Takeaway: Brazen Trump plan to fund 4.6% defense bump with 140% OCO increase will be DOA in Congress

With astonishing bluntness, senior OMB officials have confirmed that the Administration's FY 2020 budget proposal will:

  • Increase defense spending to $750B
    • $170B more than the Budget Control Act cap for defense spending (includes DoD and DoE)
    • $33B more than what was appropriated for FY 2019 (+4.6%)
    • $17B more than what the Pentagon had been planning for during the last year ($733B). 
  • Decrease non-defense spending by 3% in accordance with the caps established in the Budget Control Act
  • Increase the amount of Defense spending attributed to Overseas Contingency Operations, i.e., "emergency" spending, from $70B to $170B.  Since OCO spending is exempt from Budget Control Act caps, this maneuver would allow the caps to remain in place and while increasing Defense spending. 

Another Emergency? - Trump's Plan to Increase Defense Spending - FY20 Discretionary Spending

Another Emergency? - Trump's Plan to Increase Defense Spending - FY20 OCO Spending

Just like the current border "emergency", this will not pass Congressional muster 

  • The Democrats did not gain 40 seats in the House with the intent to cut non-defense spending. 
  • For years, Senators and Congressmen from both parties have railed against the use of Overseas Contingency Operations funding for other than overseas contingency operations.  Prior to January, the Pentagon intent had been to reduce OCO attribution to as low as $20B in 2020.  With troop presence and operations in Syria, and soon in Afghanistan, being cut by 90%, the intent of a $100B increase of OCO spending is transparent.
  • The brazen Administration proposal has essentially abdicated leadership on the biannual defense/non-defense budget balance debate to whatever House Democrat and Senate Republican leadership can work out among themselves.

What we think will happen:

  • Over the course of the next six months, both houses of Congress will try to find a way raise the caps for two years, FY 2020 and 2021, just as they have three times before.  The alternative to a deal is draconian and mindless sequestration across the board.  The constraint is the tolerance for rising annual deficits which will approach $1.2T in 2020.   
  • Given that the Treasury is likely to run out of extraordinary debt management measures by September, the negotiations for the bill that increases the debt ceiling will likely provide the vehicle to establish new defense /non-defense caps.  
  • When all is said and done (and there will be a lot said and more that must be done before the end of the year), we think the defense topline will be essentially flat to FY 2019, i.e., ~$720 to 730B.   We also think non-defense spending will be increased to about $630B. Early days...