Hoodwinked! We previously outlined OMB's announced $54B increase in defense spending as a 10% increase to the Obama plan for FY18. We were misled into using the wrong baseline. In fact, the announced $54B increase is to the Budget Control Act cap and not to the Obama proposal for FY18. Since the Obama plan for the Pentagon was already $33B above the BCA caps, the announced increase is only $18.5B above the Obama plan. The OMB plan is thus a 3.3% increase to the Pentagon's current FY18 budget plan, not 10%.
OMB also announced today that they would be seeking a $30B supplemental to the FY17 appropriations bill which is still pending in Congress. We have previously identified the size of the supplemental request to be between $19B and $35B. Details on the breakdown of the $30B between the Department of Homeland Security "wall" and the Pentagon were not available. The FY17 bill must be dealt with before the Continuing Resolution expires on April 28.
The chart below shows the relationship between the Budget Control Act caps, the Obama plan that the Pentagon has been using to date, the Trump proposal and Senator McCain's "Restoring American Power" which represents the position of Congressional defense hawks.
OMB Director Mulvaney's first major announcement falls well short of Trump campaign promises and utterances made as recently as today. Having claimed that he was "left a mess" by President Obama, President Trump certainly implied that he was going to come out of the box with a budget that was significantly higher than his predecessor's. A 3.3% increase to the much-complained-about-Obama plan is not going to impress defense hawks or the Pentagon military that Trump is on a path to quickly rebuild military readiness and meet recapitalization requirements.
A large unknown here is the level of Overseas Contingency Operations (OCO) spending for FY18. Although OMB Director Mulvaney has been one of the most vocal opponents of the use of OCO funds, it has become Congress' favorite way to comply with the BCA spending caps and increase spending. To date, $67B has been requested for OCO in FY17. Given the new campaign plan against ISIS that should become public in March, there will be further upward pressure on the FY17 and FY18 OCO requests for operational reasons if no other.
The proposed $54B increase to the defense cap is paid for in today's OMB announcement with controversial dollar for dollar cuts to non-defense spending, a proposal that will still require revising the Budget Control Act which requires 60 votes in the Senate. Since Democratic Senators essential to passage will demand equivalent increases to non-defense spending, fiscal hawks in the House are certain to be angered as well. This will inevitably lead to negotiating down and brinkmanship.
If no agreement is made, as occurred in 2013, sequestration will kick in and the Pentagon baseline budget will be reduced to $524B by means of across the board cuts. Although $524B is essentially the current level of baseline spending, it is simply not providing satisfactory readiness or recapitalization. We are still some months away from a sequestration scenario but the possibility is out there. We believe that the President and Congress will agree to larger deficits before we see a recurrence of sequestration.
Further details behind today's announcement of the so-called "skinny" budget will be published on March 16. The detailed budget for FY18 should be provided to Congress in late May.
