Federal and Defense budget update


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Federal and Defense budget update

  1. 1. PRIVATE & CONFIDENTIAL Defense Spending Status and Outlook Updates on the Fiscal Cliff, Sequestration, Debt Ceiling, and Other Issues Affecting the Defense Budget in Fiscal Year 2013 and Beyond March 26, 2013
  2. 2. Current Status Near-Term Outlook The Continuing Resolution signed on March 26 will  Attention now turns to the FY14 budget; the Obama prevent a government shutdown Administration will proposed its budget on April 8 DoD is funded at about $518.1 billion in FY13, but  Press reports indicate the Administration will continue remains subject to Sequestration fighting to lift Sequestration, at least in the near-term Sequestration, which remains the law, will push the – The FY14 President’s Budget could come in around base DoD discretionary topline to about $478 billion $521 billion, which is well above the sequestered level of $475 billion – All major accounts (other than MilPers) will be hit, but investment accounts will be hit particularly hard – This would set up a continued fight between the White House and Congressional Republicans over The new funding measure grants some DoD flexibility spending and the size of the Federal government to apply cuts more carefully than the across-the-board method required by the Budget Control Act – It is possible that FY14 could begin in October 2013 with a Continuing Resolution – However, making these cuts over the latter half of the fiscal year will yield difficult outcomes  The debt ceiling must be raised on or after May 19 The House and Senate have passed Budget Resolutions – The extension passed in January expires on May 18 for FY14 and beyond, although these are non-binding – The Treasury Department can extend Federal – Put forward by House GOP and Senate Democrats, finances beyond May, but action will be required by respectively, these have no chance of becoming law Congress at some point during the summer – These indicate overall attitudes about DoD spending PRIVATE & CONFIDENTIAL | AVASCENT | 2
  3. 3. Where We’ve BeenSequestration of the FY2013 budget on March 1 is the latest in a series of developments that beganunfolding with the passage of the Budget Control Act in August 2011 2011 2012 2013 Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. MayBudget Control Act(August 2011) Failure of the (March 2013) • Raised Federal Debt Super Committee • March 1: FY2013 Ceiling (November 2011) FY2013 Budget discretionary budget • In exchange, forced • Charged with (February 2012) is sequestered, per Continuing Resolution the Budget Control caps on proposing $1.2T in • Obama for FY2013 Act and the American discretionary further deficit Administration (September 2012) Taxpayer Relief Act spending (Defense reduction over 10 2012 Elections proposes FY13 and non-Defense) years • Congress passes (November 2012) budget Fiscal Cliff Deadline • March 12/13: House for FY13 and beyond (and Obama signs) GOP and Senate • Failure to agree to a • Obama wins (January 2013) • Includes budget CR to keep the Debt Ceiling Lifted Democrats issue • Created bipartisan deal (and pass it in levels set by the reelection • Congress agrees “Super Committee” House and Senate) Federal Temporarily alternative long-term Budget Control Act • Democrats to extend and to identify further would prompt Government (January 2013) budget plans retain control of adjust tax cuts, deficit reduction Sequestration of $1T • Does not assume functioning • House votes to the Senate, delay and • March 26: President measures by in Federal spending Sequestration, through the first lift Federal Debt Republicans reduce signs full-year CR, Thanksgiving 2011 over 10 years, however, despite half of FY2013 Ceiling through retain control of Sequestration in granting DoD including $550B the failure of the (thru March 2013) May 18, 2013 the House FY13, and make appropriations that from DoD Super Committee • Spending set other fiscal • No action on remain subject to slightly above FY12 • Lame Duck policy changes broader sequester levels (<1%) session through spending issues • March 27: After- January 2, 2013 Session Sequester takes a further $7B from the DoD toplineAttention now shifts to April 8, when the Obama Administration will put forth its budget request forfiscal year 2014 PRIVATE & CONFIDENTIAL | AVASCENT | 3
  4. 4. Where We Are After many twists and turns, H.R. 933 sets the FY13 DoD topline budget at about $518 billion, but it remains subject to sequester, for a final level of about $478 billion FY13 President’s FY13 Continuing FY13 Appropriation FY12 Appropriations FY13 Appropriation Budget Resolution with Sequester September 2011 February 2012 September 2012 March 22, 2013 March 27, 2013 $600 Revolving & Management Funds $500 $71 $69 $72 $69 Family Housing $63 $400 $105 $99 $105 $99 $89 Military $ Billions Construction $300 RDT&E $197 $209 $198 $209 $188 $200 Procurement $100 $142 $135 $143 $128 $128 Operations & Maintenance $0 FY12 Appropriation FY13 Presidents FY13 Continuing FY13 Appropriation FY13 Appropriation Military Personnel Budget (Feb. 2012) Resolution (Sept. (March 2013) (Including 2012) Sequester)Source: FY13 DoD Greenbook; H.R. 933; Avascent analysis of BCA (Aug. 2011) and ATRA (Jan. 2013) PRIVATE & CONFIDENTIAL | AVASCENT | 4
