US budget battles
End of 2017 Continuing Resolution looks likely as focus turns to Trump’s first budget
We are firmly in budget season. On this side of the pond Mr Hammond had his moment in the spotlight, but I was watching the news from the US because a few hours later the US House of Representatives approved the $584bn 2017 Defense Spending bill. This sets in motion the process to end the current Continuing Resolution (CR) that is only established until 28 April. The previous day, President Trump outlined his intent to spend $54bn (+3%) more than the Obama administration had planned to on defence in 2018. So what do we know so far and what can we expect?
Well there were no surprises in the 2017 Defense Spending bill. It requested $516.1bn for the base budget and $61.8bn for the war fund known as the Overseas Contingency Operations (OCO) account, which is in line with the National Defense Authorisation Act agreed last December. The original budget requested by Mr Obama was $524bn in the base and $59bn of OCO making a total of $583bn (as per the graph below), which means that for the first time in five years the US Department of Defense (DoD) will not have to make do with a budget far below that which is requested.
US defence budget (base and OCO) 2001 – 2021 as per the FY17 President’s Budget Request ($bn) (Source: US DoD Green Book 2017)
Unfortunately however, this small positive is offset by the fact that this year the DoD is enduring a six month Continuing Resolution. CR is a very frustrating mechanism for the defence chiefs and the defence industry. It means funding is held at the same level at last year and all existing programmes are funded at the same rate, but no new programmes can be paid for. So whilst the dollars are theoretically there, it is an inefficient way of doing business, which ironically forces money to be spent in places it sometimes doesn’t need to be. CR occurs when the House and Senate do not agree to pass the President’s budget request, and cannot reach a compromise. For the past two years the CR has ended in January, but this year’s CR is twice as long and a number of defence companies have noted recently that their short cycle businesses are seeing a significant impact.
President Trump’s first defence budget should be a positive catalyst for the defence stocks though. He outlined his headline number of $603bn during his speech to Congress last week. This means he would be requesting a 3.2% increase on President Obama’s existing plans. However, the Republican chairman of the House Armed Services Committee Mac Thornberry, and his Senate counterpart John McCain think a budget of $640bn is required. Their concern is that a lower budget would “unintentionally lock in a slow fix to readiness, consistent with the Obama Administration’s previous position, from which we would not be able to dig out.” At the moment it seems President Trump will win the initial battle, but for the first time in the last five years could 2018 be the year where we see the committee process revise the defence budget up rather than down?
We must not forget that in order for any of this to happen the US Government first needs to repeal the 2011 Budget Control Act (BCA) which sets caps for the defence budget through a process known as Sequestration. Confidence seems to be increasing that that BCA and its Sequester will be overturned, but I have learnt over the past few years that anything can happen in US politics, so it is best not to take anything for granted.
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