Military budget meets Canberra’s funding promise
If there’s one thing people think they know about the Defence Budget, it’s that the government set it at 2 per cent of GDP. But it didn’t.
It’s funny how certain numbers have staying power. People remember them, or at least they think they do. And if there’s one thing people think they know about the Defence Budget, it’s that the government set it at 2 per cent of GDP.
But it didn’t.
In its 2016 Defence White Paper, the government deliberately didn’t link defence funding to any particular percentage of GDP, to avoid it fluctuating with the vagaries of economic growth rates.
Rather, it committed to a 10-year funding line printed in black and white in the White Paper. True, the government did also promise that the funding line would hit 2 per cent of GDP by 2020-21, but it wasn’t locked there.
In fact, even before the COVID-19 pandemic hit, that funding line was growing faster than GDP. Not only was it on track to meet the government’s commitment to reach 2 per cent by 2020-21 but it was likely going to comfortably grow beyond it to about 2.2 per cent over the next few years.
Of course, once the pandemic hit both the economy and the government’s bottom line, questions were raised about the firmness of the government’s commitment to that generous funding model.
Ministers asserted that it was committed — our strategically uncertain times required it. Nevertheless, if the government was wavering, COVID-19 offered it a get-out-of-jail card. But the government didn’t use it.
In the 2020 Defence Strategic Update that it released at the start of July, the government reaffirmed its commitment to the White Paper funding model, and indeed, extended it for a further four years out to 2029-30. It was a remarkable reaffirmation of its commitment to funding Australia’s defence. That, in a nutshell, was the big defence news this year.
The 2020-21 budget does flesh out some of the details. Despite a deficit ballooning out to $214bn, Defence gets what was promised in the strategic update — $42.7bn.
With the budget that far in the hole, mooching a few billion out of Defence doesn’t make much difference to the big picture. That gets defence spending to about 2.19 per cent of GDP, due to the COVID-19 induced recession.
But in the longer term there are risks to the Defence Budget.
The first is that beyond this year, the budget continues to grow as a percentage of GDP, potentially reaching 2.4 per cent — although that, of course, depends on the rate of economic recovery.
The government makes some optimistic predictions in its budget papers, but a prolonged recession would drive that percentage even higher. And that makes defence a tempting target, particularly as the 2 per cent number has acquired a certain talismanic power as the “right” number for defence spending.
Of course, the right number actually depends on your strategic circumstances — ask Israel what the right number is and you’ll get an answer much bigger than 2 per cent. But as the difference between the defence budget and a hypothetical 2 per cent of GDP line grows beyond $3.7bn this year, potentially to as much as $10bn per year, there will be voices questioning whether that spending should be the government’s highest priority.
Whether the competing claims are for other areas of public spending, for tax cuts or for reducing the deficit, there could be other calls on defence’s dollars.
It will be even more tempting if Defence can’t spend the money. Much of the budget increase is being funnelled into the acquisition budget.
But ramping up defence projects can be agonisingly slow.
Defence has averaged an increase of about 5 per cent a year in acquisition spending since the White Paper; this year the acquisition budget shows a planned 27 per cent increase, an additional $3bn getting it to $14.2bn. That just doesn’t seem achievable.
The future submarine and frigate programs are still a few years away from the start of construction so they can’t absorb that kind of money.
Even programs that send a lot of money offshore to established US production lines, such as the F-35 Joint Strike Fighter, probably won’t be able to spend much more due to the impact of COVID-19 on American supply chains. The government would love to be able to invest some of that money in regional Australia as a form of COVID-19 stimulus spending.
Regional Australia can probably use some of it building runways and fuel storage, but it won’t be able to start making sophisticated military equipment overnight. That gets us to a related risk.
While the government is clearly interested in seeing its defence spending deliver an economic stimulus, it also wants to see actual military capability get delivered.
That’s where Defence needs to find ways to do more, faster.
The disjuncture between the government’s high-level assessment of our strategic circumstances in its July update, and what Defence is actually doing to deliver the military capabilities necessary to address those circumstances, is glaring.
The update forthrightly says we can no longer rely on 10 years of warning time, even for an attack on Australia.
Yet according to Defence’s investment program, the government’s $270bn investment in new capability doesn’t get it a new combat vessel for 10 years.
With the third air warfare destroyer now delivered, it’s about 10 years until the first future frigate enters service, and then its classmates follow on a pedestrian two-year drumbeat.
The first future submarine is still 14 years away. What was the point of saying we can’t rely on warning time if it doesn’t have the effect of accelerating Defence’s plan to get new capabilities into service?
If Defence can’t deliver, governments will lose patience. And Defence could lose its money.
Dr Marcus Hellyer is ASPI’s senior analyst for defence economics and capability.