HON. W. GRAHAM CLAYTOR, JR., DEPUTY SECRETARY OF DEFENSE HON. WILLIAM J. PERRY, UNDER SECRETARY OF DEFENSE FOR RESEARCH AND ENGINEERING

JOHN R. QUETSCH, PRINCIPAL DEPUTY ASSISTANT SECRETARY OF DEFENSE (COMPTROLLER)

INTRODUCTION

Mr. ADDABBO. The committee will come to order.

This week the committee will hear the requests of the Department of Defense for supplemental funds for fiscal year 1980. The January budget included fiscal year 1980 requests totaling $4.2 billion. The April request increased this amount by $2.9 billion, of which $572,000,000 is to be provided by transfer from amounts previously appropriated. Additional funds are also requested for fiscal year 1981. For the most part, we will consider the fiscal year 1981 requests at a later date since we have a very short time in which to consider the more urgent fiscal year 1980 requests.

Our first witness is Deputy Secretary of Defense Graham Claytor. Mr. Secretary, you have appeared before the committee many times. Accompanying Secretary Claytor is Dr. Perry and Mr. Quetsch. Gentlemen, we welcome you.

As you know, Mr. Secretary, the President has submitted a number of budget revisions encompassing all departments and agencies of the Government. The Defense Department was more fortunate than many departments in that you were permitted some program increases and fewer reductions were imposed. There are many Members of Congress, and I am one of them, who would like to make fewer reductions in programs for the people and cities and fewer increases in defense spending. One of the functions of our hearings will be to determine

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if this is possible. The burden of proof is on you to justify the funds requested; there are many other departments and programs which would like to have them.

We are, of course, interested in your proposals to transfer previously appropriated funds to new functions. We may not agree with all of those proposals.

The Appropriations Committee plans to include all of the supplementals, rescissions, transfers, et cetera for fiscal year 1980 in one bill, so there will be great pressure to transfer funds from one department

to another.

This bill must be handled rapidly. We plan to complete our hearings this week and to mark up early next week. There will not be much opportunity to provide information for the record, and very little opportunity to review the record. Give the best answers you can to the committee's questions when they are asked.

We plan to hold this hearing and those to follow in open session. If we need to discuss classified matters, a majority of the members can close the hearing.

Mr. Secretary, will you now proceed with your prepared statement?

SUMMARY STATEMENT OF SECRETARY CLAYTOR

Mr. CLAYTOR. Thank you very much, Mr. Chairman, it is always a pleasure to appear before this subcommittee, and today I will speak primarily about our requested Fiscal Year '80 supplemental appropriation. When Secretary Brown presented the administration's Fiscal Year '81 defense budget request and Five-Year Defense Program to the Congress in late January, he described our four fundamental policy and program objectives:

The preservation of essential equivalence between U.S. and Soviet strategic nuclear forces.

The deterrence of either conventional or nuclear war between NATO and the Warsaw Pact through the preservation of the military balance on the continent of Europe.

A clear and impressive ability to move substantial forces rapidly to aid our allies and other friends anywhere in the world; and finally Maintaining the most powerful navy afloat.

The Fiscal Year '81 budget, as submitted in January, provided for real growth in the Fiscal Year '81 program of 5.4 percent (TOA) over Fiscal Year 1980, and a real growth rate of just over 4.5 percent annually over the next 5 years. As a result of the March Fiscal Year '80 supplemental and Fiscal Year '81 amendment recently submitted to the Congress, TOA real growth from fiscal year '80 to fiscal year '81 is estimated to be slightly lower, 5.2 percent, but the annual growth will continue to average about 4.5 percent. This rate of growth was, and is, necessary to assure that the four major objectives just mentioned are accomplished.

In this connection I want to emphasize that the only true long-term measure of real growth in a complex operation such as Defense is TOA-not outlays. In a given year, outlays necessarily vary with many factors, including spending rates under a wide variety of contracts, production delays or lack thereof, and the like. It is accord

ingly impossible to predict in advance with any precision what outlays will be for any given period, and this variation from year to year can give a very distorted short-term picture. Accordingly, we intend to emphasize TOA in determining our real growth from year to year. In the January hearings Secretary Brown cautioned that, although the program was based on a somber and realistic national security appraisal, it was neither risk-free nor immutable and that it would remain under constant review. He said that the program may well have to be changed as world events continued to unfold-and that we would act to preserve the program if inflation were greater than forecast. I am here today to share with you our conclusions based on the administration's continuing program review. This review has been conducted against the backdrop of three major developments—one international and two domestic. But all serious.

First, of course, is the Soviet invasion of Afghanistan. The USSR's willingness to commit substantial Soviet military forces outside of the Warsaw Pact, and their apparent intention to sustain a large presence in Southwest Asia, has lent new urgency to some of our programs, such as those associated with rapid deployment forces. It has also required us to expand our continuing presence in the Indian Ocean for the foreseeable future. These changes require additional resources over those planned earlier in the year.

Inflation. Recent cost experience and revised economic assumptions compel us to act to preserve our programs in the face of inflation. If allowed to proceed unchecked, inflation could profoundly distort the defense program and fatally impair our ability to achieve our security objectives.

The Anti-inflation Program. The President's program to combat inflation includes a balanced Fiscal Year 1981 budget, with program reductions throughout the Government. Defense is no exception, and although the fiscal year '80 supplemental on balance shows a net increase, a portion of the defense reductions do involve Fiscal Year '80 programs.

Accordingly, the administration recently submitted an amendment to the Fiscal Year 1981 defense budget request. For the same basic reasons, we submitted supplemental requests to the Fiscal Year '80 budget, which I will describe today.

