It is terrific to be back here as an honorary member of sorts. As comptrollers, you are at the core of what holds the Department together. I very much appreciate the professionalism that is represented in this room. Your financial expertise is what allows our national security institutions to run so well.
What I would like to do today is give you my thoughts on the fiscal situation that we face, discuss audit readiness, and then go to your questions.
Now, it is obviously not lost on anyone that we are facing a huge fiscal challenge in this country. As a consequence, our budget is under enormous pressure. Significant changes in our defense budget have happened before. Defense drawdowns have occurred at several points in our post-World War II history. But this drawdown has two important differences from prior ones.
The first difference is that reductions are starting before the end of current conflicts. Defense reductions ordinarily take place after wars, not during them. But, at this point we are still fully engaged in Afghanistan. We plan to begin a conditions-based drawdown this summer, but it will not be substantially achieved until 2014. Trying to reduce defense spending while still having significant numbers of forces engaged in combat will be a difficult and perilous task.
The other significant difference is the prominence of deficit reduction at the national political level. When deficits reach 10 percent of the economy—a historic level—something clearly has to be done. Although defense cuts alone will not solve our deficits problem, as some commentators would lead you to believe, it is hard for defense not to be part of a solution. Our budget, large as it is, only amounts to about 20 percent of overall government spending, or about half discretionary spending. To meaningfully reduce our deficits, we ultimately have to include revenues and entitlements in our effort to restore fiscal balance. Entitlements constitute the other 60 percent of the budget. And revenues of course generate all government funds. Although there is tremendous resistance to including either in the debate, we cannot solve the fiscal crisis we are in unless everything is on the table. Importantly for us, everything on the table will include defense in some manner.
With this pressing national challenge before us, our politics have shifted. The greater focus on the fiscal environment has produced a pronounced split between fiscal hawks and defense hawks. Many of those who would ordinarily oppose any cuts for defense are also increasingly concerned about the magnitude of the fiscal challenge we face. The magnitude of the challenge has made more lawmakers willing to moderate their traditional resistance to cuts in the defense budget. This split between defense hawks and fiscal hawks is a departure from historic patterns, and it has changed the national political discourse. It presents a different dynamic that in the past. It will ultimately affect the debate about our budget and strategy.
As I see it right now, we are in something of a “stair-step scenario” with the defense budget. It seems unlikely that we will see a single catastrophic change in our finances. What we will see is successive adjustments. The first step is occurring in FY2011. We still do not know the final size of our budget for this year. But it will be significantly below what the President requested. The second step downward was the President's Fiscal Year 2012-2016 budget proposal, which has been reduced $78 billion below across the five-year plan.
We must be prepared to deal with these “stair-step” reductions by managing the reductions in resources in ways that do not hollow out the capabilities of our armed forces. Here, looking at history is instructive. I think we can draw several lessons from prior drawdowns to improve our performance as we manage this one.
We are essentially at the fifth inflection point of post-World War II spending. The first three came at the end of wars. The end of World War II, the end of Korea, and the end of the Vietnam each triggered major defense reductions. Then in the mid-1980s we faced a situation somewhat analogous to today. During the Reagan Administration, very severe deficits resulted in the Gramm-Rudman-Hollings legislation in Congress. The national political focus similarly shifted to bringing our finances in line. This focus led to defense reductions that were then accelerated after the Berlin Wall fell and the Soviet empire dissolved at the Cold War’s end.
What each of these transitions in defense spending has in common is that DOD suffered a disproportionate loss of capability as a result. Each time we had to rebuild much of the capability we lost at great expense, and often under urgent circumstances. In other words, in the four post-World War II drawdowns, we have gone 0-for-4 in terms of managing them well. We must do this better this time around. We can do better by learning the lessons from prior drawdowns and applying them to our thinking today. I would draw four broad lessons from prior drawdowns.
The first is to make hard decisions early. It is not going to get better. I described in my stair-step analogy how the external pressures are going to increase. There is likely to be less money than we anticipate in the out years, not more. The kind of planning where you think all things come true in the out years is very destructive in a drawdown. Moreover, even well-managed programs tend to experience some cost increases. Accordingly, we will see increasing internal competition for resources, as well as the external pressure on the budget topline. The bottom line is that if you cannot afford it now, you will certainly not be able to afford it in the future. It is irresponsible to embark on programs that we cannot afford. We need to make the hard decisions now to live within our expected resource levels.
The second lesson from prior drawdowns is that it is impossible to generate the savings needed to meet deficit targets through what I call pure efficiencies. By pure efficiencies, I mean where you perform the same function for less money. We can generate some savings that way. Cloud computing for instance holds out the potential of generating greater capability at lower cost across our information technology enterprise. But we are not going to find enough pure productivity gains to generate all the required savings. This means that we have to prioritize. We will have to eliminate programs that, while valuable, are not valuable enough to sustain in this budget environment. The "nice to haves" must go. We have to pare back to our core missions.
The third lesson is that reductions must be done in a balanced way. Reductions focused on a single area, like operational accounts, hollow out the force by depriving it of needed training and maintenance. Over the long-term, we pay a heavy price for such reductions. Similarly, reductions that single out investment accounts, which are easy to target, effectively force a procurement holiday, causing a huge “modernization bulge” to develop. This bulge of outdated equipment and systems then needs to be bought back at great expense a decade or so later. The bill that comes due is far larger than it would otherwise be. What we need to do is balance reductions across our force structure, operating costs, and investment accounts. The capability that we retain must be holistic. We must avoid creating imbalances in the enormous skills and capability that we have built up at great expense.
