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No Surprise Personnel Costs Eating Defense Budget Which Affects Buying Hardware

The traditional view of the Pentagon's budget is that it is bloated with expensive, non-working weapon systems cobbled together by a cabal of Generals, industrialists and Congress people looking out for jobs and money in their districts. Certainly a good percentage of the annual defense budget buys tanks, airplanes, aircraft carriers and bombs but that is not the majority of it. The large acquisition programs are key to the bottom line of Boeing (BA), Northrop Grumman (NOC), Lockheed Martin (LMT) and Raytheon (RAY). Not to forget the large European companies like BAE Systems (BAE.L) and EADS (EADS.P) who have been making inroads since 2001.

That is why it seemed that President Obama and Secretary of Defense Gates were making major cuts to the budget when the canceled the F-22, VH-71, Airborne Laser and some other large programs. In reality the defense budget's growth and long term numbers are being driven by personnel.

The U.S. military has grown since 9/11 and conducted two lengthy overseas deployments. There have been almost five thousand U.S. military members killed and tens of thousands wounded. Many soldiers, sailors and airmen have served and retired or left the military. These are drawing benefits from the Veterans Administration (VA) and also retirement checks. All of this costs money and will for the next few decades.

U.S. military personnel get base pay, housing and medical care for themselves and their families as well as a whole host of other educational and other benefits. Nobody denies that they deserve the best that we can provide but an all volunteer military is expensive. They are though expensive to recruit, train, and keep in the field. The Progressive Policy Institute (PPI) has recently done a report laying out the costs and their affect on the overall budget.

They find that the Pentagon along with the VA spend about $301 billion a year on personnel. This is out of a total budget of $638 billion. The remaining funds go to weapons development, procurement, and operations and maintenance. Total weapon procurement will only be $107 billion in 2010 so even if all of that was cut it would still be about a third of personnel costs. Of course all of that money cannot be cut as there is a need to buy and develop some weapons every year.

What this illustrates that the only real way to reduce the defense budget if that is a goal is to reduce the size and limit operations. If all of the troops were returned home from Iraq, Afghanistan, Korea and Europe that would greatly reduce the cost. If the number of active duty personnel was reduced that would save even more. In the Nineties a great deal of the "peace dividend" came from the almost fifty percent reduction in the size of the armed forces.

What this all means is that unless the defense budget grows to keep pace with the personnel requirements then the hardware budget will have to be cut. This means less F-35 fighters or KC-X tankers or submarines. This means that Boeing and the other contractors will have less of a market and their earnings and revenue will start to go down.

Reportedly $15 billion is being added to the defense budget next year beyond the Pentagon's request. This is not going for more hardware but mostly to pay medical costs. This may be the future of the overall defense budget unless there is a significant restructuring of the military, its requirements and its budget.

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