Defense Cuts are on the Way, Part 1: $100 billion, $300 billion, or $500 billion?

The question for defense spending is not whether it’s going to decrease over the next five years; rather it’s how far and how fast.  The good news for defense is that it’s unlikely to shrink as much as it did following the end of the Korean War (down 43%), the Vietnam War (33%), or the Cold War (36%).  Projections for the current drawdown tend to range between 20% and 30%, but the difference in those projections is significant, amounting to hundreds of billions of dollars.

For now there is agreement on the defense budget, with relatively few cuts …
FY13 base defense spending will be $486 billion, capped by both the Budget Control Act (BCA) and the sequester. For FY14, the BCA sets the defense cap at $552 billion, but the sequester would cut that amount to $498 billion. The $498 billion cap includes $18 billion for Department of Energy nuclear programs and $2 billion for Department of Homeland Security defense spending, so the Department of Defense (DOD) cap is actually $478 billion.

The president requested $516 billion for defense in his FY14 budget, the same as his FY13 request, and the Senate Appropriations Committee allocated essentially that same amount for 2014. The House Defense Appropriations Subcommittee allocation for defense is almost the same—$513 billion.

… but there are some complicating factors
Neither the president’s request nor the House or Senate defense allocations take into account the looming $109 billion sequester for FY 14, in spite of the fact that there’s little chance that the sides will come together in a grand bargain that would cancel the sequester prior to the start of the next fiscal year.

And there’s another often overlooked factor—while the differences in the defense allocations are minimal, the difference between the president’s and the Senate’s non-defense discretionary allocations on the one hand, and the House’s non-defense numbers, on the other, are enormous. This injects major controversy going forward. Here’s why:

The Senate’s $516 billion defense allocation is based on an overall discretionary cap of $1.058 trillion, the BCA-set amount, while the House’s $513B allocation is based on an overall discretionary cap of $967 billion, the BCA-set amount minus the sequester. With the Defense numbers nearly the same, the differences in allocations on major domestic bills were huge in some cases—for example, the Senate allocation for the Labor-HHS-Education appropriations bill is $164 billion, while the House number is $122 billion, an unbridgeable difference of $42 billion.

It’s unrealistic to think that the $91 billion gap in discretionary spending between the chambers can be resolved with dramatic cuts on the domestic side, as House Republicans are advocating. The President and the Senate would never go along. In the end, Defense will have to take a major hit in any agreement. Not that an agreement is likely. With the July recess coming next week and the August recess only a month later, the House has passed only two appropriations bills, which is two more than the Senate has passed. At this point it’s difficult to predict how the sides will be able to come together on even a continuing resolution for the next fiscal year.

Looking ahead: DOD plans for big cuts
On May 29 the Pentagon instructed senior officials to prepare two different FY14 budget scenarios: one with an across the board 10% cut; the other with a managed 10% cut. In addition, managers were directed to develop three different “internal fiscal guidances” for FY15-19, one at the president’s FY14 request level; one with a 5% cut; and another with a 10% cut. For the past 2 months, the Pentagon has been conducting the Strategic Choices Management review, which will provide Congress with 3 defense budget scenarios over the next decade – with budget cuts of $100 billion, $300 billion, and $500 billion.

I’ll look more deeply into the long-term pressures on defense spending in Defense Cuts are on the Way, Part 2: Boomers, and Boomers, in a forthcoming newsletter.