War Funding, Sequestration, and the Budget Impasse
June 12, 2015
The complex politics of deficit hawks, defense hawks, and domestic program advocates has produced an impasse on the fiscal year 2016 defense budget. Sequestration threatens.
Q1: What is “OCO” and why has it become so central to the budget debate ?
A1: “OCO” is short for Overseas Contingency Operations. This funding pays for the additional costs of U.S. military operations overseas, mainly for the wars in Iraq and Afghanistan, above normal peacetime costs—for example, supporting higher operating tempo for vehicles, aircraft, and ships; paying reservists; buying munitions; and replacing major weapons worn out or destroyed in combat. Under the Bush administration, it was called the “Global War on Terror.” It is requested separately from the base, or nonwar, budget.
OCO is sometimes criticized as a “slush fund,” but that is not accurate. OCO funds are allocated to programs and budget activities just as with the base budget. OCO funding also has rules (as of 2010) about what can be included, although both the administration and the Congress have broken these rules when it has suited their purposes. What is different is that OCO funds are not restricted by sequestration caps.
OCO moved to the center of this year’s budget debate because national security supporters (often termed “defense hawks”) want to increase defense spending, especially in the wake of Russia’s aggression and the expansion of the Islamic State in Iraq and Syria (ISIS). This requires lifting budget caps on defense spending. However, those more concerned with the size of the government and the budget deficit (“deficit hawks”) do not want to lift budget caps, which they regard as a key lever in controlling spending. The Republican leadership found a solution—designate $38 billion (the difference between sequestration level and the president’s budget level) as unrestricted OCO. Using the war funding this way would nominally maintain the budget caps while actually increasing defense spending.
The president also supports more money for defense but only if it is matched by the same amount for domestic programs. The Republicans oppose this linkage. The administration has denounced the Republican budget as a “gimmick” and has threatened to veto the Republican plan. (For more on OCO’s background and its role in this year’s budget debate, see this four-minute CSIS video.)
Q2: How did we get here?
A2: John Hamre, CSIS president, has a nice description of this in his introduction to CSIS’s 2015 Global Forecast. The short version: the explosion of spending and deficits during the Great Recession led to the rise of the Tea Party. The Tea Party wanted budget and deficit reductions. The failure to agree on how to do this led to sequestration.
Q3: What is sequestration and where did such an idea come from?
A3: Sequestration is the imposition of automatic across-the-board budget cuts. The concept of sequestration dates back to legislation in the mid-1980s requiring such cuts if the federal deficit exceeded certain levels (“Gramm-Rudman-Hollings” for those readers old enough to remember the budget history). Gramm-Rudman-Hollings petered out in the early 2000s but was resurrected as an enforcement mechanism by the Budget Control Act of 2011. The act was passed by the Congress after Republicans gained control of the House in the 2010 elections. It set discretionary spending caps to reduce the deficit by a trillion dollars over 10 years and created a Joint Committee to finish the work of deficit reduction by proposing changes to entitlements, revenue, and discretionary spending. The act also instituted sequestration of $1.2 trillion through 2021 in the event the Joint Committee failed to enact the required deficit reduction. The idea was to force a solution. Unfortunately the Joint Committee stalemated in partisan finger-pointing, and the threat of sequestration—automatic across-the-board cuts—has been with us ever since.
Q4: Has sequestration actually happened?
A4: For FY 2014 and 2015, a last minute budget deal averted sequestration. However, in 2013 sequestration happened in a major way. Many readers will remember the furlough of government employees over that summer. The military services cancelled training, deferred maintenance, and cut acquisition to get quick savings. If sequestration were to happen in FY 2016 (which begins on October 1), the Department of Defense (DOD) and the military services predict “disastrous, chaotic” impacts.
Q5: If sequestration is such a bad idea, then why is it still a possibility?
A5: Brinksmanship, in a word. The administration hopes that by linking defense and domestic spending, and threatening a veto, Republicans will allow increases in domestic spending. Republicans hope that the prospective chaos of sequestration will push the administration to agree to increase defense spending without increasing domestic spending, maybe with some budget offsets elsewhere.
Q6: So what’s going to happen?
