A Budget Reality Check

BY DAVID TAYLOR

On March 16th, President Trump transmitted a “skinny” FY18 Budget and a $33 billion FY17 Supplemental Request to Congress. The major initiative contained in Trump’s Budget release is to cut non-defense discretionary spending by $54 billion below the FY18 cap to finance a $54 billion increase in defense spending. The President’s FY17 Supplemental includes $5.1 billion in off-budget Overseas Contingency Operation (OCO) funding and proposes $18 billion in unspecified non-defense spending cuts to partially offset the $27.9 billion cost of Trump’s requested increases in Department of Homeland Security (DHS) and Department of Defense (DoD) base spending.

It’s important to remember that President’s Budgets are not designed to predict what will happen. Instead, they are advocacy tools that Administrations use to project what is possible if all the President’s budget recommendations were adopted simultaneously. For planning purposes, the safe bet is that neither of these proposals will be adopted by Congress in the form they were submitted.

Since 1990, Washington budget deals have been driven by offsets. Let’s start with the Supplemental. There is bipartisan support for boosting DoD spending to “rebuild the U.S. Armed forces and accelerate the campaign to defeat the Islamic State of Iraq and Syria (ISIS)” and majority support for boosting DHS “border protection activities.”

Sequestration happened in FY13 because President Obama and a GOP-controlled Congress couldn’t agree on alternative offsets. In the end, sequestration occurred because the economic impact of the sequester was smaller than perceived economic risks of turning it off. Those risks included a downgrade in US debt, a major (10-15 percent) stock market downturn, and rising interest rates. Since then, Congress and President Obama agreed to two separate 2-year spending deals that reduced sequesters on defense and non-defense for the past 4 years. Why didn’t those deals eliminate sequestration? The parties couldn’t agree on enough offsets.

None of Trump’s key advisors on legislative and budget strategy ever played a key role in getting major budget or tax legislation through Congress. That’s evident in both the supplemental and Trump’s FY18 discretionary spending plan. Neither will pass in either House of Congress. Why? Former House Speaker Boehner ultimately lost his job because he failed to secure enough House Republicans to support discretionary spending increases  that were not fully offset. OMB Director Mulvaney, a former Freedom Caucus member, would have voted against the FY17 Supplemental for that reason.

FORECAST
The President’s discretionary spending plan is likely to produce five short-term results

First, an additional Continuing Resolution (CR) will be needed before FY17 Appropriations are finalized. Second, Congressional leaders will be forced to attach the FY17 Supplemental to an Omnibus Appropriations bill. Third, Congress will push to boost OCO funding for DoD in the FY17 Supplemental. Fourth, even if the Administration agrees to increase OCO spending in the Supplemental, the final FY17 spending package enacted into law will increase FY17 Defense spending by billions less than the President requested. Fifth, funding levels for civilian agencies will be higher than the levels outlined in the President’s FY17 supplemental request or his FY18 “skinny” budget.

The debate over FY17 spending will prompt Speaker Ryan (R-WI) and Senate Majority Leader McConnell (R-KY) to push hard for a 2-year budget deal that boosts both defense and non-defense spending and reduces prospects for a fall 2018 government shutdown. In November, we forecast that consideration of the President’s infrastructure spending initiative would be delayed at least 6 months. The timetable for adoption of an infrastructure spending package may now stretch into 2018.

The FY17 Supplemental should have been an easy way to score an early, momentum-building legislative victory. Instead, it’s likely to divide Congressional Republicans and increase Democrats’ leverage (particularly in the Senate). As a practical matter, it should also reduce the ultimate size and scope of other priorities on the President’s economic agenda.

What do you get when an outsider selected to run a large, complex organization fails to surround himself with operational expertise? Avoidable mistakes.

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