JANUARY SUPPLEMENTAL

Last January, along with submission of the Fiscal Year '81 budget, we submitted a Fiscal Year 1980 supplemental appropriation request in the amount of $4.2 billion. The bulk of this request covered pay increases due to inflation. In fact we called it the pay supplemental. These latter can be broken down into several categories:

1. Military, Classified Civilian and Wage Board Pay IncreasesApproximately $2.8 billion, the bulk of the request.

When the Fiscal Year '80 budget was prepared it was impossible to know what, if any, pay raises would be applicable to that Fiscal Year, so the pay levels then in effect were used. Effective October 1, 1979, pay increases of 7.02 percent were adopted. The total cost of these increases in Fiscal Year 1980 is estimated to be almost $3 billion, of which DOD

will absorb 5 percent or almost $150 million. This leaves a supplemental requirement of just over $2.8 billion.

2. Subsistence of Enlisted Personnel-A relatively small item, $80 million.

Eighty million dollars is included for increases in the cost of food that were not included in the Fiscal Year 1980 budget request.

3. Retired Pay Increase and CPIs $573 Million.

The increase of $573 million in military retired pay is the amount required to cover additional costs of retired military personnel due to: four cost-of-living increases; military pay raises on October 1, 1979; and the net effect of strength and rate changes that have occurred since the initial appropriation was received.

The net changes in the four CPI increases will add $551 million to the cost of retired pay. The military pay raise of October 1, 1979 added $20 million to the original estimate. In addition, $1.7 million is required to compensate for other changes, thus making a total in this category of approximately $573 million.

The administration is submitting legislation to reduce the adjustments due to CPI increases from a semi-annual basis to an annual basis. This recommendation is reflected in the figures as given. If this legislation is not enacted prior to September 1, 1980, we will need an additional $77 million to cover CPI increases.

The January supplemental also included one nonpay item: price increases for items purchased from stock funds. The inflation rates used in the fall of 1978 to forecast the stock fund prices in the Fiscal Year 1980 budget request are no longer adequate to cover actual costs incurred. The proposed supplemental appropriations would provide $797 million to the consuming appropriations to meet the increased costs of stock fund purchases. Without additional resources, the stock fund cash position could well become so low that effective supply would be jeopardized.

MARCH SUPPLEMENTAL

We now come to the more recent March supplemental. The March supplemental requests an additional $2.3 billion in budget authority, for a new total of almost $6.6 billion in supplementals. The budget authority request is about $336 million lower than TOA, beacuse we propose to finance program increases in this amount through the transfer of Fiscal Year 1978 and Fiscal Year 1979 unobligated balances. Fuel, inflation, and the Indian Ocean/Persian Gulf operations, acting together, result in an added Fiscal Year 1980 Defense budget requirement of approximately $3.2 billion :

$428 million for Indian Ocean/Persian Gulf operations is needed to finance the increased tempo of operations and to provide minimum resources for a viable and credible Rapid Deployment Force. This supplemental includes resources for prepositioning, rapid strategic movement of men and materiel, and construction of facilities to permit bare-based operations in the region.

While we could include the change in fuel prices in the total purchase price inflation, we have deliberately chosen instead to address fuel separately. The Department of Defense consumes approximately 90 percent of all federally purchased fuel; hence, fuel price increases

affect DOD much more than they do any other part of the Government. Fuel in the Fiscal Year 1980 budget as presented this past January was priced at September 1979 levels. We were, of course, aware at the time that fuel prices would probably increase; however, we thought it too early to make a reasonable forecast.

As we now see the situation, fuel prices for refined products will average over $38 per barrel throughout Fiscal Year 1980 rather than the $24.36 price included in the budget for Fiscal Year 1980. Consequently, our fuel costs will increase by approximately $2.5 billion over the budgeted amount. We see no prudent alternative to continuing our necessary flying and steaming operations operations that have direct bearing on our force readiness and combat capabilities.

The recently revised economic assumptions increase the estimated rate of price inflation in industry purchases to 9.5 percent from the 9.3 included in the Fiscal Year 1980 budget. That change costs us $300 million. To ignore these price increases could lead to economic inefficiencies, further increasing costs while creating severe allocation and rate of consumption management problems.

Within the total appropriations available to Defense, we have identified resources that, through internal reprogramming and congressional enactment of transfer authority, could be utilized to meet about $900 million of these requirements. Hence, the net request for added appropriations in the March supplemental is $2.3 billion in budget authority. As a result of both supplementals, the overall Defense TOA for Fiscal Year 1980 rises to $141.7 billion, budget authority rises to $140.9 billion, and estimated outlays rise to about $131 billion.

With the March supplemental request, I am also proposing that section 734 transfer authority be increased to $1.25 billion and broadened to permit transfer of prior year appropriations into Fiscal Year 1980 accounts, as we have requested for Fiscal Year 1981. This additional authority is required to provide an extra degree of flexibility, which can be used to meet further unforeseen requirements and permit the most effective use of all Defense resources in the execution of Fiscal Year 1980 programs.

In summary, the Fiscal Year 1980 supplemental is designed to make our defense budget and program conform realistically to the profound events that have occurred in the world and in our economy since this budget was prepared about 15 months ago. If neglected, these changes would seriously impair achievement of our security objectives. Our challenge has been to sustain our Defense program-and even to improve our military capability in some areas while participating in the Government-wide effort to arrest inflation and restore health to the economy.

This challenge-one which the Congress shares-is a trying one. More military capability normally requires, among other things, more resources; controlling inflation necessitates austere Federal budgets, including defense budgets. This supplemental, and our Fiscal Year 1981 amendment request, strike the correct balance between these two conflicting and important requirements. The additional resourcesfor fuel and non fuel purchases, for improved capabilities, and for expanded operations in the Indian Ocean-permit us to respond