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Defense spending could rise, Wall Street analysis say

Wall Street sign on Wall Street (JSquish/WikiCommons)

Rising inflation and Congress’ delay in passing a defense spending bill could lead to Pentagon budget increases in the years to come, analysts say.

It’s an outlook that has changed dramatically over the Biden administration’s first 10 months in office. One year ago, analysts and defense watchers predicted a flat-at-best spending scenario for the Pentagon.

But that has changed as Congress has signaled its willingness to increase the Pentagon’s fiscal 2022 budget request amid a desire to keep the U.S. ahead of China’s military developments . Three of four Pentagon oversight panels added tens of billions of dollars to the Biden administration’s $715 billion Defense Department spending request. (The request totals $740 billion when defense-related spending at other agencies is added.)

On Tuesday, the House approved the 2022 defense policy bill; it authorizes $768 billion for defense, $28 billion more than the White House requested. The National Defense Authorization Act is expected to pass in the Senate.

Investor expectations “were that we are going to see a defense budget that was flat and then going to potentially be pretty dramatically cut,” Bank of America Merrill Lynch analyst Ronald Epstein said Wednesday during Defense One Outlook 2022. “That’s not happening.”

For now, Congress has passed a continuing resolution that freezes government spending at fiscal 2021 levels through February. At that point, lawmakers would have to pass an appropriations bill or another CR. While a full-year CR could hamper military spending and delay projects, it could also lead to a large plus-up to the Pentagon’s fiscal 2023 budget.

“If you have a full year of CR this year, somehow the administration’s ask has got to make up for that—and then you’re kicking a ball to Congress that’s got inflation in it, some sort of makeup for the previous year and then it’s an election year,” Epstein said. “So both sides are going to be very willing to plus-up things.”

And while rising Inflation—particularly if it continues in the months and years ahead—could drive up weapons costs, it’s becoming increasingly likely that Congress, or the Biden administration might just ask for more money instead of cutting planned buys.

“It looks like from the bills that are being proposed, it seems like deficit hawks are nowhere to be found,” Morgan Stanley analyst Kristine Liwag said during the Defense One Outlook 2022 panel. “It seems like the probability, in terms of just plussing up the budget, is more likely than cutting equipment volumes.”

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