U.S. Budget Deal Provides Relief as Long-Term Uncertainty Lingers

by Shaun McDougall, Military Markets Analyst, Forecast International.

U.S. Capitol Source: Forecast International

U.S. Capitol
Source: Forecast International

The White House and congressional leaders announced a budget deal to increase spending limits for the Department of Defense in FY16 and FY17, but the Pentagon must still trim some fat. While the Bipartisan Budget Act of 2015 provides some semblance of stability in the near term, the legislation fails to address long-term concerns and is far from an ideal solution. Similar to the Murray-Ryan deal that provided limited relief from spending caps in FY14 and FY15, the short-term nature of the agreement places yet another round of contentious debate on the horizon. Even though the legislation establishes revised spending caps for two years, it does not guarantee a smooth budget process in FY17. Even though the Murray-Ryan deal increased available funding for FY15, the administration fought a losing battle over a $26 billion supplemental fund for the military, and the Pentagon was still forced to endure a continuing resolution for nearly three months before a final FY15 appropriations bill was signed in December.

The new agreement takes a step in the wrong direction in terms of sound budgeting practices. The complicated arrangement provides funding through multiple channels. Most of the additional funding comes as a direct increase to the base budget, but the Overseas Contingency Operations account plays its part as a slush fund to help bypass spending limits. Furthermore, similar to the Murray-Ryan deal, the new two-year agreement backloads much of the savings meant to offset near-term increases, with some savings not going into effect for another decade. Pushing savings to a future administration and Congress means they may never see the light of day, potentially exacerbating the budget crunch down the road.

For now, the budget deal provides an additional $80 billion for the base budget over the next two years, split evenly between security and non-security programs. Each side will receive an additional $25 billion in FY16, and $15 billion in FY17. The security portion applies to budget function 050, which includes the Pentagon’s base budget, defense programs within the Department of Energy, and defense-related programs in other agencies.  DoD spending falls under subfunction 051.  The Pentagon estimates that its base budget accounts for roughly 95.6 percent of function 050 spending each year. The DoD therefore stands to receive around $38.2 billion in additional base funding over the two-year period.

The legislation also provides adjustments to the OCO budget. Congressional markups earlier in the year attempted to shift $38 billion from the base budget to the OCO account in order to completely sidestep Budget Control Act limits, which resulted in a presidential veto of the FY16 defense authorization bill. The two-year agreement utilizes the same loophole, but on a smaller scale. The Pentagon receives an additional $7.8 billion in OCO funding in FY16, for a total of $58.8 billion. A similar OCO increase is provided for non-defense programs funded through the State Department, for a total of $14.9 billion, but it is unclear exactly how that funding will be used.

In a strange twist, the agreement provides the same OCO limits for FY17 ($58.8 billion for defense and $14.9 billion for non-defense). The government doesn’t forecast OCO spending because it is too difficult to project operational requirements that far in advance. It is therefore difficult to gauge the true impact of the FY17 OCO limits at this time. The White House does provide a “placeholder” amount for future OCO funding, but that figure can hardly be used as an estimate of anticipated spending. The FY16 budget included an annual $26.7 billion OCO placeholder from FY17 to FY21. As a whole, OCO funding has been on a downward trend in recent years following the conclusion of major combat operations in Iraq and Afghanistan. Funding will still be needed for ongoing operations against ISIS and maintaining a contingent of troops in Afghanistan, among other things, but the $58.8 billion allocated in the agreement will almost certainly exceed the true cost of overseas operations in FY17. Excess OCO funding will therefore likely be used to support base budget priorities.

What, then, is the net impact of these various increases on budget toplines? The president’s FY16 request sought around $612 billion for national security – again, this figure includes the Pentagon budget as well as other security agencies. The two-year deal provides $606.9 billion for national security, meaning Congress must cut around $5.1 billion from the security budget for FY16. Looking at the Pentagon alone, the FY16 request totaled $585.3 billion, including $534.3 billion in base funding and $50.9 billion for OCO. The budget deal will give the Pentagon around $523.8 billion in base spending and $58.8 billion for OCO, for a total of $582.6 billion, or $2.7 billion below the request. The Pentagon will receive around $526.7 billion in base funding in FY17, which is about $20.6 billion less than the $547.3 billion the White House says it wants. The $58.8 billion in OCO funding will help offset that shortfall.

Lawmakers must now modify the vetoed FY16 defense authorization bill to match the revised spending limits, and craft a conference appropriations bill that adheres to the new framework. The Pentagon will adjust its FY17 budget request accordingly, but it remains to be seen if the administration will seek additional supplemental funding as it did in its FY15 request. The Bipartisan Budget Act of 2015 will certainly ease some pain in the short term, but the agreement falls well short of providing much-needed long-term planning stability. The military’s Future Years Defense Plan is therefore left with the same level of uncertainty as before, and the next five-year spending plan will continue to exceed budget caps beyond FY17.

About Forecast International

For 50 years, Forecast International intelligence reports have been the aerospace and defense industry standard for accurate research, analysis, and projections. Our experienced analysts compile, evaluate, and present accurate data for decision makers. FI's market research reports offer concise analysis of individual programs and identify market opportunities. Each report includes a program overview, detailed statistics, recent developments and a competitive analysis, culminating in production forecasts spanning 10 or 15 years. Let our market intelligence reports be a key part of reducing uncertainties and mastering your specific market and its growth potential. Find out more at www.forecastinternational.com

View all posts by Forecast International →