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Budget Projections - Iraq War 2003
The expenditures on the Iraqi campaign
[(Retd) EAS BOKHARI ]

Estimating the economics cost of war with Iraq is a difficult task although the expertise of Desert Shield and Desert Storm is available to the US planners. The war in 1991, however, had a different coalition and the mode of waging war was also different as the main task then was the liberation of Kuwait. Operation “Iraqi Freedom” is much more exhaustive and comprehensive and surely quite unpredictable and fraught with uncertainties. The projections of the DoD (Department of Defence) naturally have some sort of cushion and flexibility, and may be some carry over to the fiscal 2004 Defence spendings will accrue.

The cost issues have many variables and this fighting in Iraq is a totally different experience for the US. “Federal Reserve Chairman Alan Greenspan was questioned at a Congressional hearing (before the ‘Op Iraqi Freedom’) on the US $100 billion a year cost of United States troops being in Iraq. He responded that he was ‘doubtful if the impact on the economy is more than modest, largely because this is not Vietnam or Korea’.”
Some others disagree with this. William Nordhaus, for example believes these estimated economic costs of a war with Iraq are too low based on a history of underestimation of the costs of wars and based on the experience of the 1991 Gulf War. War with Iraq is likely to be costly to the world economy in the short term, if nothing else depending on the length of war and the rehabilitation process and the compounding effects of many different factors. Some economists have used model G-cubed model version 48e, and inferred a macroeconomic cost to the United States.
In this rather down to earth presentation it is intended not to touch these refinements of economics, and rather get down to the figures of the DoD and see how best these are to be utilised in and around Iraq, covering war fighting and its aftermath in some detail.
In estimating the costs of war the Congressional Budget office (CBO) had examined two cases i.e. the varying emphasis on the use of ground or air forces. The CBO apparently did not speculate on the length of war and found that executing a war with Iraq could cost between US$6 billion and US $9 billion a month with an incremental cost of deployment between US $9 billion and US$ 13 billion. On the top of this, there would be the costs of return of forces and any physical occupation of Iraq.
Analysis by Nordhaus is slightly different and he had suggested that the CBO has underestimated the economic costs to the economy because these excluded a number of other potential costs such as the total costs of occupation, peace keeping, democratization, nation-building and post-occupation humanitarian assistance. On the top of this will be the impact on the oil markets and macroeconomic effect. Nordhaus puts the costs at US$ 151 billion for a ‘short and favourable’ war, and ten year cost of US$ 1595 billion for a ‘protracted and unfavourably’ war.
Final Congressional action was completed shortly after the beginning of the war on the ‘Supplemental Appropriations FY2003 Iraq Conflict, Afghanistan, Global War on Terrorism, and Homeland Security’. Clearly, now for DoD the adequacy of the $62.6 billion provided in FY2003 supplemental may hinge on the number of troops who will remain deployed in Iraq in FY2003.
“Because DoD has not publicly identified the planned troop deployment assumed with the funding levels in the supplemental, it is difficult to assess whether the supplemental is likely to be adequate. DoD Comptroller Dov Zakheim recently suggested that the supplemental funding levels looks to be about right in the light of current estimates, but others have voiced concern that DoD may be assuming too rapid a draw down... Since DoD’s occupation costs in FY2004 are not included in its FY2004 appropriations, a supplemental next year is likely.”
The DoD has yet another major role and the appropriation of $ 2.4 billion for reconstruction (to be distributed to the Agencies by the President) has been given to the DoD.
