AVASCENT ANALYTICS REVIEW
By Michael Barber, Hamilton Cook, Jessica DiPaolo, Matt Vallone
In the recently-released FY 2019 Future Years Defense Plan (FYDP), the Department of Defense (DoD) has projected rapid near-term expansion of spending, an increase of just under 11% from FY 2017 to FY 2018 and an additional 2.3%  from FY 2018 to FY 2019. After that, the Department forecasts steady growth from FY 2020 to FY 2023. The ten-year forecast for overall national security spending sees a similar trend out for the full ten-year window of the budget request.
Avascent’s view is that this forecast is both too pessimistic in some areas and too optimistic in most. As we will lay out below, we believe that spending in the near-term will likely be higher than what is found in the FYDP, but lower once DoD gets to FY 2023 and beyond.”Avascent’s view is that this forecast is both too pessimistic in some areas and too optimistic in most. As we will lay out below, we believe that spending in the near-term will likely be higher than what is found in the FYDP, but lower once DoD gets to FY 2023 and beyond. In the near-term, the passage of the Bipartisan Budget Act of 2018 makes us more optimistic about spending in FY 2020 and FY 2021 than simple inflation growth above the FY 2019 levels. First, Congress will need to revisit spending for FY 2020 because the caps from the 2011 Budget Control Act (BCA) remain in place.
Given the recent shift among conservative Congressional Republicans towards more accommodating positions on spending, the task of the White House rounding up the votes for deals to increase discretionary spending seems less daunting than it did even a year ago. Even should there be a Democratic House of Representatives after the 2018 midterms, it is hard to see Congressional Republicans threatening shutdowns over spending legislation as long as there is a Republican in the White House.
In the longer-term, there is a significant risk that defense spending will face another downturn, as it is rare in historical defense spending for a buildup to continue more than five or six years.”In the longer-term, there is a significant risk that defense spending will face another downturn, as it is rare in historical defense spending for a buildup to continue more than five or six years. There are two scenarios where defense spending comes under pressure. The first is economic. As interest rates rise, the cost to maintain the debt increases accordingly. This growth can and will put pressure on other government spending as the debt continues to grow. Annual deficits likely will exceed $1 trillion within the next few years if current policies are continued, creating further pressure on government borrowing rates.
A second risk to defense spending is the presidential election in 2020. While historically incumbents are more likely to win than not, should President Trump lose re-election, Congressional Republicans will likely return to objecting to any significant increases in spending, making it difficult to increase defense and non-defense spending alike. The combination of these two risks makes us believe that sometime in the early 2020s, government spending will again contract and defense spending will not be immune, making our outlook for FY 2023 and beyond significantly more pessimistic than the current budget’s forecast.
U.S. Air Force
As the Pentagon turns its attention to near-peer competitors like Russia and China, next generation development programs will take the forefront of the USAF priorities. However, pressure to develop next generation technology will likely crowd out current acquisitions, as higher-than-anticipated R&D costs constrain the Air Force’s defense budget. The US Air Force needs to strike a balance between costly acquisitions, burgeoning R&D programs, and legacy aircraft upkeep, all of which threaten the service’s ability to maintain acceptable levels of readiness.
The US Air Force (USAF) is keen on developing advanced systems and weapons to ensure continued air superiority in contested environments beginning in 2030. This means focusing heavily on near term R&D programs that develop next generation capabilities, ranging from the next fighter jets and bombers to advanced space systems. The charts take into account procurement and R&D funding going towards next generation capabilities, and how much growth these programs are expected to see in the next five years. These charts do not include unclassified spending
The Army’s FY 2019 budget aims to close major platform shortfalls in the near-term, and start a set of R&D investments to enable major acquisitions in the outyears. However, there is high risk that the Army will not only struggle to shepherd so many programs through the acquisition process. The Army’s record on major system developments since the 1980s is pockmarked with programs terminated prior to production. This means there’s a good chance that legacy platforms or those ready for production in the near-term will form the basis of the Army’s forces (and budget) for a long time to come. New start development programs like Future Vertical Lift could be in for a tougher budget climate when they transition to production.
The U.S. Navy is stuck between force structure demands, the realities of shipyard capacity, and budgets. On one hand, a highly-publicized and congressionally supported 355 ship plan meshes well with the combat needs of a Navy that is constantly present in multiple theaters. On the other hand, we believe that the boost in shipbuilding will be difficult to sustain, as budgets will struggle to keep up with planned ship orders. Defense planners should expect U.S. Navy budgets to remain a priority in the next four years, but for acquisitions to slowly diverge from the aggressive shipbuilding plan proposed by leaders, particularly in a few key programs to allow for Columbia-class submarines to be ordered as planned.
The U.S. Navy’s 30-year Shipbuilding Plan reflects budgetary and Congressional support for ship construction and sustainment, focusing on aggressive growth and service life extensions. By law, it must lay out a plan that commits to an eventual 355-ship Navy. However, when expected retirements are factored into the equation, the plan itself boosts the battle force inventory to only 313 ships by 2028, and an ambitious 335 ships by the end of the 30-year window. Even at the most optimistic view of budget conditions, based on current trends a 355-ship plan is unrealistic.
 Avascent research using DoD documentation
ABOUT THE AUTHORS
- Michael Barber is an Analysis Manager with Avascent Analytics, where he guides the development, refinement and maintenance of Analytics’ suite of products. Additionally, Michael assists with Avascent’s in-depth representation of the US DoD budget, focusing on the U.S. Navy. Michael is the lead analyst tracking procurement and defense budget trends through both macro drivers (economic, security, political) and specific spending on individual platforms and systems for the following countries: Saudi Arabia, Oman, UAE, Kuwait, and France. For more information, contact: email@example.com.
- Hamilton Cook is a Senior Market Analyst and Aviation Subject Matter Expert with Avascent Analytics, where he specializes in airborne platforms and systems, simulation and training, and the US Army. In addition, Hamilton has been quoted in media regarding US Army aviation, long-range fires, and budgetary policy. Previously, Hamilton worked in Avascent’s consulting division, where he specialized in military platforms as well as services price-to-win. For more information, contact: firstname.lastname@example.org.
- Jessica DiPaolo is a Market Analyst at Avascent Analytics, focusing on European and North American defense markets. Jessica also analyzes trends and drivers affecting priority programs for the US Air Force. Prior to joining Avascent Analytics, Jessica worked as a Research Associate for the Transnational Threats Project at the Center for Strategic and International Studies. For more information, contact: email@example.com.
- Matt Vallone is the Director of Research & Analysis in Avascent Analytics, where he leads a team of defense and space-focused analysts in producing the content for Avascent Analytics products and analysis. Prior to working at Avascent, he worked as the Legislative Director for Congresswoman Carol Shea-Porter in the House of Representatives. For more information, contact: firstname.lastname@example.org.
Avascent is the leading strategy and management consulting firm with more than 30 years’ experience supporting corporate leaders, investors and government stakeholders in the aerospace, defence, security, and public services markets. Working with corporate leaders and financial investors, Avascent delivers sophisticated, fact-based solutions in the areas of strategic growth, value capture, and mergers and acquisition support. With deep sector expertise, analytically rigorous consulting methodologies, and a uniquely flexible service model, Avascent provides clients with the insights and advice they need to succeed in dynamic customer environments.