GEIA bullish on DOD growth

The Government Electronics and Information Technology Association (GEIA) opened its two-day Vision Conference today with a slightly bullish assessment of continued Defense Department growth in the next 10 years despite tighter budgets and expected declining supplemental appropriations to fight the war on terrorism.

Stephen Hellyar, manager for strategic market and financial analysis in the Strategy Planning group at BAE Systems, said that when the federal budget deficit hits about 3 percent of gross domestic product (GDP), “it reaches what we call the red zone, and there is increased pressure to cut spending.” That occurred in 2003 because of the economic slowdown of the two preceding years, he said.

The deficit environment is improving. In 2005 the federal budget deficit was projected to hit 3.5 percent of GDP but ended the year at 2.6 percent, Hellyar said. “Better than the red zone,” he said, but the president’s goal of halving the deficit to 2.2 percent continued to put pressure on DOD and other federal programs to cut spending.

GEIA’s deficit forecast for 2006 is expected to be 1.9 percent, well below the initial government prediction of 3.2 percent, he said.

That “provides an environment that we think is favorable to spending,” Hellyar said.

GEIA also foresees the deficit beginning to increase again around 2015, he added.

“This is the impact of unchecked growth in mandatory spending accounts mainly driven by health care costs,” he said. But for the first time in 2012, we’ll start to feel the impact of the baby boomers’ retirements.”

Hellyar said current levels of military spending and supplemental appropriations are expected to remain high through 2010, driven by the war. However, the DOD budget is flattening and will remain flat through 2017, putting fiscal pressure on the armed services to continue to cut costs.

GEIA predictions are cautiously optimistic, he said. “The deficit picture stabilizes and improves, providing the economy maintains its growth.”

Cecil Black, an executive in Boeing’s operations office in Washington, D.C., said the current DOD budget of more than $500 billion is higher than its peak during the Reagan administration. For fiscal 2008, the projection is for a DOD budget of more than $533 billion, “the biggest since the Korean War,” he said.

Black said procurement is now the second largest part of Defense supplemental appropriations, and their high costs may soon become a very significant concern in Congress. DOD procurement is expected to peak in 2009 and decline modestly through 2017, he added.

GEIA forecasts that supplemental appropriations will continue to pay for the wars in Iraq and Afghanistan for the next several years and that will reduce other appropriations, creating something of a “rob Peter to pay Paul” environment for some DOD agencies and programs, Black said.