U.S. Budget Agreement Secures Defense Topline for Two Years

military jet flies over four soldiers
A-10 training exercise. Photo Credit: Senior Airman Mercedee Wilds

A budget agreement has been reached that will adjust federal spending limits in FY20 and FY21, providing the Department of Defense with budget stability for the next two years.  The agreement was reached by House Speaker Nancy Pelosi (D-Calif.) and Treasury Secretary Steven Mnuchin, who was negotiating on behalf of the administration.  The deal establishes an agreed-upon topline level of discretionary funding under which lawmakers will craft the annual appropriations bills that keep the government running.

The agreement, formally named the Bipartisan Budget Act of 2019, calls for national security spending of $738 billion in FY20 and $740.5 billion in FY21.  The FY20 figure falls $12 billion shy of the $750 billion request, and is $5 billion more than the $733 billion mark previously backed by Democratic spending bills.  The administration’s FY19 budget originally projected a $733 billion topline in FY20 before the president was convinced by then-Defense Secretary Jim Mattis and the Republican heads of the House and Senate Armed Services Committees to increase the request to $750 billion.  Prior to that increase, the president actually threatened to reduce national security spending to $700 billion in FY20.  At the time, he called the $716 billion allocated for national security in 2019 “crazy,” and said he wanted to end “what has become a major and uncontrollable arms race” with China and Russia.

The $738 billion provided in FY20 includes $71.5 billion in Overseas Contingency Operations funding, which is not subject to spending limits, resulting in a base budget of $666.5 billion.  For FY21, the agreement provides $69 billion in OCO funding, leaving $671.5 billion in base spending.

The budget deal covers the final two years of the Budget Control Act of 2011, which established discretionary spending caps through FY21.  Under the last two years of the BCA, national security spending was capped at $576 billion in FY20 and $591 billion in FY21.  The budget deal increases base spending by $90.3 billion in FY20 and $81.3 billion in FY21, for a total increase of around $172 billion above the original caps.  In its FY20 budget request, the White House had attempted to bypass BCA caps altogether by shifting nearly $100 billion in base budget priorities into the OCO account, but lawmakers from both parties rejected this loophole.

The $738 billion national security budget in FY20 is $22 billion more than the FY19 level of $716 billion, reflecting an increase of around 3.1 percent in nominal terms.  The budget agreement provides for a small 0.3 percent increase in FY21, meaning the Pentagon loses buying power after inflation is taken into account.  Defense leadership has previously called for annual defense budget growth of 3 to 5 percent above inflation in order to remain prepared for potential conflict with near-peer adversaries.  The last two budget deals provide a compound annual growth rate of about 4 percent between FY17 and FY21, falling just shy of the 3 percent floor after adjusting for inflation.

The BCA has been a thorn in the side of Congress and the Pentagon for years.  The DoD estimated that the first phase of BCA cuts resulted in the loss of $487 billion over 10 years.  The cuts essentially eliminated much of the DoD’s projected growth at the time, but still kept discretionary spending on an upward trend, not counting declining war budgets.  The BCA also included a sequestration mechanism that would cut an additional $1.2 trillion from the federal budget over 10 years – split evenly between security and non-security programs – if lawmakers were unable to reach a deficit reduction agreement.  Their efforts ultimately failed, triggering the sequestration ax.  The American Taxpayer Relief Act of 2012 delayed sequestration by two months, and increased defense budget caps by $26 billion in FY13, but the Pentagon still lost $37 billion due to the sequestration mechanism.

Lawmakers subsequently relied on a series of two-year budget deals, each of which temporarily increased spending limits for both defense and non-defense programs.  This approach placed the DoD in a state of near constant budget uncertainty, exacerbated by the regular use of continuing resolutions when lawmakers were unable to pass budgets on time.  CRs fund the government at the previous year’s levels until a new budget is passed, creating havoc for program managers and budget planners.

The first of these deals, the Bipartisan Budget Act of 2013, provided an additional $19 billion in additional funding in FY14 and around $10 billion in FY15.  The next deal added $26 billion for defense in FY16 and $16 billion in FY17.  In FY17, the Trump administration also funneled a supplemental budget request through the OCO account, which is not subject to spending caps, thereby avoiding the sequestration mechanism.

The two-year budget deal covering FY18 and FY19 increased national security spending by a massive $167 billion ($81 billion in FY18 and $86 billion in FY19).  The FY18 increase alone was larger than all of the increases over the previous four years combined.  The legislation helped increase the federal deficit to $779 billion in FY18 and $1.1 trillion in FY19.  All told, the various BCA-modifying deals added $435 billion in defense spending above the caps (see table below).

The deficit will likely remain above $1 trillion in FY20 and FY21, if not longer.  Although BCA spending caps will no longer be an issue for defense budget negotiators beyond FY21, the government’s rising debt will eventually place increased pressure on the federal topline.  Fiscal hawks may currently have little sway in budget negotiations, but multiple years of trillion-dollar deficits may alter that balance, particularly if economic growth slows.  Sustaining a 3 to 5 percent real growth rate for defense presents a difficult fiscal challenge under these conditions.

It is important to note that the topline figures discussed thus far include funding for the Pentagon, nuclear programs within the Department of Energy, and other defense-related agencies outside of the Department of Defense.  In the FY20 budget request, the Pentagon’s budget accounted for approximately 95.8 percent of the broader national security category.  Using that ratio as an estimate, the budget agreement will result in Pentagon spending of around $707 billion in FY20 and $708 billion in FY21 (including OCO).  The exact amount of funding the Pentagon receives will be determined by congressional appropriators when they draft the FY20 and FY21 defense spending bills.

The few fiscal hawks remaining in Congress have criticized the agreement, particularly because of the paltry $77.4 billion in offsets, some of which are relegated to mandatory spending accounts in the late 2020s that may never actually materialize.  However, the deal has received the backing of party leaders, as well as the president.

Pelosi and Senate minority leader Chuck Schumer issued a statement saying that “a bipartisan agreement has been reached that will enhance our national security and invest in middle class priorities that advance the health, financial security and well-being of the American people.”

House Armed Services Committee ranking member Mac Thornberry (R-Tex.) said, “While I believe that our military needs more funding than this agreement provides, it undoubtedly makes our military stronger and more agile.”   Thornberry had previously chastised cuts in the House version of the FY20 defense authorization bill, which funded national security at $733 billion.  He proposed an amendment that would have restored the $17 billion cut from the original request, but the amendment was not adopted.  Thornberry also cited the potential for savings generated simply by facilitating the passage of on-time budgets for the next two years.  Senate Armed Services Committee Chairman Jim Inhofe (R-Okla.) also said he was disappointed that the FY20 topline is below the $750 billion request, but was happy to see an increase over the House spending bills.

The president voiced his support for the deal, citing it as a victory for the military, and called on Congress to pass the legislation.

Both sides agreed that upcoming budget legislation would not include “poison pill” policy riders for issues like the border wall or abortion rights, reducing the risk of a government shutdown or prolonged continuing resolution.  The agreement also suspends the federal debt limit until July 31, 2021, pushing off debate over the issue until after the next general election.

Lawmakers intend to pass the budget deal prior to the August recess, but Congress will have only a few weeks after they return to Washington to draft appropriations bills prior to the start of the 2020 fiscal year on October 1.


About Shaun McDougall

Shaun McDougall is an analyst at Forecast International covering the U.S. and Canadian defense markets.

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