The sequester strikes back

The sequester strikes back
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The much ballyhooed increase in U.S. defense spending for fiscal years 2018 and 2019 faces the same challenge as cartoon character Wile E. Coyote, who unknowingly runs off a cliff without looking down. This fiscal danger, more than the triumphant announcement of a two-year total of $165 billion in new money for defense-related activities, preoccupies Pentagon planners and defense contractor management.

A combination of simple arithmetic, aging demographics, and a fearful Congress means that just 18 months from now, base defense spending is set to drop from $647 billion in fiscal 2019 to $576 billion in fiscal 2020. This unprecedented $71 billion fall results from the reignition in fiscal 2020 of the destructive “sequester cap” process. This estimate may even be conservative, as the president’s budget proposal anticipates a drop in necessary overseas contingency operations for fiscal 2020. The could all result in a cut to defense spending of nearly 15 percent.

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As the Congressional Budget Office outlined earlier this week, when Congress agreed earlier this year to the massive omnibus appropriations bill for fiscal 2018, the arrangement was that fiscal 2019 spending for both defense and nondefense annual spending bills would increase. Those totals broke the sequester spending caps for those two fiscal years by more than $300 billion.

Either through an attempt to keep deficit projections lower, or the simple fact that neither chamber had the votes to repeal the fiscal 2020 and fiscal 2021 sequester caps, Congress set the stage for a brutal fiscal 2020 budget confrontation. The coming fiscal war will heat up in September 2019, just before the 2020 presidential primary campaigns. The appropriations battle then may become an issue for the 2020 elections, bringing deficit concerns back to the forefront.

Even assuming a pollyannaish best-case scenario — no recession, no new global military conflicts, slow increases on federal debt interest payments – the fiscal 2020 budget will almost certainly exceed $1 trillion. Recall that just a year ago, the Congressional Budget Office projected a current law deficit of $775 billion for fiscal 2020. The gross federal debt at that point will approximate $24 trillion, exceeding the size of the projected national economy. Three parties will decide this issue: Pentagon strategists, defense contractor executives, and members of Congress.

First, Pentagon strategists have assumed 5 percent growth in defense spending beyond fiscal 2019. What will they do when they realize this assumption and congressional budgets are a complete mismatch? The inevitable conclusion they will reach will include goals like 355 ships for the Navy, 80,000 more Army active duty personnel, more Air Force fighter squadrons, and increases in readiness and modernization, which are likely completely out of reach in the near future.

For defense contractors, the message is best summarized by the warning from Rep. Adam SmithDavid (Adam) Adam SmithOvernight Defense: Washington reeling from Trump, Putin press conference Dems introduce bill to eliminate ICE, shift duties elsewhere America stands to lose as China places bets on developing world MORE (D-Wash.), ranking member of the House Armed Services Committee: “The odds are, this is the largest the defense budget is going to be for, probably about the next decade. We have to make sure that we spend this money wisely and we also spend it in a way that doesn’t lock us into long-term obligations that can’t be met given the fiscal constraints that are coming.”

How can the Pentagon and the management at defense firms have any clear idea of how to plan for spending on more ships, planes, modernized weapons, and troops if the defense budget essentially peaks at $647 billion? New ships, new planes and new weapons cannot be 18-month or even five-year objectives without some level of confidence in stable funding beyond fiscal 2019.

The third major player in the budget battle is Congress, the true villain in this story. Since the 1980s, warnings from the Social Security and Medicare trustees emerge annually and are cited with alarm in Congress, prompting only pious proclamations. Projections of interest rate increases are pooh-poohed. Deficit estimates are called fraudulent. Cost estimates from impartial scorekeepers, like those on the Joint Committee on Taxation and at the Congressional Budget Office, are tossed aside for wishful and duplicitous analyses.

Because Congress refuses to touch entitlements or raise taxes, it will confront a binary proposition. Does one cut defense from the fiscal 2019 level, knowing that our adversaries now have qualitative equality in conventional weaponry? Politically, that would also lead to cuts in nondefense programs, facing a growing economic divide and a decaying infrastructure. Or will Congress do something akin to what it did in fiscal 2018, damning the torpedoes and passing tax cuts and spending increases that drive our debt to the 132 percent of gross domestic product that Italy enjoys?

Is the United States nearing a fiscal tipping point? Can it afford “guns and butter”? This question from the Lyndon Johnson era has reemerged in a transformed period. Now our “guns” face stronger adversaries and our “butter” faces rising global competitors. Do we simply assume investors will buy American sovereign debt forever? If so, at what price to our national security, to our economy, and to our future generations?

Steve Bell is a senior advisor at the Bipartisan Policy Center in Washington, D.C. He served as staff director of the Senate Budget Committee from 1981 to 1986 when the original sequester process was written.