Budget Issues

In recent years, the Defense Department (DOD) has seen increases in purchasing power--called inflation dividends--that occur when inflation is lower than had been projected at the time funds were requested. DOD has used those savings to fund a larger program without requesting or receiving additional resources. In light of the military's experience, the question of whether civilian agencies should also identify the effect of lower inflation on their funding requirements has been raised. This report describes how inflation is now treated in budgeting for DOD and civilian discretionary nonpay activities. GAO developed case studies for three civilian agencies: the Bureau of Land Management, the Office of Environmental Management in the Department of Energy, and NASA. GAO also reviewed its earlier work on inflation changes in both civilian agencies and DOD and questioned DOD about how it budgets for inflation.

GAO noted that: (1) for a number of reasons, DOD has experienced greater changes in purchasing power due to inflation and has a better ability to track these changes than civilian agencies; (2) more specifically, DOD is able to identify changes in inflation because of three factors not found in most civilian agencies: (a) large dollar amounts structured by function that can be aggregated to a relatively few account titles; (b) a budget planning process that spans multiple years and serves as a baseline for measuring change; and (c) full funding for major weapons systems and other large procurements, which provides appropriations up front for the total estimated cost of a program or project at the time it is undertaken regardless of when the funds will actually be obligated; (3) in contrast, civilian agencies, for a number of reasons, have less potential to experience large changes in purchasing power due to a change in estimated inflation rates, and have a difficult time tracking fluctuations in inflation; (4) one reason is that funding for capital assets in civilian agencies, with few exceptions, is fundamentally different than in DOD; (5) for the most part, civilian procurement is funded on an incremental basis, that is, only for the amount that is expected to be obligated during the first year; (6) thus, no matter the size and length of the procurement, the annual budget process provides a regular opportunity to reassess (and reestimate for such factors as changes in inflation) an agency's funding requirements; (7) in addition, while 40 percent of federal procurement activities are carried out by civilian agencies, they are spread over approximately 700 disparately structured accounts across many agencies and individual contracts; and (8) taking these factors into consideration, requiring civilian agencies to track changes in inflation would not be cost-effective.