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2% of GDP: just a hop, skip and a jump away

Posted By on May 9, 2018 @ 11:00

The government may be planning to get into surplus in 2019–20, a year earlier than it looked like last year, but that doesn’t mean it has also brought forward its commitment to increase the Defence budget to 2% of GDP by 2020–21. That might be asking a little too much. So the main news out of this year’s budget is that the government is standing by its 2016 Defence White Paper commitment.

So 2% is now only a hop, skip and a jump away. The hop from last year to this was a healthy if not spectacular nominal increase of $1.2 billion, up to $36.4 billion for Defence, which translates into a 1.4% increase in real terms. Next year’s skip is slightly better, but that will still leave a big jump of nearly $3.4 billion, or a 6.2% increase in real terms, to hit the magical 2% in 2020–21.

Generally there’s not a lot of new news in Defence budgets. This year’s is no exception. In terms of money moving around, Defence got an extra $500 million late in 2017–18—probably to help out Treasury with balancing the broader government’s books—which Defence has to pay back over the forward estimates. With its big US-made projects (like the Joint Strike Fighter (JSF) and P-8A maritime patrol aircraft) Defence can do this simply by bringing forward a scheduled payment to the US from this July into June.

With the Australian Signals Directorate becoming a statutory agency, its funding of $827 million has been removed from Defence’s tally and doesn’t show up in Total Defence Resourcing. But the government and Defence still count that money towards the 2% target (which is fair enough).

In terms of uniformed people, Defence’s allocation appears to be unchanged from the white paper plan and increases by nearly 600 to 59,794 this year. Whether it can achieve that target is another matter, since in actual terms it missed hitting its 2017–18 allocation by about 600 people, with the biggest shortfall being in the Navy. In essence the uniformed workforce will need to increase by 1,200 this year to make up for last year’s shortfall.

Defence civilian allocation is around 2,000 people fewer that its white paper target of 18,200—but before public servants start having heart attacks, Defence’s advice is that the change is entirely due to ‘machinery of government’ changes—in other words, taking ASD’s people (and some others) out of the Defence column. Without a detailed accounting we’ll have to take their word for it.

Funding for operations this year is $750 million. With the exception of a $150 million decrease in Operation Okra (Iraq), presumably due to the F/A‑18s coming home, that’s about the same as last year.

As ASPI has previously noted, there has been a significant decline in transparency in Defence, particularly in its capital program. Defence isn’t reporting project approvals in the annual report or additional estimates statements in anything resembling a comprehensive fashion. And now it’s no longer including a list of planned project approvals for the coming year in its portfolio budget statement (PBS). So we can’t know what approvals are coming up or whether they’re actually approved. That’s not to mention that there’s no coverage at all of the information and communications technology (ICT) program. It’s really an abysmal situation.

One good thing about this year’s Defence PBS presentation is that the capital program is now better aligned with Defence’s Integrated Investment Program. The PBS now shows only major capital equipment (the biggest), facilities, ICT and minor projects. The ‘other capital’ line has been moved into sustainment and operating costs, where it fits better.

But even taking the removal of ‘other capital’ into account, the capital program falls short of last year’s predictions. This year’s total, for example, is more than $700 million short of where last year’s PBS said it would be—and the figures for major capital, facilities and ICT individually are all short of last year’s predictions. The same goes for the next two years.

Exchange rate adjustments don’t seem to be significant enough to account for the reduction in the capital budget either. With the sustainment budget up from where last year’s PBS predicted it would be, it’s possible that Defence has needed to move money from capital expenditure to meet rising sustainment costs.

That said, the capital program is still showing a very healthy rate of increase, averaging real double digit percentage increases over the forward estimates. Lots of money is continuing to go into fixing Defence’s neglected facilities. We’re a long way from the dark days of 2012–13 and 2013–14 when the capital budget crashed.

But Defence is going to need all of those investment dollars. This year, for the first time, a single Defence project will hit $2 billion in annual cash flow, with the JSF program spending $1.8 billion on equipment and over $200 million on facilities. Considering that Defence still needs to spend another $10 billion or so to get its 72 aircraft into service by mid-2023, it’s probably going stay around that level of cash flow for another four years.

And the shipbuilding program, the monster that potentially will eat everybody’s lunch, has barely begun to get hungry. Between them, the future submarine, future frigate and offshore patrol vessel projects will spend nearly $750 million this year even though the submarines and frigates are still in the design stage and won’t cut steel for several more years. So as construction starts, that number is going to get many times bigger.



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