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Takeaway: The $30B (4.5%) cut to $733B defense budget will have ~9% impact on Pentagon investment in 2020.

President Trump has announced the need to hold "defense" spending (DoD + DoE) at $700B in FY 2020. Indications are that SecDef Jim Mattis will brief OMB Chief Mick Mulvaney on the impact of a $30B cut (4.5%) to the Pentagon’s planned budget topline for FY 2020 today.  If true, it is a testament to Mulvaney's clout that the SecDef is coming to him.  Past SecDefs have played the power game of only dealing with the President when it comes to the Pentagon topline. 

Those who know what Mattis is going to present aren't talking and those who are talking don’t know.  I don't know. However, as someone who used to run these same budget drills for SecDef Bob Gates, I offer some educated speculation on how the SecDef is likely to be approaching the challenge.  

See my last note, “FY 2020 Will Be An Inflection Point for Pentagon Budget” with specifics on the topline number pressures.  Note that the Budget Control Act sets baseline "defense" spending at $576B for 2020, so even a "reduced" proposed topline of $700B requires either an amendment or approval of $124B in OCO spending (most since 2011). 

The SecDef's brief is going to be based on two budget plans:

  • $733B "defense" topline. Mattis' team has been working for nearly a year on a budget that assumes 2% inflation growth and modifies several programs to generate money for National Defense Strategy priorities.  
  • In the $700B "defense" plan, Mattis will be trying to accomplish those Strategy priorities with 4.5% less money.  

Mattis will identify the deltas between the two toplines and likely offer a counter proposal to buy back some of those deltas with a "middle" topline.

When hypothesizing about the deltas, it is important to note that the Pentagon's 2020 plan was already going to be different programmatically than the one that was published with the 2019 budget in February. While those differences have not been published, they are not insignificant: the Army has said that it moved $30B ($5-6B/year) out of stated 2019 Future Year Defense Plan (FYDP) programs into its six priorities for the 2020 FYDP.

  • Mattis' main briefing point: This is not your father's 2019 budget, I've already cut waste and legacy programs to the bone to move money into the President's priorities and so the math is painful:
    • The military manpower title, MilPers, $156B in 2020, will mostly be excluded from any cuts.
    • Mattis will argue that most of what can be taken out of the $294B O&M account has already been taken by the services and OSD as part of the Pentagon's effort to put more money in investment and cut waste. 
      • Readiness in terms of training and maintenance has been this SecDef's mantra and he isn't going to back track there, healthcare can't be touched and any low fruit from civilian personnel savings has already been picked. 
      • Changes in strategy will permit some reductions in overseas presence in the Middle East, fewer exercises in Korea and some reduction in naval deployments (e.g., no aircraft carrier in the Persian Gulf). 
      • Although OCO can be used to fund O&M which gets around Budget Control Act problems, that doesn't help Mulvaney's deficit problem. 
      • Count on no more than $10B of the $30B bogey coming from the planned $294B for O&M. 
    • Procurement and RDT&E accounts were estimated to be $227B in 2020.  Keeping up with the math so far, the Pentagon must be looking at $20B or ~9% reduction in its planned investment for 2020 to ~$207B, 16% less than appropriated in 2019 ($247B). 
      • This isn't sequestration so the 9% will not come equally from all programs. Just as the NDS' stated priorities of preparing for war and modernizing key capabilities (nuclear forces, space, cyber, C4ISR, missile defense, etc) have driven growth, so will they be priorities to preserve in a downturn. 
      • Some programs can't be touched. Multiyear shipbuilding contracts for large cap programs like Virginia and Colombia-class submarines and DDGs are locked in. That said, a proposed block buy of Ford-class carriers is unlikely.  The Air Force dare not change the terms of the KC-46A tanker firm fixed price contract that BA has already lost $3B on and is looking to recoup. 
      • The rule of thumb when looking for savings is to prioritize capability over capacity.  This would mean maintaining the momentum of innovation DoD that has been touting but with some rationalization. For example the Army will continue to pursue Future Vertical Lift but sequentially rather than near simultaneously (Capability Set 1 (attack/recon) before Capability Set 3 (medium lift)).  Long term procurements continue but at the lower end of multiyear bands: combat vehicles, helos, etc.  There may be some slowing in the acceleration of munitions procurement seen recently. 
      • A striking exception to the capability/capacity rule is likely to come in aircraft procurement.  The Air Force appears to be moving away from its concept of an all fifth generation force (F-22, F35) and is now looking to buy new F-15s (BA) rather than continue to ramp up F-35 (LMT) production.  Navy has already opted for a 4th/5th gen mix (F/A-18E/F (BA)) so the F-35 seems likely to plateau at ~88 US aircraft per year vice the 120 once planned for the mid-2020s.  

It is still early days on the Pentagon budget in FY 2020.  The President proposes and the Congress disposes.  The newly elected Democratic House seems likely to tweak some of the Pentagon's priorities (e.g., nuclear weapons) setting up a fight with the Senate and the Administration on the content of the budget.  Trump's $30B cut to the Pentagon topline is small potatoes compared to the further $124B cut that could come with sequestration.  Sequestration is likely to be avoided but the Democrat's price will be equality in non-defense and defense spending in a $1T deficit environment. That battle will set the 2020 topline.