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THE FY 2016 PRESIDENT’S BUDGET By Ryan Crotty

obama02 Feb 15. Q1: What is the economic context for this budget?

A1: On Monday, the Congressional Budget Office (CBO) ushered in budget season with its annual Economic and Budget Outlook, painting a picture of an economy in recovery with the deficit projected to return this year to its lowest level since 2007, around its historical average of 2.7 percent of gross domestic product (GDP). According to CBO, the next four years present a lull in the steady climb of the national debt, as deficits and debt stabilize through 2018 before the long-term trend lines of health care, demographics, and interest costs once again take the reins, driving debt up as a percent of GDP. In 2015, debt is 74 percent of GDP (more than twice the 2007 level), over $18 trillion.

It is in this climate that the FY 2016 budget process provides a real opportunity to reconsider budget priorities across the federal government, which includes acting on what now appears to be a broad consensus in both chambers of Congress and the White House that defense is underfunded.

Q2: What do we expect from the topline of the president’s budget for defense?

A2: The president’s budget is expected to fund the Department of Defense (DoD) at $534 billion for FY 2016 (known as the base budget). This will be supplemented by an additional $51 billion request for supporting war efforts (known as overseas contingency operations, or OCO), $13 billion below this year’s appropriation.

Q3: Why is the defense budget request increasing, and why do many in Congress think it is underfunded?

A3: The defense budget has been squeezed by sequestration and the budget caps. Despite the modicum of relief DoD has received from Congress the last three years, the defense budget has been cut by $120 billion from the FY 2013 budget, which was developed concurrently with the 2012 Defense Strategic Guidance.

In that time, the global threat environment and the U.S. military’s involvement has gotten distinctly more complicated. The rise of the Islamic State of Iraq and Syria (ISIS) and the Russia-Ukraine situation in particular have impacted U.S. military requirements, but other events like the Ebola outbreak, Chinese activity in the South China Sea and its newly announced air defense identification zone (ADIZ), Benghazi, Mali, Boko Haram, and others hammer home the complex range of contingencies the military has been called on to address.

Q4: How does this budget handle the sequestration-level budget caps?

A4: The president’s budget ignores the Budget Control Act (BCA) budget caps on discretionary spending. In his budget, the president will include approximately $68 billion in additional discretionary spending above the cap level mandated in current law for fiscal year 2016, $34 billion (half) of which will go toward defense.

Q5: Wait, can they do that?

A5: The current law prevents Congress from appropriating funding above the level set in the Budget Control Act of 2011 (technically it says that if you do so, the sequester mechanism just cuts the budget equally across all accounts to get you back down to the cap level). The president is not bound to follow existing law in his budget request; indeed, it is often a forum for initiating new fiscal policy that would require changes to the law. The BCA is a law like any other, though one that has proven difficult to change despite its broad disapproval. The president’s FY 2016 budget keeps with the spirit of the BCA by not increasing the deficit, suggesting instead that increased spending on defense and nondefense priorities be offset mostly by increased revenues through tax reform. And that’s the rub.

Q6: What would it take to increase defense spending as the president has requested?

A6: The key to increasing defense spending is amending or repealing the budget caps. While this could be done by a simple vote like any other law, the political calculus makes it very difficult. Due to rules adopted in Congress and the rise of fiscal conservatives, any budget law that increases the deficit (adds cost or removes revenue), must be paid for somehow, to prevent the deficit from increasing.

The president pays for his increase in both defense and nondefense spending through mostly targeted tax increases. If past House budget resolutions are any guide, even with the House Budget Committee under its new leadership, House Republicans are likely to support the increases in defense spending, but seek to offset them through decreases in nondefense spending, not increased tax revenue.

Q7: What is the likelihood of this happening?

A7: There are four paths to increasing defense spending: cut nondefense discretionary spending, reduce entitlement expenditures, add tax revenue, or relax the restrictions on adding to the deficit. The key for increasing defense spending is that both parties need to care more about defense spending than one of these other issues. The first two of these solutions are anathema to Democrats, and the last two are anathema to Republicans. The elusive grand bargain that includes compromise on multiple issues (like combining tax and entitlement reform) would work, but this seems highly unlikely in the politically charged climate in the run-up to presidential elections. So, that is to say, the likelihood is low. At most, one might expect something similar to the Ryan-Murray deal that finds some pockets of savings to put toward defense for one year without dealing with the larger overall budget problem.

Q8: How does the FY 2016 budget request compare to this year’s (FY 2015) budget?

