The Fiscal Calm Before the Storm

The Department of Defense recently released a report aimed at showing the taxpayer where the extra dollars appropriated in 2018 for defense went. In its conclusion, it carries an important warning: “DOD is making significant progress, but without sustained and predictable funding, our gains will fade and investments will not realize their full potential.”

Even though the Pentagon started this fiscal year — 2019 —with authorization and appropriation bills in place, this was the exception rather than the norm. The military has had to rely on temporary funding mechanisms to start the fiscal year 13 times in the last 18 years, including every year between 2010 and 2018. Next year’s budget will face three different pressures that make it unlikely to be characterized as sustained or predictable. Sustainability is related to having enough funds to execute DOD’s mandate, whereas predictable is related to having appropriations in place before the start of a new fiscal year.

The first is the Budget Control Act, which limits federal spending for the next two annual budgets. Every two years, lawmakers have negotiated deals to raise its caps: the most recent one allowed the 2018 defense budget to exceed the cap by $80 billion and reach $629 billion; and for the 2019 budget, the cap was lifted $85 billion, allowing an allocation of $647 billion. For 2020, merely keeping funding flat will mean raising the BCA limit by $71 billion. No matter which party is leading Congress, it will be a tall order. This has the potential to affect the predictability of the resources, since the BCA caps were established Congress has delayed the budget and had to rely on continuing resolutions for the DOD every year since its passage with the exception of 2019.

A second pressure is self-created. Over time, some expenditures that should be in base budgets have crept into the Overseas Contingency Operations account, the BCA-exempt fund created to cover unexpected costs of overseas wars and other operations. It is what the Congressional Budget Office calls the forth phase on OCO usage since 2001 – “using OCO funding to avoid budget caps.” For example: the European Deterrence Initiative, designed to check Russian influence. Since it has become a long-term program and thus an enduring expense, it belongs in the base budget. In the 2019 budget request, Pentagon officials said they would begin to correct the situation by asking to transfer some $49 billion in 2020 spending from OCO to the base budget. This is the right thing to do — but doing it this year means that the BCA cap must be raised by $120 billion ($71 billion plus $49 billion) just to keep spending flat.

Related: Two-Year Budget Deal Would Raise Caps, Give Pentagon $700B in 2018

Related: Peeling the Onion Back on the Pentagon’s Special Operations Budget

Related: Cyber R&D Would Go Up at Defense, Down At Standards Agency

A third pressure, also self-inflicted, comes from unrealized savings combined with a telegraphed flat budget growth. In May, DoD leaders said various efficiencies and reforms would help make up the difference, providing some $46 billion over five years. But by August, just $300 million had been found. The stated goal was to put those savings toward in war-fighting capabilities that need to be funded. These savings would be even more important because the Department is not planning on asking for a budgetary increase. In summer 2017, Pentagon leaders said rebuilding the sadly depleted military would require annual budgets to rise 3 to 5 percent beyond inflation until 2023. But current budget projections for 2020 and beyond expect growth at or below inflation. Considering that inflation is likely to erode some of DOD’s purchasing power, this pressure will threaten the sustainability of the budget.

These three pressures will have to be tackled by a new Congress. For good or ill, the dispute over the last two years of the BCA caps will likely define what the incoming Congress will be able to achieve during its next two years.

Dispute over setting new BCA caps and disagreements on federal priorities have forced the DOD to operate under a continuing resolution for an average of 138 days between 2011 and 2018. It is hard to imagine how 2020 would be an exemption to the norm. Todd Harrison at the Center for Strategic and International Studies is already predicting “a nice, long CR” to start the fiscal year 2020. The cap raises in 2018 were fueled by increased debt expenditures, which is unlikely to be repeated,especially considering that President Trump has started to emphasize the debt again. His emphasis on the debt has come as request for every agency to reduce its budget by 5 percent, which is going to affect the Pentagon’s request. Regardless of what the President requests from Congress, it will been challenging to reach it.

All this dispute is a byproduct of our budget situation. The federal government has recently generated a record-breaking deficit and the overall outlook is that the country will maintain that trajectory, which will undoubtedly making it harder to reach a budget deal without simply further increasing the debt – the undesirable route that fueled the agreement for 2018 and 2019.

Meanwhile, in defense the stakes are high as America must deal with a revanchist Russia, an expansionist and aggressive China, a belligerent Iran and a nuclear-armed North Korea. All threats that will require resources that are currently unavailable in the budget. Even without accounting for these threats, 2020 is shaping up to be a challenging time for the Department of Defense.