  5. 5. Where We Are Decline in the base budget will hit investment accounts particularly hard, although some of these reductions may not be fully felt until outlays slow in FY14 and beyond Selected Delta, FY12 to FY13* Remarks Likely Focus of Reductions Accounts Military -$3.3 • Hardest hit among major accounts in -29.1% • Deferral of many new-start projects Construction billion relative terms • Deferral of many new-start programs -$8.8 RDT&E -12.4% • All Services RDT&E accounts are cut • Potential furlough of civilians with salaries billion funded by RDT&E • Prior to Sequester, a few accounts were set • Probability of lower buy-rates than planned, -$15.7 to make modest gains, FY12 to FY13 Procurement -15.0% with implications for unit cost growth billion • But after Sequester, only Army Aircraft and • Deferral of new-start procurements Air Force Ammo accounts will see growth • Congress added funds to many (but not all) • Unclear how DoD will revise its prior Operations & -$9.1 O&M accounts in H.R. 933 to allow DoD to Sequestration planning, given added funds -4.6% Maintenance billion sustain readiness and deployments even after sequestration • Civilian furloughs seem likely, however • Not subject to sequester, unlike all other Military -$14.3 major accounts -10.1% • Not subject to sequester Personnel billion • Decline prompted by planned reduction in endstrength H.R. 933 gives DoD greater flexibility to apportion budget cuts than the BCA allowed*Includes Avascent’s initial estimate of sequestration by Title PRIVATE & CONFIDENTIAL | AVASCENT | 5
  6. 6. Where We Are The House and Senate Budget Committees have issued competing visions for Federal spending, taxes, and implications for deficits and debt Overview of House and Senate Budget Plans Deficit/Surplus as a Share of GDP 2% The House and Senate budget plans will not become law, but instead stake out the parties’ overall visions 0% FY18 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY20 FY22 -2% • The House Budget Committee prioritized a rapid reduction -4% in Federal budget deficits and debt -6% • Budget would reach balance by FY23 -8% Senate Budget Cmte House Budget Cmte • Deep cuts in Federal outlays relative to the CBO -10% CBO (February 2013) baseline, particularly the Medicaid program and -12% Actual funding for the Affordable Care Act (ObamaCare) • No increase in tax revenues from CBO baseline Debt Held by the Public as a Share of GDP • The Senate Budget Committee put less priority on these outcomes, favoring further public investment and stimulus 90% Senate Budget Cmte 80% House Budget Cmte • Budget would not reach balance, but would reduce 70% CBO (February 2013) deficit as a share of GDP 60% Actual • Makes $733 billion in discretionary spending cuts 50% (along with a further $242 billion in interest savings), 40% but adds $100 billion in spending on infrastructure 30% • Gains $975 billion in new revenue from closing tax 20% loopholes and expenditures FY06 FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY08 FY10 FY12 FY14 FY16 FY18 FY20 FY22Source: House Budget Committee; Senate Budget Committee PRIVATE & CONFIDENTIAL | AVASCENT | 6
  7. 7. Where We’re Going The White House has revealed the basic outlines of a long-term deficit reduction plan, which offers a glimpse of what the president may propose as his FY14 DoD budget request The White House outlined in February 2013 a plan to gain an additional $1.5 trillion in deficit reduction over ten years through a mix of spending cuts and tax increases Budget Cuts: $1,080 billion in spending reductions Tax Increases: $580 billion in new revenue • Replace Sequester with $200 billion in discretionary budget • Gain ~$580 billion in new revenue reductions over 10 years • Limit tax deductions to 28% for wealthiest earners • Press accounts indicate the White House would • Close various loopholes backload cuts to the latter half of the 10-year period • $200 billion cut would be split evenly between Defense and Non-Defense discretionary spending • Gain $400 billion in savings from Health-related reforms • Gain $200 billion in savings from other Mandatory programs (non-health) • Shift to Chained CPI index to limit growth in Mandatory programs • $50 billion in new spending on “temporary growth measures” Gaining GOP agreement on any increases in tax revenue will be extremely difficultSource: White House deficit reduction outline (http://www.whitehouse.gov/blog/2013/02/21/balanced-plan-avert-sequester-and-reduce-deficit) PRIVATE & CONFIDENTIAL | AVASCENT | 7
