Continuation of military assistance somewhat below the current level because of a projected decrease in aid to Southeast Asia.

Inflation has already reduced very severely the purchasing power of previous Defense budgets. Current economic forecasts do not anticipate that future inflation will be as severe as it has been in the last 24 months. But there will still be inflation in the United States between FY 1977 and FY 1980. Consistent with current economic forecasts, the second row of figures in the table on page 44 shows one series of fully inflated, "then-year" obligational authority estimates required to support our five-year projections.

The difference between the two projections is that the second projection includes all the estimated future inflationary price increases beyond those forecast in the Defense Budget for FY 1976. If future inflation is lower than the forecast upon which the projections in the second row are based, these “outyear" totals can be reduced. On the other hand, if inflation is higher than we have forecast, the Department will so advise the Congress and prepare new projections.

Two major points need emphasis here. The first is that projections of future Defense spending which include only the real growth are shown in deflated (constant) prices in the top line of the table. The second is that Defense outlays over this period will continue to decline as a percent of capacity GNP.

Before explaining the basis for these requests, it is worth summarizing several assumptions of a more general nature that have guided the Department in preparing this Report.

The United States is inescapably the leader of the non-communist world; there is no other country to fulfill our role if we abandon it.

Grave challenges face the industrialized nations of the West, and they are much external as internal.

If we are to realize our dreams of domestic progress, we must first stay alive and free.

National defense (and the men and women who perform so well in its service) provide an indispensable public good that is the basic duty of this Republic to its citizens.

As you review this Budget and its intellectual foundations, I trust that you will continually ask whether there are any different basic assumptions on which we could or should base our posture of defense.

DEFENSE BUDGET BASED ON SPECIFIC ASSUMPTIONS

Secretary SCHLESINGER. Mr. Chairman, you referred in your opening remarks to $97.8 billion requested for appropriation and $86.8 billion for outlays for this year. This refers to amounts considered by this subcommittee. Our overall request in the President's budget is $104.7 billion in total obligational authority and outlays of $92.8 billion. Our budget is dependent on several assumptions, as shown on the following table:

EFFECT ON FY 1976 BUDGET ESTIMATES IF PRESIDENT'S LEGISLATIVE PROPOSALS NOT ENACTED

FIVE PERCENT LIMIT ON INCREASES OF SALARIES AND RETIRED PAY

Secretary SCHLESINGER. One of those assumptions, a critical one, is that the Congress will agree to the President's request that a 5-percent limit be placed upon increases in salaries and retired pay. If that request is not approved by the Congress, greater payroll for the Department of Defense would result. Our total savings through enactment of such a limitation would amount to $1.8 billion.

In addition to that, Mr. Chairman, we expect to receive some $400 million in receipts from the Naval Petroleum Reserve at Elk Hills and that also depends on legislation. Those expected receipts are an offset to our outlays. If the legislation were not forthcoming, the total request in lieu of legislation would be $95 billion in outlays-a figure that has been portrayed in the press.

Mr. Chairman, in your opening remarks, you asked whether there is any economic stimulus in this budget. This budget has been put together on the basis of what we believe to be the requirements of national security. Any economic effects of that budget are secondary and have not been a factor in the makeup of this budget.

Of course, expenditures amounting to nearly 6 percent of the GNP have economic effects and the Congress must take those effects into account. But, as I think you will see, in terms of our constant dollar receipts over a period of years, the trend continues to decline.

FACTORS ERODING THE DEFENSE PROGRAM

If this is a stimulating budget, the trend is going in the wrong way. In terms of current dollars through 1975 and, indeed, this year, the budget is increasing. In terms of constant dollars, we have been going down. If you look at the top line on each of the points in the following chart, you will see the President's initial request. The blue areas represent congressional reductions, and the red areas represent the

consequences of unforeseen inflation going beyond the 3.5 percent that we have historically been allowed.

[The chart follows:]

EFFECT OF INFLATION ON DEFENSE BUDGET

Secretary SCHLESINGER. As you will note, and as you would expect, particularly in fiscal year 1975, in terms of real resources, the Department of Defense was ravaged by inflation.

