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What will happen to the US defence budget?

The US Department of Defense (DoD’s) USD740.5 billion discretionary defence budget request for fiscal year (FY) 2021 is unlikely to be affected by the outbreak of Covid-19, but responses to the virus and its economic effects are likely to increase US public debt and potentially hit budgets in the longer term.

Within nine years, annual interest payments on publicly held federal debt have been projected to eclipse current defence outlays by FY 2030, potentially reaching USD755 billion annually, according the White House’s Office of Management and Budget. With greater debt, that time may now come sooner.

The short-term defence budget impact in the United States is likely to be minimal, but outlays are expected to be somewhat reduced as many large military exercises are cancelled and contract awards or equipment acceptances are delayed. Most of these activities and outlays can be expected to return to normal, barring another significant change.

In the longer term – 5–10 years – there could be more significant budget pressures as US public debt grows. To recover from Covid-19’s economic effects, the Donald Trump administration is likely to propose some sort of ‘bailout package’ that could include stimulus funding as well as tax cuts to help the US emerge from a likely recession.

According to projections from Janes Defence Budgets, the net effect over time is that the discretionary budget could be ‘squeezed’ (reduced as a percentage of the total government outlay) by about 0.63% per year, as of the 2021 budget request. Due to increases in both mandatory spending and the high growth of interest on the debt of 7.5%, the discretionary portion is expected to shrink from about 30% to 23.7% on the current trajectory path within 10 years. This can accelerate given increased fiscal deficits year-on-year.

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