The Pentagon will lose $110 billion in purchasing power to inflation, advocacy group warns

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Inflation will have a big impact on the Pentagon’s spending options, with billions at stake, according to a new NDIA white paper. (Graphic by Lee Ferran)

WASHINGTON — If left unchecked, the Pentagon will begin to feel an estimated $110 billion loss in purchasing power in coming years as it grapples with this year’s record inflation, a problem that will materialize in growing maintenance backlogs and generally leave the United States less prepared for conflict, a defense trade group warns.

“Inflation is particularly disruptive to our national defense because lengthy budgeting and procurement processes [the Defense Department] uses prevents timely adjustments for inflation,” according to a new white paper released today by the National Defense Industrial Association. “Without relief, it will compromise the readiness of our forces, the quality of life of our service members, and the rapid deployment of modern weapon systems for our combatants.”

The paper’s authors, John Whitley, David Norquist and Lisa Disbrow, all of whom have held Pentagon comptrollerships in both Democratic and Republican administrations, conclude that the fiscal year 2023 defense budget must total $815 billions of dollars just to outpace inflation – that’s without taking into account the 3 percent to 5 percent increase defense hawks regularly advocate for improving the capabilities of the military.

That figure represents a $42 billion increase from President Joe Biden’s proposed budget. Key congressional committees released a budget bill, including key DoD numbers ranging from $762 billion to $839 billion to $847 billion; their respective bills are at different stages of the legislative process.

The report states that the loss of purchasing power caused by inflation “will appear either as reduced quantities and maintenance backlogs or as cost overruns and schedule delays. […] When all impacts are combined (including over $20 billion in execution impacts for FY2023), the total inflation loss for FY2021 to FY2023 is over $110 billion. dollars.

Further, the white paper authors write that if the Pentagon enters Fiscal Year 2023 with continued resolve – a situation that has become almost inevitable given the polarization on Capitol Hill combined with the midterm elections on the horizon – the DOD will lose. “about 6 billion dollars”. of purchasing power each month on the CR while it suffers the compound effect of three years of galloping inflation.

“We learned in 2016 that recovering from man-made cuts costs more than getting it right in the first place,” said Norquist, president and CEO of NDIA, who previously served as DOD Comptroller and Deputy Secretary at Defense under the Trump administration, to Breaking Defense in an interview. today. Norquist was referring to the sequestration the Pentagon suffered under the Obama administration, and subsequent attempts by then-Defense Secretary Jim Mattis early in the Trump administration to catch up on backlog maintenance.

“Whether it’s maintenance of ships or maintenance or repair of facilities,” he added. It’s the same with catching up on ammo shortages… One of the lessons we’ve learned in the past is that it’s better to stay current than to fall behind and try to recover.

OP ED: How the Pentagon’s Inflation Miscalculations Made a Hollow Budget

The white paper also indicates that it will take several years to fully understand the extent of the impact that higher-than-expected inflation will have on the Pentagon.

For example, the Department of Defense uses different types of contracts depending on what is being purchased. In some cases, a contract is “fixed price,” which means that if something causes the price of materials to skyrocket, the supplier pays for it. Meanwhile, other contracts stipulate that the Pentagon must absorb any unforeseen cost increases.

And although a number of agreements include “escalation clauses”, these contracts only assume inflation of 2% “and we already know that these figures are wrong and that these contracts last for several more years. So , it affects past contracts and it affects contracts awarded now in the future,” according to Norquist.

The NDIA white paper comes a day after the Pentagon announced its own initiatives to help suppliers deal with inflation, including telling military departments that contractors can seek ‘extraordinary contract relief’ for inflation-related price increases. Ahead of that announcement, Bill LaPlante said last week that the Pentagon wanted to provide more flexibility for adjustments.

“I am worried about the small supplier who signed a fixed price contract. There are 50 employees, and all of a sudden it’s facing 11% inflation,” said Bill LaPlante, director of acquisitions at the Pentagon. “How do we deal with this company? We do not want these companies to go bankrupt.

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