A8: In terms of year-to-year change, this budget is a $38 billion increase over the FY 2015 year (7 percent growth). But, the FY 2015 budget projected this growth for FY 2016. In fact, the FY 2015 budget provides a good guidebook to DoD and the administration’s highest and lowest priorities, the first-ins and first-outs.

The Opportunity, Growth, and Security Initiative in 2015 provided the blueprint to the highest unfunded priorities: Army helicopters, Reaper unmanned aircraft, P-8 submarine hunters, and C-130 transport planes, as well as restoration of readiness and construction funding to fix shortfalls remaining from sequestration in 2013. The “Estimated Impacts of Sequester-Level Funding” document provided the casualties of sequester over the Pentagon’s five-year plan (the Future Years Defense Program, or FYDP). These casualties included buying and operating fewer surface ships, buying fewer next generation fighters, cutting fleets of tankers and reconnaissance planes, and cutting ground forces.

Q9: What are the new priorities for FY 2016 that are different from last year’s budget?

A9: Several new initiatives have been announced in the last few months that will need to find a home in this year’s budget request. Top among these is the new “offset” strategy, which has several components including the Long Range Research and Development Plan, the Defense Innovation Initiative, and the just-announced Aerospace Innovation Initiative.

There has also been a renewed emphasis on the nuclear enterprise by the Air Force and by Secretary of Defense Chuck Hagel, who announced a 10 percent funding increase for people, equipment, and infrastructure. In addition, the next generation of nuclear delivery systems, including the Ohio-class submarine replacement, the Long-Range Strike Bomber, and upgraded ICBM fleet, is expected to receive increased funding.

The Pentagon also needs to reintegrate some of the costs that it had cut in last year’s plan but whose removal was rejected by Congress. The aircraft carrier overhaul required to keep the full fleet will be funded, as will the higher level of ground forces end-strength (450,000 active duty Army and 182,000 active duty Marine Corps).

Q10: Will any hard choices from FY 2015 that Congress rejected remain in the budget?

A10: The most controversial cut in the FY 2015 budget was the retirement of the A-10 aircraft fleet. This is expected to return this year, as the Air Force looks to divest itself from single-mission aircraft. A Base Realignment and Closure (BRAC) proposal will also likely be in there and will again likely be roundly rejected. Other proposals including phased cruiser modernization and U-2 retirement are unlikely to appear in the budget this year, though would be on the table if the budget is cut below the president’s budget level.

Q11: What is happening with war funding in FY 2016?

A11: This year DoD has returned to the practice of submitting its war funding request, called the OCO account, along with the rest of the budget. OCO funding is down from $64 billion in 2015 to $51 billion in 2016. Funding for the counter-ISIS campaign is about the same (up from $5 billion to $5.3 billion), as is funding for European reassurance (around $800 billion). Although the European Reassurance Initiative was intended to be a “one-time ask,” challenges in that region persist and thus DoD is maintaining this funding line. The OCO account continues to reflect a globally engaged military, one less reliant on ground forces, with ground forces funding being overtaken in the OCO request in 2015 by the other services and activities.

Q12: Where do we go from here? What’s next?

A12: The president’s budget and policies will immediately go on trial in Congress on February 4, with Ashton Carter’s confirmation hearings. While he will not necessarily be held accountable for the details of this budget until the posture hearings in March (assuming his confirmation), Carter’s recent tenure in the Pentagon keeps him from being off the hook for overall strategic and budgetary decisions made by DoD and the administration.

The Military Compensation and Retirement Modernization Commission report was released to the public on January 29, offering suggestions for changes to the personnel pay and benefits system. DoD’s reaction, based on working groups, is reportedly due to the president on March 13, and president’s response with recommendations for Congress is due to Capitol Hill by March 30.

Other issues include the return of the debt ceiling, which initiated the BCA in 2011, coming back into force on March 16, though extraordinary measures available to the secretary of the treasury can push the default date out to the fall.

Finally, there are Congress’s next steps in responding to the budget. The appropriations and authorizing committees will hold their hearings throughout February and March, while the budget committees develop their budget resolutions. The president did his job to bring the timing of regular order in line with statute by submitting his budget on time, so the next step in regular order will be whether Congress pulls together a concurrent budget resolution by April 15. For the last few years this has been an impossibility given the differences between House Republicans and Senate Democrats, but with Republicans taking both chambers, it will be interesting to see if they can come to an agreement. That will be the first big sign if there is a building consensus in Congress over how the budget caps can be addressed.

Ryan Crotty is a fellow and deputy director for defense budget analysis at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2014 by the Center for Strategic and International Studies. All rights reserved.

 

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