There has been a whirlwind of activity surrounding the DoD budget in the past month. As the dust settles, the department finds itself facing low levels of funding for the current year and continued uncertainty for the next.
The twists and turns over the DoD’s topline budget began with the passage of the Budget Control Act in August 2011 and ultimately ended with President Obama’s approval of H.R. 933 on March 26. This law extended the continuing resolution (CR) for most agencies, but provided DoD with a formal appropriation of $518 billion for FY2013. This number fell below limits set by the Budget Control Act, but will be sequestered down to approximately $478 billion.More importantly, H.R. 933 gives DoD greater flexibility to apportion budget cuts than the BCA allowed. The FY13 DoD Appropriation increases O&M funding levels to help DoD avoid a readiness crisis, and gives DoD added flexibility to move around funds and protect higher priority programs. Sequestration will still hit all major accounts, with the exception of Military Personnel, resulting in investment accounts getting hit particularly hard: the Procurement account is expected to decline $15.7 billion (-15%). This will likely effect lower buy-rates than previously planned, subsequent higher unit costs, and the deferral of new-start procurements. Some of these reductions, however, will not be fully felt until outlays slow in FY14 and beyond.
The budget debate now shifts to FY14, where the Obama Administration will once again try to roll back sequestration-level cuts. The FY14 President’s Budget is currently expected to release on April 10th, and press accounts indicate that DoD will ask for $526.6 billion. While the number is below the BCA stated caps, it does not take into consideration the FY2014 sequestration. Unless the law is changed, sequestration will hit the FY14 DoD topline to the tune of about $52 billion.
The White House has proposed an alternative to sequestration through smaller discretionary cuts and new revenue, but gaining GOP agreement will be extremely difficult. While there is currently a divide between deficit and defense hawks in the Republican party, deficit hawks have clearly gained the upper hand and are very resistant to any compromise that includes increased revenue through tax hikes. Avascent therefore believes that there is little hope for a ‘Grand Bargain’ on federal spending by October 1st, when fiscal year 2014 begins. Given the current political environment, Avascent finds it more likely that Congress will pass another continuing resolution for FY14, which would fund DoD at the sequestered FY13 level – $478 billion.