1997 FYDP Reflects Increased Purchasing Power Due to Lower Projected Inflation

The executive branch substantially reduced its forecast of the inflation rate for fiscal years 1997 through 2002, resulting in a decline in the estimated costs of DOD’s purchases of about $45.7 billion, including about $34.7 billion over the 1997-2001 FYDP period. However, the price measure used in the executive branch’s projections had inherent limitations and has since been improved. Using a different price measure, CBO projected a much smaller drop in inflation and estimated that the future cost of DOD’s purchases would be reduced by only about $10.3 billion over the 1997-2001 period. Lowered Inflation Forecast Yields Projected $35 Billion Increase in Purchasing Power in 1997 FYDP

The executive branch reduced its inflation forecasts from 3 percent per year for the period 1997-2001 to 2.2 percent per year, or 8/10 of 1 percent.As a result, DOD projected that the cost of defense purchases would decline by $34.7 billion for the 1997-2001 period and an additional $11 billion for 2002. The executive branch allowed DOD to retain about $19.5 billion of the projected increase in purchasing power. OMB officials told us they have not decided what methodology they will use to project inflation for the next FYDP, which will encompass the 1998-2003 defense program. CBO Forecasted an Increase in DOD Purchasing Power of $10.3 Billion in the 1997 FYDP

During consideration of the fiscal year 1997 defense budget, the Chairman of the Senate Committee on the Budget requested that CBO estimate the adjustments that should be made to DOD’s budget estimates through 2002 that would keep its purchasing power constant given lower inflation rates. Major Resource Shifts From the 1996 FYDP to the 1997 FYDP

Our analysis shows that resource allocations in the 1997 FYDP vary considerably from the 1996 FYDP. Other programs are projected to be reduced. The 1997 FYDP shows that DOD plans to lower active duty force levels in fiscal years 1998-2001. Table 2 shows the minimum force levels in the law and DOD’s planned reductions. If DOD is precluded from implementing its planned personnel reductions, it will have to make other compensating adjustments to its overall program. Projected savings from the latest round of base closures are also less than were anticipated in the 1996 FYDP. The 1996 FYDP projected savings of $4 billion during 1997-2001 from the fourth round of base closures beginning in fiscal year 1996. The 1997 FYDP projects total savings of $0.6 billion, $3.4 billion less than the 1996 FYDP projection. As a result of the transfer in programs and other adjustments, intelligence and classified programs experienced the most growth. One reason for the increase is that the 1996 FYDP projected savings based on interim base closing plans that subsequently changed, and actual closing costs were higher. We examined a variety of DOD planning and budget documents, including the 1996 and 1997 FYDPs and associated annexes. GAO Comments

1. 2. Therefore, we believe the forecasted inflation rates have a direct impact on DOD’s estimated future funding requirements. 5. 4, 1996).
Why GAO Did This Study

Pursuant to a congressional request, GAO compared the Department of Defense's (DOD) fiscal year (FY) 1997 Future Years Defense Program (FYDP) with the FYDP for FY 1996, focusing on the: (1) impact of the reduction in the inflation rate on DOD's 1997 FDYP; (2) major program adjustments from the 1996 FDYP to the 1997 FDYP; and (3) implications of these changes for the future.

What GAO Found

GAO found that: (1) as a result of projecting significantly lower inflation rates, DOD calculated that its future purchases of goods and services in its 1997 FYDP would cost about $34.7 billion less than planned in its 1996 FYDP; (2) according to DOD, the assumed increased purchasing power that resulted from using the lower inflation rates: (a) allowed DOD to include about $19.5 billion in additional programs in FY 1997-2001 than it had projected in the 1996 FYDP; and (b) permitted the executive branch to reduce DOD's projected funding over the 1997-2001 period by about $15.2 billion; (3) the price measure the executive branch used in its inflation projections for future purchases in the 1997 FYDP had inherent limitations and has since been improved; (4) if the executive branch decides to use the improved price measure for its 1998 budget, DOD may need to adjust its program as a result of that transition; (5) Office of Management and Budget officials told GAO they have not decided what price measure they will use to forecast inflation for the 1998 FYDP; (6) using projected inflation rates based on a different price measure from that used by the executive branch, the Congressional Budget Office estimated that the future cost of DOD's purchases through 2001 would decline by only about $10.3 billion, or $24.4 billion less than DOD's estimate; (7) resource allocations in the 1997 FYDP vary considerably from the 1996 FYDP as a result of the lower inflation projections, program transfers, and program changes; (8) the projected savings from the latest round of base closures and realignments changed considerably from the 1996 FYDP to the 1997 FYDP; (9) in the 1996 FYDP, DOD estimated savings of $4 billion from base closures; however, the 1997 FYDP projects savings of only $0.6 billion because: (a) the 1996 FYDP projected savings based on interim base closing plans that subsequently changed; and (b) military construction costs related to environmental cleanup of closed bases are projected to be $2.5 billion higher than anticipated in the 1996 FYDP; (10) a comparison of the 1996 and 1997 FYDPs also shows that DOD plans to reduce active duty force levels; (11) the smaller force planned for FY 1998-2001 would bring force levels below the minimum numbers established by law; and (12) if DOD is precluded from carrying out its plan to achieve a smaller force, it will have to make other adjustments to its program.