Last week the Pentagon finally released the outlines of its FY 2020 request. Detailed budget exhibits and program plans for budget years 2021 through 2024 will not be released until later this week. Indications of the toplines and some of the changes to major program have been dribbling out for the last few weeks but this is the first comprehensive look at how the Pentagon wants to adjust the budget towards Great Power competition on October 1.
Topline. As has been discussed by the President since December, "defense" discretionary spending (known as 050) will be set at $750B:
- $718B is planned for the Pentagon (known as 051 funding). This is $33B (4.8%) more than enacted for FY 2019 and about $18B (2.6%) more than what the Pentagon had been planning for.
- $32B will go to DoE and other agencies (known as 053/054 spending). This is approximately the same as was enacted for FY 2019.
- Although the $750B defense topline exceeds the Budget Control Act caps by ~ $174B, the Administration is not requesting that the caps be raised but instead has expanded and trifurcated emergency spending, which does not count against caps:
- $66.7B for Overseas Contingency Operations (OCO). Compare to $68.8 in FY 2019. This breaks down to $25.4B for Direct War Requirements plus $41.3B for "enduring" requirements that will continue even after combat operations end.
- $97.9B for "OCO for Base". Compare to $2.0B enacted in FY 2019. These are baseline requests for which there simply is not sufficient baseline topline. Although previously used by Congress, this ploy by the Administration has drawn heavy bipartisan fire to include spinning from the grave of John McCain (kidding!). Wisely, the Pentagon has requested these funds in a way that can be easily converted to normal baseline budget lines should the BCA caps be increased by Congressional action. This will be the battleground for the Pentagon budget.
- $9.2B for Emergency Requirements. Defined as "unspecified construction for emergencies to include facilities damaged by Hurricane Florence and Michael." This has drawn criticism because of its potential to be used to pay back money previously appropriated by Congress but taken by the President to fund the "wall".
- The Pentagon intends to use the "OCO for Base" gimmick again in FY 2021. The BCA is due to expire at the end of FY 2021. For FY22 and beyond, the Pentagon is assuming a large ($145B) increase in baseline funding with a return to a more conventional definition of war funding ($20B).
The Upcoming Fight in Congress
- The Congressional budget process calls for each house of Congress to pass individual budget resolutions by simple majority vote in March and then to pass a joint resolution in April that establishes toplines to which respective committees mark program detail.
- House. We expect the Democratic House to move first with a resolution setting discretionary defense spending at ~ $730B with the Pentagon ceiling at about $700B, i.e., about the level that had been predicted for FY 2020 in last year's budget documentation.
- We believe that the House will plan for about $75B in OCO and/or emergency spending, i.e., remain in line with recent years.
- We believe that the House will propose raising defense caps by about $75B but will also push to increase non-defense caps by a similar amount. Note that the President's budget would maintain the BCA caps that amount to a 5% reduction in non-defense spending.
- The House intends to complete its version of the authorization and appropriation bills by the end of June.
- Senate. We expect the Senate to pass a resolution with a topline at about the level proposed by the President, i.e., $750B for 050 including $718B for the Pentagon, but that also raises the caps on defense and non-defense albeit by dissimilar amounts.
- A Joint Resolution is extremely unlikely to happen. The fight later this summer will be over the $98B currently proposed as "OCO for base" with this menu of choices of: inflate OCO as requested, increase the caps, deny the money or some combination thereof. We expect that resolution of the differences between House and Senate will come in the context of the need to raise the debt ceiling which must occur by September.
Bottom Line
- A topline of $718B for the Pentagon as requested is unlikely.
- More probable is a topline at the level that was forecasted last year: the FY 2019 topline plus inflation = ~$700B, ~$17B less than requested.
- An equally likely case, particularly if the budget becomes contentious within Congress or with POTUS, is a fall back to a Continuing Resolution, i.e., $685B for the Pentagon (the 2019 level), $33B less than requested. We think this would have veto override support in view of the recent shutdown experience and the universal distaste for the alternative: sequestration.
