Australia’s defence budget in the age of Covid-19: Room for a cut?
1 Jun 2020|

In the first post in this series, I noted that, so far, the government remains committed to the 10-year defence funding line it presented in the 2016 defence white paper. That funding line is likely to grow past 2% of GDP. In this post, I’ll look at what effect a budget cut could have if that commitment wavers.

Let’s first look at the planned trajectory of the defence budget. Over the remaining six years of the white paper decade, the funding line continues the healthy growth it has shown over the past six years.

Figure 1: The defence budget, 2011–12 to 2025–26 (A$ million)

Source: Department of Defence portfolio budget statements. Real baseline is 2019–20.

But that growth is not spread evenly across the three big subcategories of the defence budget: personnel; operating and sustainment; and capital investment and acquisitions. As the government’s repeated references to its $200 billion investment in defence capability would suggest, the capital budget is by far the biggest beneficiary of the growth. Even in real terms, the acquisition budget grows substantially.

Figure 2: Defence’s capital investment budget, 2011–12 to 2025–26 (A$ million)

Sources: Department of Defence portfolio budget statements and additional estimates statements. Real baseline is 2019–20.

That sustained growth changes the balance of the department’s budget. While there’s no perfect ratio between the big three, in most defence organisations capital is generally the smallest of the three and Australia’s is usually no different. The capital budget bottomed out in 2012–13 but has grown dramatically since then. If it achieves the trajectory laid out in the white paper it will come close to 40% of the total defence budget.

Figure 3: The balance of the big three, 2011–12 to 2025–26

Sources: Department of Defence portfolio budget statements and additional estimates statements; 2016 defence white paper.

I’ve suggested previously that that distribution could be hard to achieve. In short, as you spend more on equipment you need to spend more on people and operating budgets. If we look at the path of the big three, the proportion of capital seems to have stayed fairly constant over the past five years at around 30% of the budget. There may well be a natural balance or equilibrium that is hard to break.

With the department’s funding increasing, the suggestion that it should take a budget cut as a share of the Covid-19 financial pain might appear reasonable. I’m on the record as saying now is not the time to be reducing the defence budget—the government should actually be increasing it significantly—so what follows may appear as special pleading. But it’s helpful to understand the impact of a cut before one advocates for or against it.

The defence budget is emerging from a long period in which Australia enjoyed a post–Cold War peace dividend. Defence spending went from between 2% and 3% (and in some years even more) of GDP during the Cold War to less than 2% for 25 years, under governments of both sides of politics.

That level of funding resulted in the phenomenon described as ‘Defence’s broken backbone’: decaying facilities, equipment lacking spares, insufficient funding to train, lack of war stocks of munitions, and so on. The result was that readiness fell, impacting the Australian Defence Force’s operational capability.

That became clear in 2010 when the ADF didn’t have a single amphibious ship available in cyclone season. One of the most beneficial outcomes of increased defence spending is that the department has remediated much of the broken backbone. Nevertheless, a drive around any defence base will show there are still people working in facilities dating back to the middle of last century.

It’s useful to bear in the mind the maxim that strategy is the alignment of ends, ways and means. A coherent strategy is one in which we know what we want to achieve, know how we will achieve it, and have properly resourced it. If you reduce the resources, then you must adjust your goals; otherwise, strategic incoherence results.

So where could you cut? Reducing people is difficult. Getting rid of uniformed people is bad PR. Moreover, the future force is going to need substantially more people than the ADF currently has. Unmanned and autonomous systems will likely help in the long term, but not overnight. Short-term cuts to personnel are false economies when it can take years to train them at a cost of millions of dollars. Some ranks in some trades are already critically rare commodities.

It’s hard to see Defence further reducing its civilian numbers. They’re already at the lowest level in 20 years. The cost of public servants is only a small part of the defence budget, so cuts wouldn’t help much. Plus, getting rid of public servants often shifts work to the private sector as consultants and contractors are called in.

It’s always tempting to find savings in operating budgets, and despite many years of Defence finding savings through ‘shared services’, there’s no doubt that more can be done. But there’s not too much to be found in taking the scalpel to the budget for photocopying.

The vast bulk of the operating budget is in the sustainment of Defence’s systems (around $12 billion this year). Sustainment costs are trending upwards. That’s because new systems always cost more than the ones they are replacing. Always. It’s certainly possible to reduce sustainment budgets, but if it continues for any length of time it inevitably leads to the broken backbone. And there’s already pressure on the sustainment budget, as I’ll discuss in the next part of this series.

So that leaves the capital budget, which may look a tempting target. When governments need money, they often turn to Defence’s capital budget. But Defence’s investment program always plans on spending every single dollar, so if the capital budget is reduced, Defence will have to change the plan. The usual way it does that is to delay projects. Repeatedly delaying projects creates a ‘bow wave’ effect of deferred investment. That means existing capabilities stay in service longer, and new capabilities that are needed to meeting emerging threats aren’t delivered. Eventually that results in zombie capabilities that can’t be deployed because they are effectively obsolete and present unacceptable capability risk.

So, the government could cut the defence budget, but it will affect capability. The longer the cuts last, the more enduring the effect and the harder the recovery. The government would have to restore coherence to its strategy by realigning ends, ways and means.

That doesn’t mean the current plan is perfect and can’t be improved. Indeed, Defence Minister Linda Reynolds has directed the department to review it. In a future post, I’ll look at ways Defence could deliver better value for money and get more bang for its buck, particularly considering what we’ve learned from the Covid-19 crisis.