  8. 8. Where We’re Going The House and Senate budget plans approved this month, as well as the White House’s notional debt reduction plan, all feature DoD budget estimates that vary only slightly in the near-term Defense Discretionary Spending (Base Only) Under Alternative Budget Plans $700 $650 Current Year $ Billions $600 $550 $500 $450 $400 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 CBO Baseline Assuming White House Deficit House Budget Senate Budget CBO Baseline Sequester Reduction Plan Committee Committee (Feb. 2013) (March 2013) (Feb. 2013) (March 2013) (March 2013) Baseline did not assume March 2013 “Budget Shifts proposed Assumes greater spending Assumes no real growth in Sequestration Alternatives” estimated discretionary cuts to the on defense than projected DoD topline over time effect of Sequester in FY14 latter years of the 10-year under either CBO baseline (nominal growth after and beyond window or sequestration FY17)Source: CBO, “The Budget and Economic Outlook: Fiscal Years 2013 to 2023,” February 2013; CBO, "Approaches for Scaling Back the Defense Department’sBudget Plans," March 18, 2013, Table 1-1, p.9 ; House Budget Committee; Senate Budget Committee; White House deficit reduction outline PRIVATE & CONFIDENTIAL | AVASCENT | 8
  9. 9. Where We’re Going With a government shutdown averted, the budget debate shifts to FY14, in which the Obama Administration may aim to roll back sequestration-level cuts Path Forward from Sequestration February March April May June July August September October Sequestration Deadline FY13 Continuing Resolution FY14 President’s Budget Revised Debt Ceiling Deadline Fiscal Year 2014 Begins (March 1) and DoD Appropriations (April 8) (May 18) (October 1, 2013) (March 22) • Extended from • President to unveil his • Debt ceiling must be raised to • FY2014 spending January 2 • Government shutdown FY14 budget following a allow continued borrowing to measure must be in place averted two-month delay finance Federal operations avoid government shut- • January 1 agreement down extended deadline • Sequestration remains • Press accounts* indicate • Failure to raise debt ceiling for Sequestration in force, and will be DoD will ask for ~$521 could prompt downgrade in • Another CR could be used applied to toplines set billion, an implicit move U.S. credit rating, and rise in as a stopgap measure by H.R. 933 to take away interest rates sequestration • DoD granted flexibility • Treasury may be able to finance to apply cuts outside Federal operations into the rigid BCA guidelines summer via “extraordinary” measures Assuming no Grand Bargain is achieved between the White House and congressional Republicans, the probability is high that FY14 will begin with another Continuing Resolution*Source: Defense News, “New WH Plan Would Cut $100B From Defense,” March 21, 2013; InsideDefense,“Hale: DOD’s FY14 Topline To Exceed Budget Control Act Levels By Up To $55 Billion”, March 6, 2013 PRIVATE & CONFIDENTIAL | AVASCENT | 9
  10. 10. Where We’re GoingSeveral outstanding questions remain for the balance of FY13 and FY14 The Balance of FY13 Issues Affecting FY14 How will DoD implement deep funding reductions? Whither the FY14 topline budget? Across the board cuts are no longer required, but deep cuts  The White House may aim to roll back sequestration, and back- must be accommodated in a short timeframe load proposed discretionary cuts to the period beyond FY18 Among the investment accounts, many programs may be  How will Congressional Republicans respond to an FY14 budget spared from very deep cuts, but others may be severely request that does not incorporate sequestration? reduced to make up the balance – There is a divide between GOP deficit/debt hawks and GOP – Terminations, delays, and cuts in order quantities are highly defense hawks which the White House will try to exploit likely among many programs – But the deficit/debt hawks have clearly gained the upper hand – Contractors will feel the effects of these cuts relatively slowly, as outlays materialize in FY14 and beyond  There remains a wide divide between Democrats and Republicans in the Senate/White House and House of Among operating accounts, the Services may be able to avoid Representatives, respectively cuts in maintenance, training, and other sustainment activities that they had been planning – Prospects for reaching consensus on FY14 funding levels for DoD or other agencies in time for the new fiscal year in – Furloughs of DoD civilians still seems likely, however, starting October are very small as early as April – A CR for the opening months of FY14 currently appears to be – While some contractor-addressable activities may see fewer the most likely outcome cuts than previously feared, many services related to HQ support and infrastructure sustainment are at high risk – An FY14 CR would fund DoD at the sequestered FY13 level PRIVATE & CONFIDENTIAL | AVASCENT | 10
  11. 11. www.avascent.com (202) 452-6990 PRIVATE & CONFIDENTIAL | AVASCENT | 11