President Reagan's five-year defense program will cost an estimated $136 billion more than he predicts because he is allowing too little for inflation, the Congressional Budget Office said yesterday.
The CBO estimate is based on a predicted average annual inflation rate two percentage points higher than the administration used in planning to spend $1.5 trillion on defense in the five fiscal years ending in 1986, CBO budget expert James L. Blum told a House Government Operations subcommittee hearing.
The effects of such an overrun would be "devastating" to the federal budget, numerous social programs and the economy, subcommittee Chairman Rep. Jack Brooks (D-Tex.) said.
For Congress, he said, the alternative to appropriating the $136 billion would be a defense capability weakened by buying less hardware than the White House says is required, by delaying delivery of much of it and by juggling funds among its accounts.
As in past administrations, the Pentagon is "not leveling with the American people," Brooks charged. Either its list of defense requirements is in "total erro" or it is changing the requirements without owning up to what it is doing, he said. In addition, he accused the White House of "skewing the defense budget" to offset deficits in the overall budget.
For many years, the Department of Defense has been under White House orders to calculate the impact of inflation on its purchases not on the basis of Pentagon and defense contractors' experience, but on the basis of guidelines drawn by the Office of Management and Budget from inflation rates for the whole economy.
In a practice that OMB Director David A. Stockman is scheduled to testify about Tuesday, the Reagan administration is continuing to bind the Defense Department to OMB guidelines while predicting general inflation rates sharply lower than any foreseen by private forecasting firms or by the CBO. In 1986, for example, the administration is counting on a modest 4.9 percent inflation rate.
Yet, the CBO's Blum warned, "the next five years could be worse than historical experience suggests," especially if instability in the Middle East, bad weather or other uncontrollable factors cause sharp price increases in commodities bought in vast amounts by the Pentagon, such as oil, food and exotic metals.
In projecting an annual average inflationary increase for all defense purchases two percentage points higher than the Defense Department does, the CBO calculated yearly fuel costs seven percentage points higher and procurement 2.5 points higher than did the Pentagon. By its estimate, the understatement of inflation's impact would grow from $1.7 billion in fiscal 1981 to $50.2 billion in fiscal 1986, for a cumulative total of $136 billion over the five years.
Similarly, Walton H. Sheley Jr., a top official of the General Accounting Office, recalled that past Pentagon projections of inflation rates even three years in advance turned out to be "less than half" the actual rates. The $1.5 trillion defense plan "cannot be accomplished if projected real growth in the budget does not materialize," he cautioned.
The prices paid by DOD to buy major weapons systems and military supplies have typically increased faster than prices in general. In fiscal 1976 through 1980, Blum testified, the yearly differential ranged from 0.3 to 4.4 percentage points, for a five-year average of better than 1.5 points.
In addition, a 1979 subcommittee study showed that overly optimistic inflation projections accounted for about 30 percent of the cost increases in major weapons systems. By giving low initial cost estimates to Capitol Hill, Brooks told the hearing, the Pentagon, "buys in," that is, obtains commitments to weapons programs that then soar in cost.
In the last quarter of 1980, the Defense Department reported recently, the price of 47 selected major weapons systems increased by $47.6 billion, a sum said by Brooks to be "roughly equal to the total budget reductions proposed by President Reagan."
Nearly $14 billion of that was "at least partially attributable to government inflation projections being lower than actual and contractor-predicted inflation, and to revision of future inflation projections," the GAO's Sheley said. At year's end, the cost of the 47 systems was put at $310 billion.