a time. this is the 21st century. and our adversaries will come at us using 21st century technology. and for that reason, we've got to be able to respond with 21st century technology. so we must invest in space, in cyberspace in, long range precision strikes and in special operations forces to ensure that we can still confront and defeat multible adversaries even with the force structure reduction that's i outlined earlier. even with some adjustments to the force structure, this budget sustains a military that is the strongest in the world. we'll have in the army 18 divisions and 65 brigade combat teams. the navy will maintain 285 ships with the marines we'll have 31 infantry battalions and 10 artillery battalions. and in the air force, we'll

maintain 54 combat squadrons. as well as 275 strategic airlifters. so we will have, without mistake, the strongest military in the world. even after we've made these reductions. the last point i would make is that this can't just be about cuts. it also has to be about investments. so we targeted our investments in developing that technological leap that we have to have if we're going to be able to get ahead of the rest of the world. we're investing in science and technology and special operations forces in unmanned air systems and in cyber. at the same time, we recognize the need to prioritize and distinguish urgent neets frds f those that can be delayed, particularly in light of the cost problems we confront. we identified $75 billion in savings over five years that result from canceled or

restructured programs. $15.1 billion from restructuring the joint strike fighter program, $13.1 billion by stretching investment in the procurement of ships. $2.5 billion from terminating an xpengsive version of the global hawk. all of these are important steps to try to modernize the force but do it in a cost effective way. an additional key to this strategy is making sure that we maintain a strong reserve and a strong national guard. that has been one of the basic support systems for the last ten years of war. we've relied on the national guard. we relied on the reserve. those of that you have been to the battle zone know that these individuals are fighting alongside the active duty. they're getting tremendous experience. they're making tremendous sacrifices. but they are an experienced a d effective force. we need to maintain that for the future. and also, i need to maintain a strong and flexible industrial

base. if we start losing that industrial base and it impacts on our ship building capability, on our tank construction capability, on our plane development. if we lose those crafts and skills, we'll damage our national defense. i have to try to maintain that industrial base at the same time. finally, with compensation, the most fundamental element of our strategy and our decision making process is our people. they, far more than any other weapons system or technology, are the great strength of the united states. we're determined to sustain basic benefits that flow to the troops and to their families and to wounded veterans. and yet at the same time, we had to look at the compensation area because it has grown by 90% since 2001 and we have to implement cost constraints in the future in this area. for that reason, we have

approached it in a way that we think is fair, transparent and consistent with our commitments to our people. on military pay, there is no pay cuts. and we're going to provide pay raises these next two years but then limit those pay raises in the outyears. on costs for health care, we have recommended increased fees. we have not increased those fee levels since 1990. we looked at retirement commission to look at the retirement area with the idea we grandfather the benefits so those serving will not lose the benefits promised to them. but at the same time, try to look at reforms on what can be made for retirement for the future. that's the package that we presented. this is not been easy. this is a tough and challenging responsibility. but we need your support as someone who comes from the legislative branch and has served in this congress, served

in this room and in the congress. i believe in a partnership between the executive and le legislative branches. we need your partnership to implement this strategy. please make no mistake, there is no way i can reduce the defense budget by half a trillion dollars and not have it impact on all 50 states. and also not have it increase risk. we think they are acceptable risks but nevertheless, there are risks. we have a smaller force. we will depend a lot more on mobilization. we will have to depend on our ability to develop new technologies for the future. we have troops that are coming home. we've got to provide them jobs. we've got to provide them education and support. there is very little margin for error. you have mandated, the congressman dated on a

bipartis -- congress has mandated that this will be a test. as you know, better than i, everybody talks a good game about deficit reduction. but this is not about talk. this is about action. and doing what's right for this country. mr. chairman and members of the committee, as a former member of and a former chairman of the budgets committee this committee cannot cease to being a conscience of the congress and the country when it comes to fiscal responsibility. and doing what's right for this nation. i look forward to working with you closely in the months ahead. but try to develop what this country expects of their leaders, to be fiscally responsible and developing a force for the future, a force that can defend this country that, can support our men and women in uniform and most importantly, be the strongest military in the world. thank you.

