By Matt Vallone, Senior Analysis Manager
Main Story: President-Elect Trump
In an election day shocker, Donald Trump ran the swing state table, enabling him to win the electoral college vote – despite losing the popular vote – to become the 45th President. At the same time, Republicans down-ballot benefited from Trump’s strong performance and ended up keeping the Senate and only losing a handful of House seats. Overall, the balance of power in the 115th Congress will be in clear Republican control of both chambers of Congress (52-48 in the Senate – assuming a Republican win in Louisiana – and 241-194 in the House). This will represent a major shift from the past eight years and has significant implications for the defense and aerospace industries. It also will have a significant impact on how the lame-duck session plays out. This week’s ‘Political Report’ will briefly go over what the election may mean for defense and aerospace, and touch on what Congress might do in this week of the lame duck (not much). I’d also encourage you to listen to the podcast I participated in with Doug Berenson, Avascent Managing Director, where we further analyze the implications for the defense industry.
Republican control of both the executive and legislative branches of government is likely to result in a significant boost in defense spending. In September, President-Elect Trump laid out his plans for defense spending in a speech that went into surprising detail. Trump would return to the defense topline numbers that were requested in the FY2012 President’s Budget Request. For FY2017, that would be at least 17% higher than the current budget request, or an additional $100 billion in base defense spending. In order to provide some sense of scale, the budget process is currently stalled over a dispute concerning a proposed $18 billion (3.4%) increase. While it remains to be seen how budget hawks in Congress would respond to such a proposal, an increase of this scale should not be viewed as out of the question for FY 2018. Based on past budget proposals by Speaker Paul Ryan, this would be accommodated by additional cuts to non-defense discretionary spending as well as significant reductions in entitlement spending.
In terms of what this money would go towards, the Trump campaign’s proposals for defense were among its most detailed. His defense plans call for a major expansion in the number of ships in the navy (from 308 to 346), increased end strength in the Army and the Marines, and increased investment in air superiority platforms. Of note is that Trump’s proposals offer little indication of his views on the Third Offset or increased engagement with Silicon Valley. Such concepts will likely be fleshed out by his eventual Secretary of Defense. The short list that is currently being reported includes Sen. Jeff Sessions, former Gen. Mike Flynn, Rep. Duncan Hunter Jr., former Sen. Jim Talent and former National Security Advisor Stephen Hadley (the short lists for other departments/positions available here). We’ll have further updates as more information becomes available.
While speculating on who will get what and what the FY2018 budget might look like will almost certainly be the most interesting parlor game in Washington for some time, there remains the small matter of funding the government beyond December. Congress is only in session for this week before recessing again for Thanksgiving. Don’t expect major movement on funding issues to take place until after Turkey Day. It appears Congressional Republicans are debating between a short-term CR to carry them into 2017 or some sort of “cromnibus” that would keep non-defense departments under a CR while providing the DoD with a normal appropriation (to potentially be plussed up next year). Given the election results, it seems pretty likely that DoD will get at least the amount outlined in the House budget for its FY 2017 totals, though the exact mechanism and timing of such legislation remains to be seen. The NDAA remains hung up on the sage grouse, so will likely not see floor action until December. Also, given recent events, it seems important to point out that predicting these things is difficult and surprises frequently occur.
- SASC – No hearing scheduled
- HASC – No hearing scheduled
- HAC-D – No hearing scheduled
- SAC-D – No hearing scheduled
Government Activity Round-Up
The GAO has a report out on how cost savings from commissary reform might work. As with most things, GAO is skeptical at what DoD will achieve in cost savings. The CBO has an update on the budget summary for FY 2016. For those of you curious, total government spending was $3.854 trillion, total receipts were $3.267 trillion, creating an annual deficit of $587 billion, the highest level since FY 2013.
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