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Takeaway: Congressional leaders agree to expected 3.1% DoD increase and remove topline uncertainty through September 2021

As part of the urgent need to increase the Federal debt ceiling prior to next week's Congressional recess, Congressional leaders and the White House agreed to increase the "defense" spending ceiling to $738B in FY 2020 and $741B in FY 2021.  The $738B for FY 2020 includes ~$705B for DoD and ~$33B for DoE and represents a $22B (+3.1%) increase over the FY 2019 enacted level.  While the agreed level is ~$12B less than the $750B the President formally requested in February, it actually exceeds by ~ $5B what the Pentagon had been requesting as recently as December.  

Defense Hawks Win, Fiscal Hawks Lose: Congress Settles Topline Through 2021 - Screen Shot 2019 07 22 at 3.50.41 PM

As shown, total spending consists of baseline spending which is limited by the Budget Control Act plus Overseas Contingency Operations (OCO) spending that is technically exempt from BCA caps. The debt ceiling agreement sets OCO spending in FY 2020 at $71.5B, about $2B higher than the enacted level for 2019.  OCO spending has become a budget gimmick in that the level has remained constant and even increased despite reduced activity overseas and now includes activities that simply didn't "fit" into the baseline. 

The next step is to quickly get the debt ceiling agreement through both houses of Congress and to the President before the Senate leaves next week.  There is bipartisan agreement to do this and the President, so far, has indicated that he will sign. 

Thereafter the Congress will need to align their authorization and appropriation bills to the new ceiling.  This should happen quickly.  The House versions of both bills are essentially ~$4B below the new ceiling while the Senate version of the NDAA is ~$12B high. The Senate Appropriations Committee has been waiting on this debt ceiling agreement to make their marks and is prepared to move quickly.  While there are still relatively minor policy differences between the Senate and House versions of the NDAA (low yield nukes, space force organization, etc), there is good reason to expect that both the NDAA and appropriations bills will be passed and sent to the President on time before the end of the fiscal year on September 30.

Besides the robust level of funding provided, the most important impact of the agreement is the removal of uncertainty surrounding the topline at least through the election. Without this agreement, "defense" spending would have been limited to $577B ($545B for DoD) in FY 2020 and cuts would have been enforced through draconian sequestration. The Budget Control Act is due to expire at the end of FY 2021 so whoever is President in 2021 will have a freer hand, at least on paper, to set future toplines.