Elections Alter FY25 Spending Patterns

On November 5, American voters elected Donald Trump as President. They also gave Republicans unified control of Congress with a 53-47 majority in the Senate. With three House races still unresolved, Republicans currently hold a narrow 219-213 majority in the House.

Federal Budget IQ focuses on the implications that major events have on federal agency spending patterns and priorities and the addressable market for public sector contractors. The 2024 elections certainly qualify. The transitions for President-elect Trump and the Senate will have major implications on procurements across government altering funding totals, timing, and priorities for FY25 and the next four years.

During the Biden Administration federal civilian agency spending from all sources grew significantly faster than defense totals. President Biden and the Democrat-controlled 117th Congress led by former Speaker Pelosi (D-CA) and Senate Majority Leader Schumer (D-NY) approved major elements of Biden’s Build Back Better Agenda. Cumulatively, they adopted the largest domestic spending agenda in over 50 years rivaling LBJ’s “Great Society” in size and scope.

Four laws created trillions in new spending above and beyond the direct federal COVID-19 response:

1. The $1.9 trillion American Rescue Plan Act (ARPA) L. 117-2 adopted in March 2021
2. The 10-year $1.2 trillion Infrastructure Investment and Jobs Act (IIJA), L. 117-58, adopted in November 2021
3. The Honoring our PACT Act (PACT Act) L. 117-168, adopted in August 2022, included over $450 billion over 10 years in expanded VA benefit and operating costs and billions in non-defense discretionary baseline adjustments, and
4. The August 2022 Inflation Reduction Act, P.L.117-169 included over $250 billion over 10 years in funding for clean, green energy programs.

Other than the PACT Act’s expanded service-connected benefits, these laws effectively shifted billions in funding for activities traditionally financed through annual appropriations (discretionary spending) outside spending cap negotiations.

A SHIFT IN PRIORITIES

At a strategic level, President-elect Trump and a Republican Congress will seek to reverse that trend, claw back billions in unspent non-defense spending (especially from the Inflation Reduction Act), alter policy priorities, cut taxes and regulations, and increase defense spending.

With narrow House and Senate Majorities (like the ones Democrats had during the 117th Congress), expect the Trump Administration, Senate Majority Leader Thune (R-SD) and presumptive House Speaker Johnson (R-LA) to use the budget reconciliation process (reconciliation bills only require a simple majority) to implement elements of their economic and budget agenda and avoid being blocked by a Senate filibuster that requires 60 votes to overcome.

While President-elect Trump may release a summary of his FY26 Budget in February, a detailed economic agenda is unlikely to emerge before FY25 appropriations are finalized. Since February, FBIQ forecasted that Trump’s election would reduce prospects that FY25 appropriations are finalized by the end of December. We expect a 2-year debt limit extension and spending cap deal to set the budgetary parameters for the 119th Congress. We also expect the Trump Administration to delay release of the full FY26 Trump Budget until late April or early May. That has become the norm for incoming administrations.

In the short-term, operating under CRs for half the federal fiscal year (Oct 24-Mar 25) impacts the pace of procurement spending by delaying new starts. We saw that occur in FY24. As we predicted over a year ago, those decisions resulted in a more back- loaded FY24 procurement cycle for every federal agency.

The ongoing transition complicates matters, particularly for civilian agencies.

FORECAST

85% Congress adopts a continuing resolution (CR) in December that extends into March 2025.

TRANSITION IMPLICATIONS

In 2020, the Presidential Transition Act of 1963 was updated by the Presidential Transition Improvement Act (P.L. 117-328). Under the law, agencies are required to designate senior career employees to serve in an acting capacity overseeing agency operations. Generally, the guidance to these “acting” career officials is to avoid making policy or funding decisions that would limit options for the incoming administration until the new leadership team is installed. For most agencies, Senate confirmation of key nominees will take months.

While President Trump’s transition team has talked about short-cutting the time-consuming Senate confirmation process by using “recess” appointments, doing so would severely diminish the Senate’s Constitutional advise and consent role. We would expect presumptive Senate Democratic Leader Schumer (D-NY) and a handful of Senate Republicans like Collins (R-ME) and Murkowski (R-AK) to oppose the extensive use of recess appointments by President-elect Trump.

A long-term CR, an ongoing transition, Trump’s threatened reimposition of Schedule F that would remove employment protection from thousands of career civil servants, and the fact that most civilian agencies are likely to end FY25 with funding levels well below FY24 enacted totals means that FY25 procurement spending will be even more backloaded than agencies experienced in FY24. For agency managers, spending up to the permitted FY24 levels through the first half of FY24 makes likely FY25 spending reductions more disruptive with the potential for greater reductions in agency headcount.

For civilian agencies other than the Veterans Administration which in addition to bipartisan support for its mission is protected from these budgetary challenges through 1) a combination of mandatory spending for veterans benefits and PACT Act implementation, and 2) billions in advanced appropriations, agency managers are likely to reduce the volume and slow the pace of procurements through March to minimize the potential impact of FY25 spending cuts on agency headcount. There will be targeted exceptions for Trump priorities like increased border enforcement.

Finally, after FY25 appropriations are adopted, we expect Trump appointees at several agencies to explore additional spending cuts through a combination of potential impoundments and rescissions.

Chart I. Source: FBIQ

Chart I outlines how these factors are likely to impact procurement spending for civilian and defense agencies for the remainder of the fiscal year. Because each agency is different, this chart is oversimplified to illustrate some key points. The dashed black line assumes steady state spending for procurement at 25% of the agency’s annual procurement budget each quarter. The green line shows what typically occurs. For the past 25 years, most agencies began each fiscal year operating under a CR through most of the first quarter (Q1) of the fiscal year (Oct-Dec). Because CRs prevent new starts, the typical 3-month delay in finalizing appropriations back-loads procurement spending into Q4 (Jul-Sep).

The yellow line represents how a 6-month CR (Oct-Mar) impacts procurement spending. Procurement spending is slightly lower through Q2 than a typical CR to give agency managers more flexibility to reallocate funds to protect agency headcount when appropriations are finalized. The red line summarizes our outlook for aggregate Federal Civilian Executive Branch (FCEB) agency procurement spending for FY25. For all agencies, procurement spending slows in Q2 (Jan-Mar) as acting officials work to avoid limiting options for Trump appointees. With targeted exceptions, we expect most FCEB agencies to spend less on procurement than outlined in their final appropriations as the Trump Administration and a Republican Congress work through the year to realign agency spending, policy, and regulatory priorities.

The blue line represents FBIQ’s procurement outlook for the Department of Defense (DOD). The key factor in this equation is that the FY25 Fiscal Responsibility Act (FRA) cap that limited DOD spending growth to 1% has been overtaken by events. FBIQ expects FY25 Defense Department (051) totals to exceed the $870.8 billion levels outlined in the bipartisan Senate Appropriations Committee-approved FY25 Defense and Military Construction-VA appropriations bills.

If that forecast holds, final FY25 defense spending totals and defense procurement totals will exceed the levels outlined in President Biden’s FY25 Budget. While the transition will slow procurement spending in Q2 (January-March), second half (April- September) procurement spending will increase by more than in a typical 6-month CR because the department will get more money than it planned later in the year. We would also expect a Republican-controlled Senate to prioritize approval of key Senate-confirmed positions at the Department of Defense to minimize delays in implementing those decisions.