Reaction to White House Budget Plan Highlights A Divided Congress
(Source: Forecast International; issued March 06, 2017)
By Shaun McDougall
The White House has issued initial budget guidance to federal agencies for the 2018 fiscal year, calling for an increase in defense spending that will be offset by an equal reduction for non-defense discretionary programs. The plan calls for $603 billion in defense spending in FY18, reflecting an increase of $54 billion, or nearly 10 percent, over the current $549 billion Budget Control Act (BCA) cap. The topline figure applies to budget function 050, which covers the Department of Defense, defense programs within the Department of Energy, and defense-related programs in other agencies. The Pentagon’s base budget accounts for 95 to 96 percent of function 050 spending each year, with the exact amount varying with each budget.

Many media outlets reported that the administration is requesting a 10 percent boost in defense spending, but that narrative lacks important context. The Obama administration was already calling for an FY18 defense budget that exceeded BCA caps by over $35 billion. Compared to the Obama plan, Trump’s budget guidance reflects an increase of around $18.5 billion, or just over 3 percent – hardly a 10 percent increase. Obama’s budgets were constantly reined in due to disagreements on the Hill about how to address BCA caps, with lawmakers settling on a number of short-term deals that provided partial relief for both defense and non-defense programs.

That trend looks to continue, as there has already been fierce reaction to Trump’s budget plan on both sides of the aisle. In order to pay for the defense increase, the White House plan calls for cutting $54 billion for domestic programs, which is an immediate non-starter for Democrats. The aforementioned short-term budget agreements were only made possible because they altered spending caps across the board, and Democrats have said they want to see any defense increases matched by equivalent increases for non-defense programs.

On the other hand, some Republican lawmakers are concerned that the White House plan doesn’t do enough for the military. The most vocal critics, Senate Armed Services Committee Chairman Sen. John McCain (R-Ariz.) and House Armed Services Committee Chairman Rep. Mac Thornberry (R-Tex.), previously laid out their own recommendation to provide $640 billion for defense in FY18. The latest budget guidance misses that mark by $37 billion, or around 6 percent.

This continued divide will make it extremely difficult for Congress to eliminate or modify the BCA caps, a move that requires a 60-vote consensus in the Senate.

It remains to be seen to what extent the administration will rely on the Pentagon’s Overseas Contingency Operations (OCO) account, which has already been used as a loophole to increase defense spending since it is not subject to BCA limits. The new director of the White House’s Office of Management and Budget, Mick Mulvaney, has spoken out against the use of the OCO account as a slush fund. Nevertheless, the OCO loophole remains the easiest way at the moment to increase the defense topline. The administration is also working on an FY17 supplemental, which will likely take shape as an OCO adjustment for that very reason.

The details of the FY18 spending plan remain in the works, and the White House plans to submit a budget blueprint to Congress by March 16. However, a full budget request will not be released until at least early May.

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Trump’s Budget Plan Hits Wall of Opposition: is the Military Build-up in Jeopardy?
(Source: Taxpayers for Common Sense; issued March 06, 2017)
Widespread rejection of President Donald Trump’s budget trial balloon last week has Washington bracing for months of trench warfare over spending priorities.

Trump’s highly touted military buildup may eventually materialize, but at a slower pace than the Pentagon and the defense industry had imagined.

The administration’s proposed $54 billion increase in military spending in 2018 already has been deemed a political nonstarter because it would be paid by equivalent cuts to nondefense agencies. The defense sector, nevertheless, is far from hitting the panic button. It is buckling down for a protracted fiscal fight that likely will stretch into 2018, and some industry analysts believe investors will take the long view.

Some defense industry stocks have been downgraded upon recognition that expectations of quick-and-easy buildup were too high. There is still however high confidence in the defense industry that Trump will make good on his promise of pumping more money into defense. “Investors see this as Trump’s first down payment on increased defense funding,” says James McAleese, principal of the consulting firm McAleese & Associates.

The House soon will move to approve a $577.9 billion defense appropriations bill for 2017 — $516.1 billion in the base budget and $61.8 billion for the OCO war account. Lawmakers are expected to give the Pentagon an additional $7 billion to pay for new equipment. More money on top of that will come from a new OCO request that the administration soon will submit. That would push the Pentagon’s overall 2017 budget above $600 billion.

The markets are banking on substantially larger defense budgets beyond 2018, McAleese suggests in a briefing distributed to clients. “Investors are expecting an eventual 2018 compromise, but need to get in now ‘at-ground-floor-valuations’ before final defense funding growth is fully priced into the stocks.”


Trump’s bid appears to be as “bad-faith ‘us-versus-them’ politics,” he observes, that will mobilize Senate Democrats to block 2018 appropriations, and possibly force a showdown over funding for the remainder of fiscal year 2017. A temporary funding measure passed last year runs out April 28.

The president, meanwhile, sees this initial move as building “leverage” for a future compromise, while “checking off the box” on campaign promises, McAleese notes. “Trump may be applying cuts to Democratic domestic priorities to position for compromise on tax-reform,” and he may also be applying pressure on domestic priorities to motivate Democrats to offer modest cuts to entitlements.

White House budget chief Mick Mulvaney is “trying hard to style the $54 billion defense-versus-domestic zero-sum competition as a ‘negotiated-conversation,’” McAleese suggests.

If all else fails, tucked in Trump’s back pocket is a free “get-out-of jail” card — the overseas contingency operations account — to increase the military’s base budget without having to offset it with discretionary domestic or entitlement cuts.

