Defense Budget:

Projected Inflation Savings

NSIAD-98-177R: Published: May 11, 1998. Publicly Released: May 11, 1998.

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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) projected inflation savings, focusing on: (1) identifying the projected savings by fiscal year and the programs that DOD plans to buy with those savings; (2) the implications of applying those projected savings to additional DOD programs; and (3) a comparison of DOD's estimated savings to estimates provided by the Congressional Budget Office (CBO) and identify possible reasons for the difference in those estimates.

GAO noted that: (1) as a result of lower projected inflation rates, DOD calculated that its future purchases of goods and services over the 1999-2003 period would cost about $21.3 billion less than projected 1 year ago; (2) according to DOD, it will be able to buy additional programs with assumed savings from the projected lower inflation; (3) these programs include procurement items and civilian and military pay raises, which account for $15 billion of the $21.3 billion; (4) GAO's reviews of DOD's Future Years Defense Programs (FYDP) over the past few years have shown that DOD has not been able to reduce its infrastructure and increase procurements as planned; (5) this problem can be attributed somewhat to optimistic projections of future savings that did not materialize; (6) if the projected inflation savings that DOD has factored into the 1999 FYDP materialize or the inflation rates fall even lower than projected, DOD can fund the additional programs; (7) however, if the projected rates prove to be too optimistic, and the savings do not materialize, DOD will have to adjust its future budgets by cutting programs and/or request additional budget authority from the President and Congress; (8) CBO estimated that lower projected inflation rates would save defense $13.4 billion over the 1999-2003 period rather than the $21.3 billion estimated by DOD; (9) the most significant reason DOD's and CBO's estimates differ is that the declines in projected inflation are different; and (10) other reasons are that the budget baselines are different and CBO's estimate includes savings from low fuel costs, whereas DOD's estimate of $21.3 billion does not include savings for lower fuel costs of about $1 billion.

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