Leaks in advance of Tuesday's formal announcement confirm that President Trump will request $640B in total Pentagon budget authority for FY 2018, $18B more than President Obama planned to request for FY 2018 and $35B more than was just appropriated by Congress for FY 2017. These topline figures are in line with projections made in February and are reflected in the budget scenario chart we have been using with clients for some time:
Program details, i.e., exactly where all of this money is proposed to go, will only become available Tuesday when the thousands of pages of exhibits should start rolling out. In the meantime the think tank, Third Way, distributed (leaked) some high level OMB data that provides a cursory overview of what is to come.
The budget is slightly (3.3%) more than what had been planned for by the Pentagon prior to the election but much of the $18.4B difference is consumed by higher direct military personnel costs ($4.1B) and the associated need for increased O&M ($4.5B). It is not clear if the $65B OCO request includes a much discussed increase of 3-5K troops in AFG or any change to our posture in Syria.
The main takeaway here is that the President is proposing a Pentagon budget that requires a major change to the Budget Control Act since it exceeds the caps by approximately $54B. OMB intends to cover the proposed increase for defense through equivalent cuts to non-defense appropriations and maintain the overall $1.065T discretionary topline. Even Republican leadership has declared OMB's proposed methodology DOA. Congress will be writing the FY18 budget and while defense spending is going to increase by some amount, how that is going to happen is going to look quite different than the OMB proposal.
An additional boost to the fortunes of defense primes came with the signing of a mammoth $350B economic agreement that will include $110B in military sales to the Saudis over the next ten years. Full details of this agreement have yet to be released but all indications are that winners include LMT (C130Js, THAAD missile defense system, 4 fully equipped LCS-type frigates, missiles) and GD, which will be helping Saudi to establish its own capability to design and build its own vehicles. While it is clear that most of these projects have been in work for some time, the very visible committment moves them closer to true backlog status. The bundle is on par with the $115B in total arms sales to the Kingdom during the Obama administration in which BA was the biggest winner (F15s, Apaches, munitions, etc).