The next marker to watch is the 2018 “skinny” budget, or top line agency funding levels, expected to be out March 16. A detailed 2018 federal budget request will follow in May.

As to how this muddled state of affairs gets sorted out, it’s a guessing game. Trump’s antagonistic approach and the unworkable math of his spending and tax proposals have left budget experts in Washington scratching their heads.

“This is a pretty complicated political landscape,” says Katherine Blakeley, budget analyst and research fellow at the Center for Strategic and Budgetary Assessments.

What will be telling is how different factions posture for the fight. Blakeley does not see many favorable scenarios for Trump to get what he wants. “Republicans have a fairly thin Senate majority. The House is ideologically divided. And the deficit hawks are newly emboldened by the appointment of [former tea party congressman] OMB director Mulvaney.”

The fiscal year 2017 bill will be the first test for these factions, of how strong they really are, Blakeley says. Already the fiscal hawks are showing their teeth as Congress hashes out the 2017 OCO supplemental. “There has been a shrinking of expectations from $40 billion to $30 billion or even below that,” she says. In the long term, the question is whether Senate Democrats will be able to “stick to their guns of not allowing a defense increase at the expense of domestic spending,” Blakeley adds. “The FY17 will be a trial run for the fight that we are going to see for fiscal 2018 and beyond.”

Congressional proponents of larger military budgets — notably the leaders of the House and Senate Armed Services Committees — have called for even more dramatic spending hikes than what Trump put forth. That raises the question: Under what scenario can anyone get past the political and fiscal landmines that would likely derail a defense buildup?

Blakeley anticipates there will be some effort to tackle mandatory spending to free up funding for discretionary accounts. “Trump has been cagey on entitlement changes,” she says. But they are not out of the picture. Something has to give, as most of the budget gimmicks that have been used in past budget deals have been exhausted. “You’ve already gone to the well and there’s not a lot there.”

Slashing nondefense agencies to the tune of $54 billion is improbable both politically and mathematically. “You’d have to cut entire departments,” says Blakeley. And agencies like the State Department, the Treasury and the Department of Homeland Security all carry out significant duties related to defense and foreign affairs that would be jeopardized by cuts. Lawmakers from both sides were especially peeved by a proposed 10 percent cut of $1.3 billion to the Coast Guard budget.

“Even Republicans are against it,” Blakeley says of non-DoD cuts. As clashes continue into next years, “Someone is going to have to lose, and it’s not clear yet who that will be. You can’t satisfy everyone.”

When the 2018 skinny budget comes out next week, it will show the administration’s opening bid. “But Congress has the final say,” Blakeley notes. “That’s when we will be able to gauge that strength of the Democrats in the Senate and the strength of the split in the GOP caucus in the House.”

The defense industry appears to be confident about a buildup, but people should be more skeptical, cautions Blakeley. “I am not as optimistic.” The outcome depends on what the administration ultimately ranks as its top priority. “Is it a defense increase, infrastructure, taxes? You can’t get all of that.”

If defense spending is indeed number one on the list, actions thus far say otherwise. “The administration should not have alienated the Democrats and moderate Republicans with a $54 billion hit to domestic spending. “They have made it harder for people to say they support defense spending. They could have quietly left domestic spending alone.”

Because the picture remains murky, Citi analysts last week downgraded top defense firms General Dynamics, Northrop Grumman and Huntington Ingalls from buy to neutral.

The administration’s move to offset defense increases with domestic cuts has sparked outrage and has created new opponents. “Several Republicans in positions of power in Congress are already throwing cold water on the suggestion,” declared the watchdog group Taxpayers for Common Sense. “It’s worth remembering the old saw ‘The President proposes, Congress disposes.’”

Robert Kahn, senior fellow for international economics at the Council on Foreign Relations, raised tough questions about the administration’s strategy. “The president has a long road ahead of him to take these priorities and turn them into legislation, and not much clarity for his agenda or for the U.S. economy more broadly.”

First order of business before any defense buildup can begin is the repeal of the 2011 budget law that limits discretionary spending.

“The main issue for defense is not the DoD’s budget, but it’s going to be how that budget fares given conflicting demands on non-defense discretionary spending and other costs associated with Trump’s initiatives such as immigration, infrastructure and border security,” industry analyst Byron Callan, of Capital Alpha Partners, writes in a research note. “It’s murky now how all this will come together.”

Former Pentagon official Michèle Flournoy, chief executive of the Center for a New American Security, criticized Trump’s dollar-for-dollar cuts in nondefense programs to pay for a bigger military budget. Depleting agencies like the State Department and USAID “would create an even more imbalanced national security toolkit, limiting our ability to prevent crises through diplomacy and development and result in an overreliance on the military,” Flournoy contends in a Washington Post op-ed.

Republican defense hawks, for their part, have blasted Trump for not spending enough. The proposed 2018 budget of $603 billion is just 3 percent above the level anticipated in President Obama’s final budget, and “well below the $640 billion recommended jointly by the chairmen of the House and Senate Armed Services committees, Rep. Mac Thornberry and Sen. John McCain and about $60 billion below the top-line recom­mended by the bipartisan National Defense Panel in 2014,” conservative pundits Gary J. Schmitt and Thomas Donnelly wrote in The Weekly Standard. “In fact, the added monies proposed by the Trump White House will not even suffice to meet the nearly $60 billion hole in the readiness and maintenance accounts facing the services right now.”

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