Concerns about inflation have dominated the debate around the defense budget request for fiscal 2023. The Department of Defense requested $773 billion in discretionary funds, roughly 4% more in nominal dollars than the base budget level enacted by Congress for FY22.
But while rising inflation rates threaten DoD’s purchasing power, congressional politics around a continuing resolution to start FY23 could exacerbate inflation’s impact on the defense budget.
The Biden administration locked in its inflation assumptions in November of last year, projecting that inflation would decline through FY22 from FY21 highs and eventually level out.
But those forecasts have thus far proven more optimistic than realistic. Annual inflation measured by the consumer price index rose from 6.8% in November 2021 to a peak of 8.6% in May 2022, representing the largest annual increase in consumer prices since December 1981.
The GDP-chained price index, which DoD uses to measure inflation, was estimated at an annual rate of 8.1% in the first quarter of 2022 — well above the administration’s assumption of 3.9%. While it’s too soon to know with any certainty what inflation will be in FY23, current conditions suggest it will be higher than the 2.2% forecasted by the administration.
This high rate of inflation poses a threat to the department’s purchasing power. Instead of the real increase in defense spending assumed by DoD, rising prices over 2022 likely means the requested level of funding represents a cut. And the administration’s five-year funding projections could mean an even greater loss in purchasing power — potentially over $300 billion between FY23 and FY27 — should high inflation persist.
Unless the Biden administration intends to scale back the demands it places on an already over-stressed military — which appears unlikely given the conflict in Ukraine and the administration’s recent decision to redeploy troops to Somalia for counterterrorism missions — DoD must work with Congress to mitigate the effects of inflation. In May, Deputy Secretary of Defense Kathleen Hicks expressed the department’s willingness to work with legislators on updating inflation estimates to protect DoD’s buying power in the FY23 request.
The ball is firmly in Congress’ court to combat the effects of inflation on the defense budget given its constitutionally-mandated power of the purse. But congressional politics could threaten to exacerbate inflation’s effects on DoD’s purchasing power.
If Congress fails to pass appropriations by the start of the fiscal year on Oct. 1 — a task made more difficult by the administration’s late budget request — DoD will likely be forced to operate under a continuing resolution for months. The department is no stranger to working under continuing resolutions, having started the year under one for 15 of the past 20 fiscal years with an average CR length of over 112 days.
But a long-term continuing resolution this year would have a more severe impact given inflation. Under a normal continuing resolution, DoD would be funded at the FY22 base funding level of $742 billion (excluding emergency supplemental funding in FY 2022), which would mean a significant loss in buying power to start the fiscal year.
A long-term continuing resolution may be more likely given this year’s midterm elections. If one or both chambers of Congress shift control, legislators may delay passing appropriations until the new Congress is seated in January 2023 to gain more favorable terms in budget negotiations.
The Biden administration and both political parties in Congress must work together to mitigate the effects of inflation by passing FY23 appropriations by the start of the fiscal year. To get buy-in from Democrats and Republicans, this will likely require a budget agreement that increases funding levels for both defense and non-defense programs above the administration’s request. Washington has seen this trend before: During the Budget Control Act era of the last decade, both parties came together to increase defense and non-defense funding above the spending limits in a series of budget deals.
If they fail to reach an agreement to pass a long-term appropriations bill by the start of the fiscal year, Congress at the very least can pass a continuing resolution that raises funding for defense and non-defense programs above FY22 levels by a uniform across-the-board rate, as they have done at times in the past. This would provide a temporary solution that restores some lost buying power in FY23.
Seamus P. Daniels is an associate fellow and the associate director for defense budget analysis in the International Security Program at the Center for Strategic and International Studies.