By Matt Vallone, Director of Research & Analysis, & Shane Mason, Senior Market Analyst
Main Story – FY 2018 Budget Debate Begins in Earnest
There will be debate in both chambers this week on a budget for FY 2018, five or six months after the normal time when budgets are considered on the floor. In order to update the state of affairs relative to the expectations embedded in regular budget order, we’ve decided to post an updated version of our table from February. Basically, we are now one month into the Fiscal Year and roughly where you’d expect Congress to have been in May. That may overstate the progress that will be made this week as, while the House will pass their budget resolution on the floor this week, the Senate is unlikely to pass its budget until the week of October 16th. Even after that, the two documents will be markedly different and will require a Conference Committee to hammer out differences, pushing substantive consideration of tax reform until further into October. While the tax reform debate will certainly be interesting to watch, the impact on aerospace and defense funding is likely to be that no major negotiations on appropriations is likely to begin while tax reform is dominating the conversation. This means that there will be less time available prior to the December 8th deadline to get a deal, and increases the odds of an additional CR to push a funding debate into 2018.
While the level of defense spending in the budget is likely to generate less controversy than the tax reform reconciliation instructions, it is still worth considering the two proposals. Note that these proposals don’t dive beneath a distinction between ‘defense’ and ‘nondefense’ spending, meaning ‘defense’ spending here will include functions outside of the Department of Defense. The exact values for the Department of Defense will only eventually show up in the formal appropriations process (in the Department of Defense bill and the Military Construction-Veterans Affairs bill).
The Senate budget adheres to the BCA for its defense toplines (though it provides increased spending with OCO) to get to a total of $626 billion in FY 2018. However, over time OCO fades away but the base budget grows steadily throughout the period to a total of $6.3 trillion on defense through FY 2027. The House version removes the BCA caps for defense, which results in a major increase in defense spending both in the near term and throughout the window. In FY 2018, defense spending would receive $622 billion plus an additional $87 billion in OCO. OCO winds down more slowly and the defense ramp up continues through FY 2027, resulting in total defense spending of $7.3 trillion over the ten-year window. These figures are drawn from summary tables available here (Senate) and here (House).
House Activity – The House will consider a variety of suspension bills before working to pass a budget in the latter half of the week.
Senate Activity – The Senate will work through nominations this week and may consider legislation related to stabilization of the individual insurance markets should Senators Lamar Alexander (R-TN) and Patty Murray (D-WA) reach an agreement. On Monday they confirmed FCC Chairman Ajit Pai to another term.
- SASC – 10/3 ‘Political and Security Situation in Afghanistan’, Full Committee Hearing, SD-G50 Dirksen, 10am
- HASC – 10/3 ‘Securing the Peace After the Fall of ISIL’, Full Committee Hearing, 2212 Rayburn, 330pm
- HAC-D – No hearing scheduled
- SAC-D – No hearing scheduled
Washington Activity Round-Up
Avascent Analytics, in partnership with the Canadian Association of Defence and Security Industries, will be hosting a free data-driven presentation on the Indian defense market. The goal of the Webinar will be to:
- Outline the budgetary dynamics that shape Indian defense investment, with a particular focus on issues like currency fluctuation and MoD returns to the treasury that tend to influence the ability of the Indian armed forces to modernize by importing equipment from abroad
- Provide an overview of opportunities in India and how they may be influenced by existing programmatic priorities and budget dynamics as they unfold over the next 5-10 years;
- Discuss the competitive landscape among suppliers to the Indian MoD, focusing on the positions of companies that tend to draw on the Canadian supply chain relative to Russian, French, Israeli, and local suppliers;
- Discuss the factors that can influence a firm’s approach to the Indian market, like the high expectation of indigenous industrial participation, technology transfer, Make in India policies, and so on.
The presentation will take place in a 45-minute briefing, followed by a 15 minutes question and answer period. Avascent will distribute the briefing materials to attendees following the conclusion of the presentation.
The CBO has released a review of its Economic Forecasting Record this week. This document looks at CBO’s recent performance as a forecaster relative to Blue Chip firm consensus. The primary takeaways are that CBO has, in the recent past, been a bit too optimistic on wage and interest rate growth and, in a related pattern, overestimated existing economic trends. Full report here.
There are two GAO reports for the Department of Defense. The first looks at defense health reform, in particular moving administration of military treatment facilities into the DHA. The implementation plan for this transfer is due by March 1, 2018 but from this report it seems like there is still quite a ways to go if the Department wants to achieve the savings it has claimed it will from this transition. The second report looks at how well DoD is managing its defense supply chain. In particular it examines whether DoD has enough information to proactively address risks from single sources of supply. GAO concluded that while DoD has done quite a bit of work in identifying major programs with critical components provided by a single source, but does not have a clear plan to respond to the loss of a supplier and has not attempted to identify what the operational impact might be if suppliers were no longer available. Full report available here.
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