A6: It’s fair to say that no one knows how all this will play out. The first battle is being fought over the defense authorization bill. The bill incorporates the increase in OCO, and the administration has threatened to veto it. In the end, however, the Democrats may allow it to pass since it does not actually provide money, only authorities (like pay raises). The major battles will then take place over the appropriations (spending) bills later in the summer and into the fall.
I see five possible outcomes:
- Grand bargain . This multiyear agreement would adjust discretionary spending, entitlements (social security, Medicare, Medicaid, et al.), and revenue (taxes) and put the country on a fiscally sustainable path but is the most difficult politically.
- President’s budget . The president proposed increasing discretionary spending by $74 billion above sequestration levels—half for defense and half for domestic—and paying for it with increased revenue (“tax increases” to the Republicans, “closing tax loopholes” to the Democrats) and with savings from health and immigration reforms.
- Republican budget . The Republicans held FY 2016 discretionary spending (defense and domestic) to sequestration levels ($499 billion for defense) but added $38 billion to the war funding (for an OCO total of about $90 billion). The Republican budget also proposed changes to entitlements—like Obamacare—and to future discretionary funding.
- “Murray-Ryan 2.0” . The original Murray-Ryan agreement of December 2013 (named after Senator Patty Murray (D-WA) and Representative Paul Ryan (R-WI) and formally called the Bipartisan Budget Act of 2013) reached a two-year agreement on discretionary spending. “Murray-Ryan 2.0” is shorthand for a similar, limited agreement—one or two years that sets discretionary spending between the president’s request and sequestration.
- Full-year continuing resolution (CR) . This is the stalemate outcome. If a fiscal year begins without a budget being passed, the Congress passes (and the president signs) a CR. This tells agencies to keep doing what they were doing last year until a new budget gets passed. CRs can cover one day or the entire year. DOD has had CRs ranging up to six months but has never had a full-year CR. A full-year CR would keep DOD funding at the FY 2015 level—about equal to sequestration level ($496 billion) but with more DOD OCO funding than the president had requested ($64 billion v. $51 billion) but less than the $90 billion of OCO in the Republican budget.
I recommend that readers participate in CSIS’s survey about what they think will happen. At the end of the survey, readers will see what the CSIS experts predict.
Q7: What does this mean in the long term for OCO and defense?
A7: War funding is in a very unstable place, and that is bad for national security. The Republican proposal is a one-year fix. Even if this year’s disagreement is resolved, the year-to-year decisionmaking on OCO means there is no stable and predictable level of funding.
Further, there is recognition that OCO should not continue as a separate, “emergency” activity forever. Some parts of OCO will decline automatically as troop levels in Afghanistan and Iraq decline. However, other parts won’t. DOD depends on OCO for about $20 to $30 billion of annual “enduring costs”—that is, costs that will continue after the troops are out of Iraq and Afghanistan, for example, activities in the Persian Gulf and the Horn of Africa. Pushing those costs into the base budget without an increase to the top line would disrupt a lot of other programs and, according to the administration, the military chiefs, and many commentators, require a change of strategy. Currently, there is no plan for handling these long-term costs.
The administration has said it will propose a long-term plan for OCO with the FY 2017 budget (submitted in February 2016), but it is unclear at this time what that plan might be or whether it will have a chance of getting enacted. The end of the Vietnam War provides a cautionary tale. In 1973 and 1974, a war-weary Congress severely restricted support to the South Vietnamese government. This had disastrous effects on South Vietnam’s ability to defend itself against the communist offensive in 1975. We don’t want to get into a similar position with our current Middle East commitments.
Q8: Is there any good news here for defense?
A8: Yes, the good news is that sequestration seems to be the budget floor. Few observers, and no elements of government, are proposing defense budgets lower than sequestration. That’s good because, when the current downturn began, a lot of analysts expected much larger reductions. They looked at the long-term historical trends in the defense budget, which rose during and then declined after the Korean War, the Vietnam War, and the Reagan buildup. Extrapolating those up and down cycles to the post-9/11 buildup predicted a defense budget declining to about $450 billion. Sequestration level is $499 billion. So the situation is not as bad as many analysts feared it might be.
Mark Cancian is a senior adviser with the International Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Previously, he served in the Office of Management and Budget (OMB).
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