Defense investors need to care about this year's Congressional budget process and the coming ugly fight over discretionary spending. Right now there is a range of $91B (15%) that spans the gap between what defense hawks say is needed in FY18, and what the law says with the President's budget (already pronounced DOA) somewhere in the middle.
The specter of sequestration has once again raised its head. If there is no agreement on changing the Budget Control Act's discretionary spending ceiling and/or the defense/non-defense shares thereof before October 1, the existing law will be enforced by means of sequestration. Under sequestration, every discretionary "program, project and activity" within the Trump FY18 budget will be reduced by ~10.6% on a straight percentage basis. There is no latitude to shield any accounts except Military Personnel pay. While a 10.6% cut is significant in and of itself, the mindless, across the board nature of the cuts is even more disruptive. The Pentagon attributes most of its current readiness problems to the ~5.7% sequestration that was eventually imposed late (April) in FY 2013.
The first step in changing the Budget Control Act and avoiding sequestration is the passage of a budget resolution that:
- establishes the discretionary budget topline for the Federal Government for FY 2018
- allocates that topline among the twelve needed appropriations, e.g., defense, transportation, etc.
- provides reconciliation instructions that enable specific budget-impactful legislation to pass without threat of filibuster
The resolution is supposed to be at the front end of the budget process. Its getting late. Congress has only 43 legislative days to pass a budget before September 30 and already has plenty on its plate: extend the debt ceiling by August, redo healthcare and reform taxes. Oh, and deal with Russiagate...
Options on the table for the Congressional budget resolution writers include:
- Adhere to the Budget Control Act as written. This is the default position and is enforced by sequestration as noted. The mindlessness of sequestration can of course be avoided by writing a budget that adheres to both the ceiling and the defense/non-defense ratio. Almost every public official has come out against this COA. Nevertheless, it remains the default position.
- Change the Budget Control Act
- Change the defense/non-defense ratio within the legal ceiling. As shown in the chart, the Trump Administration has proposed retaining the ceiling but increasing the Defense share from 53.3% to 58% while reducing the non-defense share concomitantly from 46.7% to 42%. There have been scant few in Congress, even among Republicans, that have supported the specific program cuts necessary to execute this course of action. Of course less drastic proportional changes could be proposed. These would all result in less Defense spending than proposed by the President which already fails to meet his own campaign promises and is viewed by most defense observers as inadequate.
- Increase the discretionary spending ceiling. Democrats have long advocated simply raising the ceiling but have insisted that any increased headroom be shared equally between Defense and Non-Defense spending, i.e., only 53.3% of any increase in headroom would go to Defense. Keeping the proportions but giving the defense hawks what they want would require a ceiling expansion to $1,323B, a level of discretionary spending seen only once in US history! (2009) Even the Trump level of Defense spending would require a $1,253B ceiling (exceeded only twice in history). Not going to happen.
- Some combination of the two. This will require compromise among fiscal hawks, defense hawks and non-defense advocates within both parties that will by definition not completely satisfy anyone. Bottom line
What To Look For When:
- Budget Resolution discussions in June - Which of the three options will be pursued and to what degree?
- Debt ceiling extension discussions in late July - How will this must pass legislation be shaped?
- Government Shutdown Discussions before September 30 - What will be the level of brinkmanship? Note that even a Continuing Resolution that extends FY17 spending beyond September 30 without changing the law would only delay sequestration and not prevent it.
- End Game? - Thanksgiving?