>> thank you. general dempsey, if you could try to summarize as best you can. we have a lot of members who want to get to questions. >> yeah, fair enough. thank you, chairman ryan and congressman van holland, distinguished members of the committee. thank you for the opportunity to be here with you today. i think this budget does represent a responsible investment in our nation's security, strikes a purposeful balance between succeeding in today's conflicts and preparing for tomorrow. it also keeps faith with the nation and with the greatest source of our military strengths, that is america's sons and daughters and i submit the rest of my statement for the record. >> that's pretty fast. i wasn't expecting that. we're not used to that fast. okay. secretary panetta, as i mentioned, we have tremendous respect for you for your past, for your service to our country. i agree with lots of what you said in your testimony. but it is as hard to get my mind around whether this is a

strategy driven budget or a budget driven strategy. and that's what we're getting down to here. the administration since february 2010 has reduced the base budget, and that's the buget without the cost of the wars in iraq and afghanistan by $500 billion. at each time of the requests, your predecessor and now you argued that this budget reflects a strategy driven budget. but you said the world is not safer, that the challenges are mounting. you mentioned wmd, north korea, turmoil in the middle east, on and on and on. and so i don't know how to reconcile this. is the world becoming safer and, therefore, we can trim our sales so much more, or are we changing our strategy? are we changing our defense and foreign policy to a much less ambitious goal? >> i think the fundamental problem is that as mike mullen

said that one of the key threats to our national security is national debt. and in the effort to try to confront the national debt, obviously the congress came forward and proposed the budget control act. the budget control act provided about a trillion dollars in reductions. he developed a fence that was part of the act that set aside national security. and ensured that we would be required to reduce the budget by almost half a trillion dollars. that's the law. and that's the requirement that i've abided by. >> mr. chairman, can i take a stab at adding to that a little bit? >> sure. >> i do wear the uniform, i've been around 38 years, have gone through any number of strategic reviews. some of your question about whether we can really make this a strategy driven discussion i think probably relates to the amount of time we've taken. i'm a personal believer in parkinson's law. some of you may remember in 1955

and the economists magazine there was a idea put forward that work expands to fill the time available. i believe that. i believe in the six months, five months we had to take a very comprehensive look at strategy, we actually accomplished that task. >> okay. >> yeah. >> so whether we take away the budget gimmicks and the accounting trips which is what we do in this committee, we have a budget from the president that has a net spending increase of $1.5 trillion. it has a tax increase of 1.9. but you're dropping this category by 487. so from our perspective, this looks like a budget driven strategy, not a strategy driven budget because there is no entitlement reform. there is no reform in the other parts of government. and the only real specified cuts are here. let me ask it this way. we have this new revised defense

strategic guidance talks about increasing the asia pacific region. analyst who's look at this strategy and this region say that this necessarily means we need more naval and air forces. but your budget abandons the long standing goal of a 313-ship fleet and it does very little to expand or modernize the air force whether that general schwartz notes is smaller or older than the air force at the end of the post cold war drawdown. so how do we reconcile this rhetoric with this budget? >> well, okay. first and foremost, you know, some of the questions you're asking ought to probably be better directed to an om bment director. >> can you do that, too. >> i can play any role. today i'm secretary of defense. and so, you know, i'm dealing with the number that was handed me and what we did to try to respond to that number. and the approach we took was to

say okay. if we are going to emphasize the pacific and middle east, we have to have force projections. that's the reason we're maintaining 11 carriers. some proposed we ought to cut back on a carrier force. we said, no, we're going to maintain 11 carriers. they are very important to our ability to project power. we're going to maintain our bomber fleet. more importantly, we're investing in a new bomber. and developing a new bomber for the future. in addition to that, we continue to invest in the joint strike fighter which is the fifth generation fighter that we think is very important for the future. so and in addition to the ships and the navy, we're going to maintain the number of ships we have now and our plan is in the next five years to meet that 300 ship navy that we think is important for this country. so we tried to protect the key priorities that relate to the strategy that we've developed which is to stress the pacific, stress the middle east and maintain the kind of forces we need to confront any enemy in those areas. >> without going into the omb

territory, these are the only specific cuts we see. everything else is net increasing. let me get to some specific budget about your budget. you did a good job of identifying budget gimmicks when you were here as chairman and trying to push them out of the budget when agencies tried to put them in when you were omb director. there are two that i want to talk about here. i'll do this as fast as i can. you moved funding for the 64,900 soldiers from the base budget which iscapped under the bca. how is that not a circumvention of the budget caps? >> that's why i have a comptroller here to answer that kind of question. >> the rules say that we'll budget for permanent end strength in the base budget. we have now decided that we're going to go down to 49 o,000 in the army and our view, the difference between where we are now and the 490,000 and 182 thou

