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.
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