The fourth lesson from prior drawdowns is not to cut too much, too fast, especially from core mission areas. As I said before, rebuilding capabilities five, ten, or fifteen years later comes at a multiplier in terms of costs. And cost alone is not the only price we pay. We have paid for some of our prior decisions with the lives and welfare of our troops who find themselves in conflicts for which they are not optimally prepared. So we do not want to make precipitous or imprudent cuts we will soon come to regret.
Secretary Gates has discussed an important corollary to this historical lesson, which is to not confuse math with strategy. Some of the deficit reduction proposals circulating in Washington identify extremely specific targets for defense reductions, but then fail to articulate how our strategy should change to meet them. It is essential that the budget and the strategy match.
What we have to do as defense professionals is point out the policy choices that are incumbent with changed resources. What are we doing today that we are not going to do with fewer resources tomorrow? What are the lower-priority missions? Which programs should be ended? What does a smaller force structure mean to our international commitments? Do we pull back in the Pacific? Or Europe? Adjusting force structure and capabilities to reflect new budget targets is not a simple, mathematical exercise. Numerical targets alone are not a strategy.
However our national conversation on deficits and military commitments unfolds, our challenge is to manage the transition in the defense budget without disrupting the capabilities of the world's best military force. Secretary Gates anticipated much of this. The last two years he has shifted our fiscal and strategic approach in accordance with the four lessons I have just described. He has been making the tough decisions and been making them early. We have ended the buy of the F-22 and the C-17. We have cancelled programs where the performance was unacceptable, like the presidential helicopter. This year we terminated the Expeditionary Fighting Vehicle, which fulfilled an important capability but at too great an expense.
The whole efficiency initiative that Secretary Gates led the last nine months is about prioritizing. It eliminated commands like the Joint Forces Command, not because we don't think jointness is important—jointness is important—but because we do not need a billion-dollar, four-star command to promote jointness given the progress that has been made in this area. Secretary Gates is also trying to ensure the third lesson: balance. As we go to a flat budget in FY 15 and FY 16, we have proposed conditions-based force structure reductions in the Army and the Marine Corps. These proposed reductions help ensure we maintain a balance between operating costs, investment costs, and personnel costs.
Finally, Secretary Gates is trying to avoid making cuts that are too deep. Of the $178 billion in savings we identify through the Future Year Defense Plan, we reinvested $100 billion into technologies that will help us in the next generation of conflicts we face. This includes major commitments to unmanned aerial vehicles, long-range strikes, cyber, ISR, shipbuilding, and health of the force issues. We also generated $78 billion in reductions that the President can use to help get our fiscal house in order. This represented a balanced approach that supported deficit reduction but did not cut too deeply.
Before I close, I want to talk about something that is especially important to those of us in this room—our effort to achieve a clean audit for the Department of Defense. As you know, I previously served as the DoD comptroller. I know just how hard it is to reach this high standard of financial accountability across the complex accounting systems we use to manage the department. There is no organization like the Department of Defense, in terms of the size and scale of the enterprise and the unique missions we carry out. Our financial and accounting systems reflect this complexity. Yet despite this, we are making progress toward achieving the higher standards of audiability Congress has asked us to reach.
Some of those who see value in achieving a clean audit opinion make a comparison to commercial entitles that is not valid. We do not audit our accounts and assets for the same reasons that commercial entities do. We are not going to sell the place. We do not have investors who are reading our financial data for precise estimations of commercial valuation. And we do not have lenders who are concerned about our ability to repay debt. But we do have a Congress and a public. They need confidence that the now-$700 billion they are investing in our military capabilities is being well spent and well cared for. Achieving a clean audit opinion for the Department is not the only way to establish accountability in the department, but it is an important way to provide Congress and taxpayers with confidence in our fiscal stewardship.
There is also a second, institutional reason to achieve a clean audit opinion, which is more comparable to the logic that applies to commercial entities. If we achieve a clean audit enterprise-wide, it shows we have strong management information systems. There is a great convergence here between systems that enable audit readiness and tools that enable better management. Imposing more precise controls and safeguards on the resources we are entrusted with also helps us manage those resources in more efficient and effective ways. We structured our audit readiness plan to help foster this convergence between management tools and audit readiness. Our plan deliberately focuses first on implementing information systems that have the greatest management value. So as we work toward the goal of full auditability, our management information systems will significantly improve. So I would ask that all of you support Bob Hale and his team in achieving the audit readiness plan. I know the goals we have established are ambitious. But as I have just explained, the reasons for meeting them are critical and the payoff in public trust is substantial.
As you can see, we are all in for a busy year. Each of the issues I have touched on today is an enormous challenge. And we are taking them on simultaneously, while fighting one war and winding down another. The road ahead will not be easy. But as Secretary Gates is fond of saying, difficult is not impossible.
If we can hold the course that Secretary Gates has set, and continue to execute the four lessons of tough choices, prioritization, balance, and avoiding precipitous cuts, we can successfully transition to the new fiscal environment. We can avoid going 0-for-5.