So the final congressional action on the FY2003 Supplemental is that it provides the $62.6 billion requested for the Department of Defence for the war in Iraq, the continued US presence in Afghanistan, enhanced security at US military bases, postwar occupation costs in Iraq, the repair of equipment and replacement of munitions and hardware lost in the war. Of the $62.6 billion, DoD requested $59.9 billion in the Defence Emergency Response Fund (DERF), a transfer account where DoD can exercise discretion about the monies that would be spent and then move the funds to the appropriate account, and $2.6 billion for specified activities. And more specifically the DoD request assumed a “short and extremely intensive” war and covered deployment and return of forces and equipment, repair and replenishment of equipment and munitions damaged or used during the war, mobilization of reserve forces, special pays for active, duty forces, and a “lower intensity” operations phase after the war is over. The request also included funds for the cost of US presence in Afghanistan and enhanced security in the United States for the remainder of the fiscal year.
The request also included some rather controversial proposals which broadened DoD’s role in the military assistance including $1.4 billion for aid to Pakistan, Jordan and other nations for logistical and military-related support; $150 million that DoD could use to pay irregular of ‘indigenous’ foreign military forces; and $50 million for foreign military regular forces of unspecified countries who cooperate with the US in the ‘global war on terrorism’. In addition to the funds for DoD, the Administration requested $2.4 billion for an Iraqi Relief and Reconstruction Fund, with the Administration retaining flexibility both as to how to spend the funds and which Agency would manage those funds. It is more likely that rather than going to the USAID, the funds would be managed by DoD. This fund though technically under the control of the President permits the fund transfer to the DoD. Thus the major role of reconstruction is also of the DoD.
The supplemental FY2003 also included specified requests for aid to 22 countries that have assisted the US in some fashion in Iraq or the global war on terrorism and ‘that face economic and political risks because of the Iraqi war. ‘This request totalled $4.7 billion and major recipients would include Jordan ($700 million), Israel ($1 billion plus $9 billion in guaranteed loans.) Turkey ($1 billion could be applied to $8.5 billion in loans), $325 million for Afghanistan, $300 million for Egypt and $200 million for Pakistan. (It appears that the request of Afghanistan has been curtailed to $167 million.)
And finally the monumental supplemental only addresses costs for the war itself, initial occupation and replenishment of equipment and supplies for the remainder of the fiscal year. “The Administration’s request does not specify its assumptions about how many or how long troops would remain deployed in Iraq “as an occupation force. And to address the issue of long term costs, the FY2004 budget resolution as passed by the Senate includes an amendment that created a $100 billion reserve fund for the next 10 years to cover the cost of war in Iraq, to be financed by reducing the size of tax cut by $10 billion annually between 2003 and 2013.
The estimates of some renowned economist notwithstanding, and economics according to Carlyle is a dismal discipline, the DoD believes that FY2003 Supplemental will be adequate. In a recent press conference, DoD Controller Dov Zakheim suggested that DoD’s estimates of costs in the FY2003 supplemental request appear to be about right based on costs experienced thus far. Based on its cost reports, it appears that DoD’s costs in FY2003 for Iraq and Afghanistan and the global war on terrorism could range from $55.4 billion to $65.0 billion. The mid-point of the two estimates is $61.1 billion or close to $62.6 billion provided by the Congress in the supplemental. (See table) It is interesting to see in perspective the total yearly defence budgets of Pakistan and defence expenditures, and how puny these appear in contrast. The figures as gleaned from the ‘Military Balance, IISS London’ for the years 1995, 1996 and 1997 are as below:


