Personnel costs accounted for 38% of the Army’s fiscal year 2022 budget request, compared with 27% for the Navy and 21% for the Air Force, according to Pentagon budget documents.
A higher share of personnel costs is often a liability in the budget process, since the cost of soldier pay and the number of soldiers does not change rapidly, [IDA’s David] Tate said. But it could be a blessing for the Army this year because soldier pay is expected to grow at a slower rate than other costs.
… As long as the Biden administration’s inflation estimates are made in good faith, then costs should rise more quickly for procurement and operations and maintenance than personnel in the FY-23 budget request, said [Heritage’s] Thomas Spoehr.
That was from an interesting Inside Defense article, Inflation might hit Army less than other services due to higher share of personnel costs.
I see the logic that inflationary impacts will not hit the Army as hard, but it’s not clear that personnel pay should grow slower than materiel prices. The Employment Cost Index (blue) has largely outpaced the Consumer Price Index (red) and GDP Price Index (green), as seen in the chart below. If this were not the case, then workers would be getting worse off over time (or even less productive). So to the extent MILPAY doesn’t grow as fast as other accounts, it may signal difficulty keeping personnel who have increasingly good opportunities elsewhere.
I think the real issue being where pointing to is that pay raises are more within government control, whereas spares and repairs prices, the cost of contract labor, sheet metal, etc., depend more on the market where inflation is creeping up faster. Certainly, the benefits received by military personnel downstream in healthcare, education, and so forth will be growing very quickly and are outside government control. But those costs aren’t really faced in current Army budgets.
And here I am quoted in the article:
The service typically has three years to spend its procurement appropriations, [GMU’s Eric] Lofgren said. So even though it is currently FY-22, the Army will also spend procurement funds this year from earlier appropriations.
There can be a four-year gap between when the budget is prepared and when 90% of the funding has been spent, he said.
So, if the Army budgeted $100 million for a program in FY-21 and planned to buy 10 vehicles, much of that money might not be spent until FY-22 or FY-23, according to Lofgren. If prices to build the vehicles increase, the service might only be able to buy nine vehicles with the FY-21 funding.
A little clarification to that: Most procurement accounts have 3 years to obligate the money (a promise to pay) but the expenditure rate of dollars leaving the treasury will flow over a longer time period, 4 years roughly until 90% of the appropriation is outlaid for Army combat vehicles. The USD Comptroller Outlay rates from the Green Book used for calculating weighted inflation indexes is below:
And below, you can see the Comptroller rule of thumb obligation and expenditure rates for different colors of money.
And the other qualification I’ll add is that if a budget justification calls for, let’s say, 10 vehicles at $100 million and then Congress appropriates to that, by the time the program gets a vendor on contract inflation might have changed and they can only fit 9 vehicles into $100 million. Well, tough for the government unless it can negotiate a better price. But if the government had already gotten onto a fixed price contract for 10 vehicles at $100 million, then unexpected inflation hurts the contractor margins. They’ll have to deliver potentially at a loss unless there are other modifications.
And some final insights from me:
Since abnormally high inflation was not built into the budget in those earlier years, the service’s purchasing power will fall, Lofgren said. This will be especially true if inflation remains elevated.
Difficulty in predicting future inflation might pose more of a problem than high inflation itself as the services assemble their budgets, he said. If the Army knew in advance where inflation will land in the next few years, it could build the price increases into its models.
“Even if [inflation] changes, as long as we knew what the predictable path was, then the budget process is not really affected,” Lofgren said. “The problem is when you have an unexpected shock, like it did, all my cost estimates said 2%, and then all of a sudden, I get a 10% growth.”
Does this make us celebrities, Eric? 🙂
One point that I think didn’t come through in the article is that it isn’t that wages necessarily go up less than prices of goods and services; it’s that there’s a lag. It’s not that the Army will avoid the pinch; it’s that they get a few years to plan for it. When it comes, I suspect it will be worse than the original price pinch, because you can’t respond to increased personnel costs by cutting quantities or stretching schedules the way you can with RDT&E and procurement. Force structure has a lot more momentum than acquisition, and force size is much less elastic than budgets.
Thanks Dave, good point — wages tend to lag. Been seeing articles that companies are already facing that pressure. But the real question because whether the supply of military labor is elastic or inelastic. Because if it is elastic, then you’ll have problems recruiting and maintaining quality people. And then you have to sling shot back to even higher wages to entice people back when a reasonable growth rate would have avoided the churn all together. But if supply is inelastic, then govt can “milk it” for a while.