Andrew Davies has a good stab at the nexus between government revenues and the defence budget in his recent post ^[1], but I think he might be giving the government a bit too much latitude. The government’s story at the moment, and that of most of the commentators, is ‘we would love to fund defence but unfortunately, the cupboard is bare’. But the cupboard is bare because the government has made its spending choices and defence wasn’t among the things it considered important.

Consider the carbon tax. This was projected to raise some $25 billion over the forward estimates. Of that $25 billion, $15 billion is being applied to ‘household assistance measures’, including $8 billion in income tax cuts, another $10 billion is going to ‘support for business’, while some $5 billion is being spent on various green measures.

But had defence been a high priority, there is no reason that spending could not have been on defence. And exactly the same applies to the Minerals Resource Rent Tax, though how much that will raise is unknown. True, if the government had even more money, it might throw defence a bone, but are we even confident of that? Instead it might bring the Gonski education report ^[2] spending forward or speed up the deployment of the National Disability Insurance Scheme ^[3].

Now, I think this ultimately comes back to the point Mark Thomson made in his budget brief—the September 11 effect has worn off. Imagine if just before the carbon tax came in, there had been another spectacular attack. Then spending priorities would have been very different. But at the moment, the judgement is that there are absolutely no votes in defence. I think the government also believes, but does not say, that in any event, whether we do or do net get the new gear defence wants (and that was promised in the 2009 White Paper) makes no difference at all from a national security point of view, much less whether we get it quickly or slowly.

And who knows, on some of that, they may be right—Hugh White, for instance, was scathing about the AWDs ^[4]. And there’s a lively debate on the nature of the future submarine ^[5] fleet. But there is still the question of whether they are cutting back sensibly or just allowing it to happen more or less randomly—which is certainly the impression one has. Moreover, it is difficult to see how this relates to the Defence Strategic Reform Program ^[6], which was really premised on a predictable path of defence outlays.

In any case, this is just a long winded way of saying ‘Andrew, don’t buy the constraint story too readily’. Yes, they are constrained, but not as much as they claim (viz the decision to cut income taxes to offset the carbon tax). And it is when people are constrained that you see what they think is important, just as when families feel the pinch they scrap the luxuries. For the moment, defence is plainly in the luxury category.

Henry Ergas is a senior economic adviser, Deloitte Access Economics, and professor of Infrastructure Economics, University of Wollongong.