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. 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
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3. Where We’ve Been
Sequestration of the FY2013 budget on March 1 is the latest in a series of developments that began
unfolding 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. May
Budget 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 topline
Attention now shifts to April 8, when the Obama Administration will put forth its budget request for
fiscal year 2014
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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 President's 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. 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. 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
FY22
Source: House Budget Committee; Senate Budget Committee PRIVATE & CONFIDENTIAL | AVASCENT | 6
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 difficult
Source: 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. 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’s
Budget 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. 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. Where We’re Going
Several 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
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