sthou not permanent. >> but the end strength reduction is 92,000 soldiers, not 65,000. so why do you put the entire 92,000 in the budget? >> because everything above 490 for the army and above 182 for the marines is now primarily in the force because of afghanistan. and, therefore, we think proper budgeted inoco. some might add we cleared with omb. >> first time this ever been done. this is not normal. >> we've had end strength effort for a number of years, mr. chairman. smaller. but -- >> yeah, i would say that. we usually have extra costs of having personnel and war zones covered. but this includes the full $6 billion of costs for compensating troops. so that i would say is pretty unprecedented. >> well, we had about a billion two in the last budget. and now it's at six. but again this is an unprecedented change we made a decision to go to a much smaller army and a much smaller marine corps consistent with the new

strategy. >> but the last administration tried plowing base budget spending into their supplementals as well. i just don't know how this is -- look, we have a problem with the general budget. i don't know how you can't say this is isn't putting it into a supplemental. you mentioned the joint strike fighter. you got a large number of program restructurings in this budget request. for the most part of it, you're delaying the acquisition of purchase. for example, i think you claim $15.1 billion from the joint strike fighter program over the next five years but the program of record hasn't changed. so you're doing a five-year budget. we do ten-year budgets. you're just pushing it into the back end of the ten-year budget. so how is that achieve any taxpayer savings over a ten-year period and if you're elongating the programs, does that not violation -- does that not violate the direction you're getting on the commission which is to tighten the time frame of these programs?

>> well, the key there is to produce a plane that when we go to full production doesn't have to be changed time and time and time again which does the very problems that you pointed out which is increases the cost and increases the expenditures to the taxpayer. our goal here is having worked with the joint strike fighter that we felt as it goes through the tests, let's be able to determine what changes need to be made now, not go into full production with what we have. but wait and trail that out and when we completed those tests, when we know, you know, what is to be in the final product, then we'll go into full production. this was based on substance. it wasn't based just simply on trying to, you know, to achieve the savings although fortunately whether do you extend it out, do you get some savings. >> so -- you think that stakes another five years? that's what makes it difficult to see this as more of a budget-driven strategy than a

strategy-driven budget. >> i urge you to some time go down to some of our facilities and look at this plane and the technology that is involved in the plane. it is -- it's spectacular technology. it also requires a great deal of testing to insure that it works. >> well, there are a lot of members here. i want to be kog niza acognizan their time. >> i want to thank you all for your testimony today. want going to go down this line of questioning. i do want to take a moment to discuss the math here. we are the budget committee. when the acting director of the congressional -- of the omb was here the other day, the chairman criticized him and the administration for taking -- for saying as part of this budget we got the $487 billion worth of cuts saying that that was stuff that congress did on a bipartisan basis. today the chairman's criticizing the administration for taking those same budget cuts in this

as part of this budget and savings. you just can't have it both ways. i would also point out that in addition to the security cuts made as part of the budget control act, we took very deep cuts over the next ten years in nondefense discretionary spending. those items are also on the chopping block as part of sequestration. i just would note historical note that in designing the sequester, the offer was made to our republican colleagues to say instead of having these particular defense cuts as part of sequester, we can get rid of a lot of special interest tax loopholes. they chose -- they chose to put the defense cuts on the table before cutting tax loopholes and special interest tax breaks. that's just a matter of historical record. that's a decision they had to make. let me -- i would also point out that as part of the administration's budget request, there are over $300 billion in

savings and mandatory help which is about equivalent in the amount recommended by simpson-bowls in that category as well as nonhealth mandatory spending cuts. and, of course, the president's budget includes about $1.6 trillion in revenue raised as part of a balanced approach closing those tax loopholes and asking folks at the highest income levels, the top 2%, to go back to the same top marginal rates they were paying during the clinton administration, a period when the economy was booming. mr. secretary, i want to ask you about one of the proposals that's been put forward by the chairman of the arms services committee to deal with sequester and what he proposed and the piece of legislation that i have right here is across the board cuts in civilian personnel, both the defense department and outside the defense department.

i think it's worth noting that 36% -- 36% of executive branch civilian employees employees ar defense department. almost one in four civilian employees in the federal government work at the defense department. that's 764,000 out of 2.1 million federal employees. so that proposal would result in the department of defense cutting over 80,000 civilian workers over the budget period. now as part of your budget, you've emphasized the need to strengthen the defense acquisition workforce in order to save taxpayer money, to make sure we have sufficient capacity and capability. you say this workforce determines the quality of d.o.d.'s acquisition outcome, an

area of budget in which we all agree sh in need of improvement. mr. secretary pointed out that in many cases we actually now hire contractors to oversee the contractors as part of the acquisition process because we don't have enough in house expertise, a practice that raises conflict of interest issues, which has also been pointed out could waste taxpayer money. if we were to mandate a cut in the d.o.d. civilian workforce, h what impact would that have with respect to saving taxpayers money without harming the defense of this country? >> let me respond by first saying he was trying to make a good faith effort to try to do something to avoid sequester.

