Developing improved deflators for defense research and development

the long version

This report considers both the theory and practice of allowing for prospective inflation in multiyear defense research and development programs. It reviews and analyzes current and prior methods of deflating out-year R&D spending in the United States, and, more briefly, in the United Kingdom and Japan and in two high-technology firms in the U.S. private sector. As defense budget constraints become increasingly tight, the share of R&D in the budget is likely to remain constant or perhaps even increase. At the same time, the absolute size of defense R&D will decrease, and the defense share in total government R&D will continue to decline. The problem of estimating expected inflation in the out-year costs of defense R&D programs is important because most of these programs extend over several years. Consequently, if future inflation in R&D costs is misestimated, R&D budgets will either be squeezed, if actual costs exceed those allowed for in budget planning, or excessive, if actual costs fall short of R&D projected for future years.