Due to certain uncertainties and unknown parameters observers outside the Administration have calculated on the plus side of the figures as they argue that the cost will be much higher than the Gulf War 1991 as the US Allies may not be able to contribute to either the cost of war itself or to post-war occupation.

The question of post-war occupation and stationing of troops particularly US troops in Iraq is particularly worrisome to US as this will affect their readiness for other likely operational tasks. The estimate of requirement of troops as occupation forces has ranged between 50,000 to 75,000 which is under consideration by the Joint Chiefs of Staff to over 200,000, an estimate proposed by Gen Eric K. Shinseki Chief of Staff of the Army. This is based on recent experience in Balkans and 1991 Gulf War. Colonel Scott Feil of the Association of the Army, a reputed military analyst feels that about 75,000 troops staying a year would be the minimum requirement.
Members of Congress have voiced concerns about the effect of war costs on the deficit. It is likely that the total war costs in FY2003 will reach $100 billion in the first year, which would have increased the FY2003 deficit by one-third from $300 billion to $400 billion, setting a new record in real terms (when adjusted for inflation) though still a smaller per cent of the GDP than in 1983.
“The full costs of a war with Iraq could include not only the cost of the war but also the cost of aid to allies to secure basing facilities and to compensate economic losses (e.g. Pakistan, Israel, Egypt and Jordan) post-war occupation costs, reconstruction costs, humanitarian assistance, and paying Iraqi Government officials. Hence the post-war costs could prove higher than the cost of the war itself. See table.
The estimates suggest that direct war costs could range between $33 billion and $60 billion, while the costs of aid to allies, occupation, reconstruction and humanitarian assistance could range between $35 billion and $69 billion in the first year depending upon the size of the occupation force, the amount of aid to allies, the scope of humanitarian assistance, and the sharing of reconstruction aid.
In this context earlier on the Secretary of Defence Rumsfeld had stated that $50 billion would be “on the high side for the cost of war”. The Office of the Management and Budget had reportedly estimated costs of $50-60 billion, but it did not issue publicly or explain the assumptions underlying its projections. An earlier estimate by former chief White House economist Larry Lindsey of $100 billion to $200 billion was dismissed by the Administration.
Finally here are some more (previous) estimates of war costs. In March 2003, and on the basis of then current deployments, the Congressional Budget Office (CBO) revised its estimates of the costs of a war. Using its assumptions, a one month war would cost $33 billion and a two months war would cost $41 billion. Adding $19 billion cost of an occupation force of 100,000 to the cost of one-month war, CBO’s estimates would be about $51 billion, which is fairly close to the Administration’s request taking into account that the request included about $10 billion in the non-Iraq costs.
Using a methodology based on the costs of the Persian Gulf War of 1991, the Democratic Staff of the house Budget Committee estimated that a two-month war that deployed 250,000 troops would cost $53 billion to $60 billion, an estimate closer to that used by Secretary Rumsfeld. An estimate by the Centre for Strategic and Budgetary Assessments (CSBA) that blends the two approaches, suggested that the direct costs of a two-month war would be $35 billion. A six-month war, with the same force size, could cost substantially more, ranging from $50 billion using CBO’s figures to $85 billion using CSBA’s approach.

CRS-47
Table 1. DoD Estimate of Adequacy of FY2003 Supplemental for Cost of War in Iraq and Afghanistan
(in billions of dollars)
FY2003-
Lower
Range
FY2003-
Higher
Range
Source: CRS calculations based on DoD Press Transcript, Dov Zakheim, OSD/Comptroller, April 16, 2003; see the related Department of Defence web site page at [http://www.defencelink.mil/transcripts/2003/tr20030416-0111.html].

Covers personnel and personnel support costs for second half of FY2003; first half is covered in category, “Spent Thus Far”.

Provides military and logistical support to Pakistan, Jordan and other “key cooperating” nations in the global war on terrorism.

DoD estimates cost of Afghanistan and global war on terrorism runs about $1.1 billion to $1.2 billion per month; CRS assumes the last seven months of costs are covered in the FY2003 supplemental with the previous months funded in the $6 billion received by DoD in the FY2003 Consolidated Appropriations Resolution (P.L. 108-7)

DoD’s and Senator Steven’s estimates of effect of congressional action to increase imminent danger pay and family separation allowances for deployed troops for FY2003 in P.L. 108-7.

Congress set a floor of $1.1 billion for fuel costs due to higher prices compared to the $430 million assumed by DoD in its request.

Based on discussions with the services, Congress allocated $1.7 billion more for military personnel that DoD included in its request; however, if DoD’s estimates are correct and the funding is not needed, DoD can transfer the funds elsewhere

(see H.Rept. 108-56, p. 10).

May not add to total due to rounding
Notes and Sources:

Lower end reflects CBO revised estimate of cost of one-month war reflecting current deployments, a 10 month occupation of 100,000 troops, the US paying half of the UN’s estimate of $30 billion for reconstruction over three years, humanitarian aid for 10% of the population, and $10 billion in aid to allies based on State Department sources cited in Los Angeles Times, “Iraq War Cost Could Soar, Pentagon Says, “February 26, 2003.

Higher end estimate reflects House Budget Committee estimate of cost of a 250,000 force, a 10 month occupation of 200,000 troops, the US paying the full cost of reconstruction, humanitarian aid for 20% of the population and $18 billion in aid to allies based on State Department sources cited in Los Angeles times, “Iraq War Cost Could Soar, Pentagon Says,” February 26, 2003