Last Monday, the US government released its budget proposal for 2020, entitled ‘A budget for a better America’. It highlights the key priorities for the executive but, just like any budgetary plan, there are winners and losers and it’s clear in this case who those two groups are: Defence is the clear winner and the Medicare and Medicaid health programmes are the clear losers.
The US administration is proposing to invest a staggering $7.7 trillion into defence between 2020 and 2029 inclusive. This exceeds the entire budget deficit over this period which is $7.5 trillion. Another way of putting this is that the entire US budget deficit is tantamount to total US defence spending. The defence proposal includes a continued systematic modernisation of the US armed forces and their equipment as well as the creation of the new US Space Force (USSF) which will become the sixth branch of the US armed forces. It also includes substantial improvements to national cyber security systems too. If approved, it is likely that this investment will prove beneficial for the equity prices of US defence companies and their affiliates.
How is the extra defence expenditure to be funded? Essentially, it will be through non-defence expenditure cuts, US increased borrowing and a projection of sustained GDP growth. All three are controversial.
Non-defence expenditure cuts are projected to total $2.1 trillion over the next 10 years. The majority of this burden falls on Medicare (health care for the elderly) and Medicaid (health care for low-income groups). To a lesser extent other department budgets are to be cut too, including education, general services administration and various independent agencies. Some might say such severe cuts, especially to the Medicare and Medicaid programmes, is unfair and misplaced.
The defence expenditure is expected to be funded by growing tax receipts from a continuously strong US economy over the next ten years. According to the budget proposal, real GDP is projected to grow continuously by about 3% over this period. Most economists would agree this is an incredible assumption and unlikely to be sufficient to fund the defence spending as forecast.
Even if we accept these unrealistic growth projections, the Federal debt is still expected to increase by $ 7.5 trillion over this period (from $24 trillion to $31.5 trillion). We can therefore expect a great deal of Treasury issuance to occur and this will be unwelcome for US Treasury investors.
Congress, however, is unlikely to pass this budget as the proposed cuts to healthcare are likely to prove intolerable to Democrats. It is somewhat puzzling as to why this budget contains the proposals it does.
So what’s the process now? Congress has until June 30th to send their proposed Appropriation Bills to the President. From here it has ten days to respond. Appropriation Bills must be agreed and passed before September 30th 2019 or no new budget for 2020 will be adopted and the existing budget will be re-applied.