i commend him for that. i also told him the approach of going after the civil service side of it, particularly when it came to defense, where we do have almost 700,000 civilians who work in the defense department alongside the military men and women in uniform. it could impact on the commission. particularly with regards to the area that you just described. look, i was director of the kci. it's made up of civilian workforce. and these are people who every day put their lives on the line in order to protect this country. it isn't to say that, you know, obviously some savings can't be achieved here, but i think we just put it all on the backs of the civil servants in this country would be not a wise

ste step. >> thank you, mr. secretary. despite efforts of the defense department over the years, the defense department remains the federal agency that has not passed a clean audit. department of homeland security finally cleared the hurdle. so there's clearly room here for improving efficiency, and, in fact, as part of your budget, you recommend increasing the audit workforce in order to save taxpayer money and not allow those dollars to be wasted. in fact, you recommend a 10% increase in the audit workforce so thea with can get a handle on these things. i'm going to assume that a 10% cut in that workforce when you've asked for a 10% increase would make it more difficult for you to save taxpayer dollars in a wise way through auditing. >> obviously. >> thank you. thank you. now, i want to get to this issue

of contractors. because sometimes people in congress when they talk about they're going to reduce the civilian workforce, they think it's going to save the taxpayer dollar. you say, hey, we reduced the size of the civilian workforce. when in fact, in many instances, those same tasks and responsibilities have to be, are contracted out. in fact, there secretary, if you could talk about that. because one of your goals has been in part to reduce the number of contractors. i would point out the project on government oversight has a study that found that contractors get paid 1.8 times more than the government pays federal employees for employing comparable services. so anybody who thinks that just cutting federal civilian employees and contracting out that work saves taxpayer money is just plain wrong. so if you could talk about that choice and that challenge.

>> well, one of our efforts of efficiency was to try to reduce the number of contractors we had there. i think secretary gates basically said he didn't know how many contractors were at the defense department. because you're looking at number of contractors plus all the subs and others related to that. so it's a huge number. but there's no reason why we shouldn't know how many contractors we have. and frankly there have been responsibilities that have been contracted out that i think should be performed within the civil service side of the defense department. so we are looking at the whole area as part of the $60 billion that we hope to achieve in savings. that represents a good part of that. >> thank you. my last question deals with looking at our national security challenge in a comprehensive way.

pro your predecessor points out we need the full scale of resources. focusing on the military and our assistance capabilities. i would like to read a quote from him that he gave at a speech center. he said i never miss an opportunity to call for more funding on an emphasis on diplomacy and development. whatever we do should reinforce the lead role in crafting and conducting foreign policy to include foreign assistance on which building security capacity is a key part. proper coordination and concurrence procedures will ensure that urgent military capacity and building requirements do not undermine american's initiatives. admiral mullen stated in a letter to the majority leader in 2010 the diplomatic capabilities of the united states have a direct bearing on the military to reduce the need for military

action. general dempsey has made similar statements in the past. i want to ask you, because last year's budget, republican budget, cut 280 $280 -- around billion from diplomacy and development systems which your predecessor and admiral mullen and others have said are important to the overall national security. if you can comment on whether you share the views of secretary gates on the issue. >> i think we all understand that a national security can't be just dependent on our military power and our military weaponry and our military men and women. a strong national security is dependent on having a strong development arm. a strong intelligence arm. a strong capability to try to have a strong economy in the world. i mean, all of this is related to our national security.

and i think if any one of these areas suffers cuts above and beyond others, it's going to damage our security by virtue of the broad approach we need to have to maintain the leadership position we have in the world. >> thank you. mr. kelly? >> thank you, mr. chairman. mr. secretary, thank you. for your service. i believe your home in the area has to be one of the most beautiful places on the planet. so i know you're enduring a big sacrifice being here. so i thank you very much. >> it does make my sanity subject to question. >> and general thank you for 38 years of service. the next few may be your most critical time. secretary, you've publicly sated that sequestration is unacceptable. i agree with you. i'm concerned ta eed about the devastating amounts of the

sequestration. as you mention, right now china is building two aircraft carriers. with them, the ability to protect power. they continue on cyber warfare capable. north korea is increasingly unstable and confrontational. north africa is experiencing a rise in terror. there's strife right in our backyard. the middle east remains unpredictable. russia continues to rise both economically and militarily. and the list goes on. according to reports, sequestration reductions would lead to the smallest ground force since 1940, as was just mentioned, a fleet of fewer than 230 ships, the smallest level since 1915, and the smallest tactical fighter force in the history of the