Mr. Chairman, I think many on the Hill expected us to send up a supplemental to offset the consequences of inflation. We decline to do that, partly because of the observations of Chairman Stennis with regard to the appropriateness of various supplementals. They would prefer to wrap these things together in one total request for the new fiscal year. We have done so; some of the requests, however, particularly in the procurement account, are intended to cure the underfunding that comes from prior years.

As you will note, our request for this year just counterbalances the effects of inflation in 1975. It does not vary to any great extent to offset the consequences of the congressional reduction. Year after year we are faced with the fact of diminishing real resources for the Department of Defense. This is a consequence of inflation and of the reduction in requested outlays after our high point in Vietnam. It is also the consequence of congressional reductions.

The overall budget request is down 40.2 percent in real resources from the fiscal year 1968 high when we were involved in Vietnam.

A more relevant guideline is fiscal year 1964, before we went into Vietnam. As compared to that year, we are down some 20 percent.

These are trends that have continued, partly as a result of the disenchantment of the American public with the involvement in Vietnam. People on both sides of the issue recognize that there is public disenchantment and there has been divisiveness, but we have issues to deal with in the world that go well beyond our involvements in Southeast Asia.

We are attempting to maintain a worldwide military balance, and that undergirds détente just as it also represents a hedge against the failure of détente. I think that Senator Proxmire has put this very well in the past; in fact, he has a plaquette in his office-I believe he still has a plaquette-which reads: "National Defense is a Life Insurance Policy-We Must Be No. 1".

I do not think we can claim anymore to be No. 1, but our objective is to be second to none, and that implies a degree of equality in terms of forces.

FISCAL YEAR 1976 BUDGET REQUEST IS BELOW FISCAL YEAR 1975 LEVEL

Senator PASTORE. In the last column, you have 1976 requests and then right next to the left, you have requests in 1976 prices. In other words, you are asking for less now irrespective of the reduction of the unforeseen inflation.

Are you asking for less in 1976 than you did in 1975?

Secretary SCHLESINGER. Yes, sir, by about $5 billion.

The budget request for fiscal year 1976 was forecast in the fiscal year 1975 budget document at $98 billion, with inflation running at about 10 percent. Now if we priced out the 1976 program, which we forecast at $98 billion, it would amount to $110 billion. We are about $5 billion less than we would have intended to be. That is inevitable, Senator Pastore, because it takes a long time to turn around an organization that spends as much money as the Department of Defense. When funding is reduced and additional funds for the programing are requested. if programing is conducted in a managerially effective inanner, it increases more slowly than those reductions which can occur very rapidly.

U.S.S.R. DEFENSE EXPENDITURES

Under the heading of defense establishment second to none, we must recognize that the Soviet Union continues to increase its defense outlays in real terms by about 3 to 5 percent a year. This has gone on in spite of the spirit of Camp David, in spite of the spirit of Geneva, in spite of the spirit of Glassboro, and in the time of détente. There has been a steady expansion of ready military power as portrayed in the following chart.

U.S.S.R. DEFENSE PRODUCTION ESTIMATED

Secretary SCHLESINGER. In recent years, qualitative improvements have grown to be more significant than the quantitative.

Senator YOUNG. How do you arrive at those Soviet figures? Were they published somewhere?

Secretary SCHLESINGER. No, sir. The data that they publish in their official budget is fallacious data. The way that we arrive at the correct figure is to estimate tank production, the number of men in uniform and we price those things out in American dollars. We do have a complex, technical problem of the ruble-dollar exchange rate. These are the estimates of the intelligence community.

In my judgment, and I can go into this in detail later on, if anything, in dollar terms, these estimates are probably on the low side. Senator YOUNG. Are those DIA estimates?

Secretary SCHLESINGER. No, these are CIA estimates.

What they show is a steady expansion of Soviet military power since Mr. Khrushchev. Men in uniform have increased from 3 million to in excess of 4 million. Expenditures in constant 1975 dollar terms are on the order of $105 billion or $110 billion, as compared to expenditures by the United States.