Mattis Budget Guidance Spans Multiple Budget Cycles, Calls for FY17 Growth

 by Shaun McDougall, Military Markets AnalystForecast International.

The Pentagon. Source: Department of Defense

U.S. Defense Secretary Jim Mattis released a memo on January 31 providing initial guidance for strengthening the armed forces through an FY17 budget amendment, the FY18 budget request, and the FY19-FY23 Future Years Defense Program.  The memo is a direct response to a memorandum on rebuilding the U.S. armed forces, released by the president on January 27.  Mattis outlines a three-phase approach: improve warfighter readiness; achieve program balance by addressing pressing shortfalls; and build a larger, more capable, and more lethal joint force.  Those objectives are centered around the completion of the FY17 budget process, and the release of the next two budget requests.

For the first phase, the military is preparing an FY17 budget amendment to address “immediate and serious readiness challenges,” including emerging requirements stemming from increased operations against ISIS.  The FY17 amendment may include an increased force structure, according to the memo.  Mattis says that the amendment will reflect a net increase over the original FY17 topline, but may include offsets from lower priority programs where appropriate.  The amendment will be delivered to the Office of Management and Budget (OMB) no later than March 1, 2017.

Secondly, the Department of Defense is launching a review of the F18 budget plan to “refine and improve” the request.  It is regular practice for an incoming administration to make some changes to existing plans before a budget is released, as there would be insufficient time to develop an FY18 request from scratch.  The FY18 budget review will be led by the deputy defense secretary.  Some examples in the memo for addressing shortfalls in the FY18 budget include, but are not limited to, buying additional munitions, increasing facilities sustainment funding, “building programs for promising advanced capability demonstrations,” “investing in critical enablers,” and force structure growth.  A revised F18 budget plan will be delivered to OMB no later than May 1, 2017.

The third phase involves drafting a 2018 National Defense Strategy and an FY19-FY23 defense program.  Mattis says the NDS, which will come on the heels of an updated National Security Strategy from the White House, will include a new force sizing construct, and will help determine the approach needed to improve the military’s effectiveness across the warfighting spectrum.  The department will subsequently work on the FY19-FY23 spending program, which will contain “ramps that grow the force quickly but responsibly, and critical investments in advanced capabilities,” the memo says.  The outyear defense plan will also include an “ambitious reform agenda” aimed at improving business practices.  The FY19 budget will be the first budget de eloped solely under the current administration.

All three phases discussed in the memo rely on increasing defense outlays.  Donald Trump has strongly advocated increased investment in the military, even at the expense of balanced budgets, but raising the defense topline will be no simple task.  The first step involves modifying or repealing the Budget Control Act, which established federal spending limits through FY21.  With Republicans holding a slim majority in the Senate, any effort to modify the BCA must still gain support from Democrats and Republican deficit hawks.  Democrats want equivalent increases for non-defense programs, while deficit hawks have reservations about overall topline growth.  Even in a continued stalemate over the BCA, however, the end of sequestration is at least on the horizon.

Another option for increasing military’s budget is using the Overseas Contingency Operations (OCO) account, which is not subject to budget caps.  House lawmakers took this approach in their FY17 markups, shifting billions of OCO dollars to pay for other priorities.  One of the downsides to this short-term accounting loophole is that it makes long-term budget planning extremely difficult.  There are also questions about the future of the OCO account itself.  The man tagged as the next Director of the Office of Management and Budget, Rep. Mick Mulvaney (R-SC), has often spoken out against the use of the OCO account as a slush fund.  He has said he would recommend integrating all war costs back into the base budget, or at the very least, push for any enduring costs contained in the OCO account to be moved to the base budget.  The Pentagon has said that about half of the current OCO budget, or some $30 billion, are actually enduring costs.  Those costs have remained in the OCO account because of base budget caps.  The problem here is that OCO funding cannot be integrated into the base budget without either modifying or eliminating those base budget caps, or finding massive offsets elsewhere in the budget.  Mulvaney acknowledge, however, that the president may very well decide to leave the current OCO practices intact.

Please feel free to use this content with Forecast International and analyst attributions, along with a link to the article. Contact Ray Peterson at +1 (203) 426-0800 or via email at ray.peterson@forecast1.com for additional analysis.


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