If President Trump’s promise to increase defense spending comes to fruition, it would sharply reverse the trend of the past five years—and have important implications for the outlook on US growth and inflation.
TRUMP’S NATIONAL DEFENSE PLAN
President Trump has promised an ambitious program to rebuild the US military. His plan includes modernizing US nuclear weapons systems, investing more in cybersecurity, enlarging the US Navy’s fleet and increasing the number of US Air Force fighter aircraft. Military personnel levels would also grow: Trump envisions adding more than 100,000, according to some estimates.
The details of Trump’s first Pentagon budget is part of the overall budget he’ll submit to Congress in late February or early March. The actual funding request for the current fiscal year (which ends September 30) must be completed by April 30—that’s when the current legislation funding the military budget is set to expire. More important, Trump’s blueprint for the Pentagon budget could set the baseline for defense spending for at least the next four years.
The President’s military expenditures could be at the low end of what some in Congress are proposing. For example, Senator John McCain, who chairs the Senate Armed Services Committee, recently released a white paper on defense spending, Restoring American Power. McCain argues the US has underinvested in the military for years, and that it’s now vital to substantially increase funding for the Pentagon. His plan calls for a US$640 billion defense budget for fiscal year 2018, which is US$58 billion above the current budget baseline. Moreover, McCain’s defense plan urges an additional US$430 billion in military spending over the next five fiscal years.
DEFENSE SPENDING PATTERNS: UNLIKE THE REST
Defense spending patterns are unlike other federal programs in that they’re neither cyclical nor countercyclical. They’re usually based on military and political strategies, as well as the country’s ongoing readiness to respond to or engage in global encounters. In the past 50 years, we’ve seen three large defense spending programs in the US (Display), according to historical gross domestic product data.