FY18 US Defense Budget
Not as radical a departure from Obama as the headlines suggest
President Trump released his first full US Defense Budget yesterday. It requests a base budget of $574bn for FY18, and $65bn in Overseas Contingency Operations funding (OCO), making a total request of $639bn (as shown in the chart below). This would be a 3% increase year on year, and it is 3% higher than Obama requested for FY18. Whilst I acknowledge that the market environment looks better for the defence industry under the Republicans compared to the Democrats, I think the headlines this morning are focusing on the bullish rhetoric rather than understanding the nuances of the numbers. This budget is positive for the overall trajectory of defence spending and there is clearly going to be a focus on providing good equipment for troops, However, most of the uplift is consumed by higher troop costs and the Budget Control Act means there is uncertainty over whether this budget will ever come to fruition. In today’s blog I examine what I consider to be the three key questions; what has changed in this budget from Obama’s plans? Where will the extra money be spent? And how likely is it that the proposed budget is enacted by Congress?
US base defence budget and Overseas Contingency Operations funding ($m) FY01 – FY22 (Source: FY17 DoD Green Book & FY18 Budget materials)
How does President Trump’s budget compare to Obama’s?
To understand how the Trump budget compares to Mr Obama’s plans, the most relevant comparison is to the projection for FY18 in the last budget submitted by the Obama administration. The net increase in Trump’s base budget is $17.8bn, or 3%. There can be no comparison for the OCO spending because Obama had not made a projection for FY18. However, Trump’s requested $65bn would be the highest amount spent on OCO since FY14 when the Afghanistan campaign was coming to an end. Both Obama and Trump’s budget plans were above the $549bn base budget cap set by the 2011 Budget Control Act.
Where will the extra money be spent?
FY18 Defense Budget request by line compared to Obama’s (Source: FY17 DoD Green Book & FY18 Budget materials)
Of the additional $17.8bn dollars, 45% is consumer by higher military personnel costs and Operation & Maintenance (O&M) costs. Much of this is due to decisions made on force levels in the FY17 budget enacted by Congress last April. It was agreed to increase the Army’s end strength by 3.5% to 476,000, compared to Mr Obama’s plan of 460,000. Mr Obama then wanted Army end strength to fall to 450,000 but this budget suggests troop number may rise again in the future. Increased wages and accommodation costs are accounted for in the Military Personnel line, but these forces also require training and support which increases demand on the O&M budget. The largest percentage increase is in Research Development Testing and Evaluation, up 10% or by $7.6bn. Procurement is slightly down, by -0.2%, however this is a 12% increase on FY17 outlays so the increase there has already happened as illustrated by the graph below showing DoD outlays on procurement month on month.
DoD outlays on Procurement month on month ($m) (Source: Bloomberg)
Will this proposed budget be enacted by Congress?
The chart below shows that over the past five years, expectations for US defence spending have got lower almost every year due to Congress enacting a budget lower than that requested by the President. Putting aside the complication of the budget caps for a moment, Congress rarely enacts a budget at the level requested by the President, so it is likely that the overall spending number will be slightly lower. However, this outcome requires a resolution to the Sequester set in place by the 2011 Budget Control Act (BCA). Opinion in Washington is currently much divided on whether or not this will happen. Modifying the BCA requires 60 votes in the Senate so Republicans needs some Democratic votes to enact change.
Presidential 5 year budget requests F12 – FY17 (covering FY12 – FY21) (US Budget materials)
The three previous deals to modify the caps have required every increased in the defence budget (including OCO) to be matched by an increased in non-defence spending. Given the size of President Trump’s requested increase for FY18 though, currently offset by cuts to non-defence spending, this does not look financially viable. Therefore we could see a compromise similar to that for FY17 where a smaller increase in the defence budget is allowed in return for flat non-defence spending. President Trump has firmly set out his stall though, saying in the budget introduction that it “fully reverses the defense sequester”. Whether Congress is in the mood to compromise though remains to be seen.
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