Below is an institutional research note written by Hedgeye Potomac Senior Defense Advisor Lt. Gen Emerson "Emo" Gardner USMC Ret. If you're an institutional investor email email@example.com to read more.
Leaks in advance of Tuesday's formal announcement confirm that President Trump will request $640B in total Pentagon budget authority for FY 2018, $18B more than President Obama planned to request for FY 2018 and $35B more than was just appropriated by Congress for FY 2017. These topline figures are in line with projections made in February and are reflected in the budget scenario chart we have been using with clients for some time:
Program details, i.e., exactly where all of this money is proposed to go, will only become available Tuesday when the thousands of pages of exhibits should start rolling out. In the meantime the think tank, Third Way, distributed (leaked) some high level OMB data that provides a cursory overview of what is to come.
The budget is slightly (3.3%) more than what had been planned for by the Pentagon prior to the election but much of the $18.4B difference is consumed by higher direct military personnel costs ($4.1B) and the associated need for increased O&M ($4.5B). It is not clear if the $65B OCO request includes a much discussed increase of 3-5K troops in AFG or any change to our posture in Syria.
The main takeaway here is that the President is proposing a Pentagon budget that requires a major change to the Budget Control Act since it exceeds the caps by approximately $54B. OMB intends to cover the proposed increase for defense through equivalent cuts to non-defense appropriations and maintain the overall $1.065T discretionary topline. Even Republican leadership has declared OMB's proposed methodology DOA. Congress will be writing the FY18 budget and while defense spending is going to increase by some amount, how that is going to happen is going to look quite different than the OMB proposal.
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