 

Not every lawmaker is convinced that a massive increase in the Pentagon’s budget would help it to catch up with inflation. 

During Thursday’s hearing, Sen. Elizabeth Warren (D-Mass.) slammed lawmakers who she said suggested that the Pentagon’s budget should be raised by upwards of $100 billion due to inflation.

“There’s no question that inflation is raising costs across the country, but we’ve also seen big companies take advantage of inflation to jack up big prices and to pad their profit margins,” Warren said, noting that the Pentagon’s Office of Inspector General has proven multiple times that defense contractors gouge their prices.

Rising inflation costs continue to worry Americans outside of the Pentagon heading into the midterm elections in November.

According to a Gallup poll published on March 29, 17 percent of Americans named inflation or the high cost of living as the most important problem facing the U.S. And overall, respondents appeared pessimistic about the nation’s economic outlook.

“I think that a lot of the issues that are affecting the average American, particularly around prices and budgets and supply chains, we’re seeing really affect the military,” Rep. Elissa Slotkin (D-Mich.) said at the April 5 House Armed Services committee hearing.

Moving forward, Congress will begin working on a National Defense Authorization Act, which is a defense-policy bill that will later need an appropriations bill to fund authorized projects in the former legislation.

In response to a question from Slotkin, McCord indicated on Tuesday that the Pentagon would be willing to go back to Congress with a proposal that reflects the realities of inflation. 

Elaine McCusker, a former acting Pentagon Comptroller in the Trump administration who is now a senior fellow at the American Enterprise Institute (AEI), says inflation will have to have a big role in the appropriations process going forward.

“We are already seeing it as a consistent theme in questions from the Hill,” McCusker said.  “And when the numbers are as big as they are, it has to be a factor in the final, negotiated top line — or military modernization stagnates and defense spirals down taking the personnel, communities and industrial base that support it with it.”

Aside from inflation, McCusker said that Congress will probably base its budget on other factors like shipbuilding, proposed ship retirements, and procurement accounts. 

“I really hope Congress takes its responsibilities for funding the government seriously and passes appropriations bills before the start of the fiscal year,” she said. “Not doing so poses its own sort of threat.”