Era of Huge U.S. Defense Spending Hikes May be Coming to an End
Author: Greg Valliere
May 26, 2020
WE HAVE ASSERTED FOR YEARS that one of the pure plays in Washington has been the defense sector, which enjoyed a 20% increase from 2016 through 2020. But the astonishing stimulus required because of the coronavirus — probably over $4 trillion in this fiscal year alone — may result in curbs on Pentagon outlays for years to come.
THE OPTIONS ARE GRIM: At some point later in this decade, when the pandemic has been contained by a vaccine, Washington will have to begin some serious belt-tightening — regardless of who’s in the White House.
IT’S DIFFICULT to envision major cuts to Social Security or Medicare — they’re sacred cows — and tax hikes on corporations and wealthy individuals may not generate enough money to cover debt servicing costs, which are likely to soar. New taxes on Wall Street transactions are possible but this won’t pay all the bills.
THAT LEAVES DEFENSE as a juicy target. Even before the virus hit, progressives were calling for outright cuts; that’s not likely, but we could envision a stretch of
minimal hikes. Pentagon officials were taken aback earlier this year when President
Trump proclaimed that the defense infrastructure had been “completely rebuilt.”
PENTAGON OFFICIALS are requesting a $705 billion budget for fiscal 2021 (which does not include another $30 billion for “national security” and also will allow for
extra outlays through the the Overseas Contingency Operations fund, which will provide an additional $10 billion — or more — for emergencies.
THE PENTAGON REQUEST IS AN UPPER LIMIT; a more likely scenario, starting in this fiscal year or next, is for outlays that won’t be much greater than the inflation
rate, which probably will return to the 2% neighborhood once the virus ends.
DEFENSE EXPERTS WORRY that a leveling off of U.S. spending will harm long-deferred goals of modernizing the military; they cite a need for more shipbuilding, based on threats in the Persian Gulf and the South China Sea. And the Pentagon is planning to roll out the next generation of bombers, which may have to be delayed or stretched out.
OUTLAYS OF $700 BILLION OR MORE in fiscal 2021 would dwarf spending by other countries. China is second in global defense outlays, at about $260 billion, and Beijing also may have to trim its outlays because of the pandemic and weaker economic growth.
NO OTHER COUNTRY, other than the U.S. and China, spends more than $100 billion annually on defense; others in the top five are India, Russia and Saudi Arabia (Russia spends slightly more than the U.S. as a percentage of its GDP, 3.9% vs. 3.4%). Canada spends about $22 billion, among the lowest of major country outlays as a percentage of GDP, about 1.3%.
BOTTOM LINE: We’re not anticipating outright cuts in the U.S. defense budget, but significantly smaller increases are likely during this decade. The era of enormous defense spending hikes may be coming to an end as the bills come due for this year’s massive stimulus.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
©2022 AGF Management Limited. All rights reserved.
