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22 July 2016 · 5 min read

Inside the White House

A guide to the US budgetary process

Last week I wrote about what Donald Trump as President of the United States might mean for the US Defence Budget and I noted that in an election year, the President’s ability to alter the budget is quite limited. Today I look at why that is the case by unpicking the rather confusing and protracted US budget process.

The process, which takes nearly a year from start to finish, is nicely summarised by the graphic below from the National Priorities Project (NPP) – an organisation that attempts to make the federal budget process transparent to the US taxpayers. 

There are six main stages:

1. Federal Agencies submit budget requests to the President – these outline which programs need more funding, which could be cut and any new priorities the agency would like to fund.
2. The President submits his / her budget request – this is a compilation of all the agency’s budgets and is usually submitted on the first Monday in February, although it is frequently delayed.
3. The House and Senate pass budget resolutions – these set annual spending limits for the federal agencies, but do not set specific amounts for individual programs. The documents are not legally binding. A conference committee then attempts to iron out the differences between the two resolutions and each chamber then votes on the reconciled version.
4. House and Senate subcommittees write ‘Appropriations’ bills – there is a specific defence subcommittee, responsible for deciding the level of allowed spending by the Department of Defence (DoD). The subcommittee holds hearings in which they pose questions to the leaders of all three services about their requests. An Appropriations Bill is then written, amended and voted on. Once passed it goes to the full Appropriations committee and who then sends it the House or Senate.
5. House & Senate vote on each Appropriations Bill – A conference committee then meets to reconcile the House and Senate’s Bills. This reconciled Appropriations Bill is then voted on by both Chambers, and once passed it goes to the President.
6. The President signs each Appropriations Bill and the Budget is law – this is due to occur by 1 Oct, in time for the new fiscal year, but the deadline has rarely been met in recent years. 

Stage One is already well under way for the FY18 President’s Budget Request , which is due next year. The new President will take office on 20 January 2017 and whilst the President’s Budget Request (PBR) will be delayed until April / May, Obama’s successor will have very limited time to put his stamp on the DoD’s submission. The President’s involvement at the end, signing the bills into law, is very much a formality.

The real horse-trading takes place when the defence subcommittee thrashes out its Appropriations Bills, and then between the House and Senate as they attempt to pass a mutually agreeable bill. This is when the new administration can attempt to stamp its authority on the defence budget, although achieving anything is very much reliant on having a majority in the House and Senate (the lack of which has caused a stalemate in recent years).

The delayed submission next year makes it almost certain that the US will enter a period of Continuing Resolution (CR). This happens when the budget process has not been completed by 1 October. A CR provides temporary funding to all the agencies at the same level as the previous year.

There are a few other nuances to the US budgetary process that are worth understanding:

Mandatory vs. Discretionary spending: About 1/3rd of federal spending is discretionary, 2/3rd is mandatory. Mandatory spending includes the three largest entitlement programs (Medicare, Medicaid and Social Security) as well budgets such federal civilian and military retirement benefits, disability benefits, interest on national debt etc. The PBR does not need to include budgets for mandatory spending as it is automatically granted, however the President can include proposals to alter mandatory programs (hence Obama’s Medicare reforms). The process I have outlined above is therefore only applicable to discretionary spending, and crucially almost the DoD’s entire budget is discretionary.

Budget Control Act and Sequestration:  The 2011 Budget Control Act imposed limits (known as caps) on the level of discretionary appropriations until 2021. If the budget submission is above these caps then theoretically the Sequestration mechanism (equal cuts across all budget lines) is triggered, unless Congress passes a bill to modify the requirements of the BCA. However, it has so far passed a deal in every year as per the chart below from the Centre for Strategic and International Studies.

Base Discretionary National Defence Budget compared to amended BCA budget caps (CSIS – Todd Harrison)

Appropriations vs. outlays – The budgetary process is focused on agreeing ‘appropriations’ i.e what can be spent in future years but the money flowing down to the defence contractors is known as ‘outlays’. This is the actual in year defence spending and normally reflects the budgetary trends developed one to two years previously. Therefore the Fiscal Years Defence Programme (FYDP) that we see requested in the PBR is normally a lagging indicator of the budget’s trajectory, particularly during drawdowns, as the chart below shows.

FYDP budget projections versus enacted budget (CSIS – Todd Harrison)

The next US defence budget is undoubtedly an important one. It will set the tone for the new President’s tenure and give an insight into whether US strategic priorities are likely to change. However, the complicated budgetary process means that it will be the President’s rhetoric that the defence industry and financial markets are most interested in. Those close to Washington know that way to influence the numbers is through the members of the House and Senate Appropriations Committees.



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