Jim Molan wrote recently that the ADF is '...being pushed into a state where its capabilities are at, or will soon be at, a state from which they will not be able to be revived in any reasonable period of time—a situation of terminal decline'. Regular readers of this blog will know that I have no reluctance to argue with Jim, but in this case I think he's not too wide of the mark. For the amount the government spends, I don't think we get much of a return in terms of military options available.

It's not too hard to find examples that support Jim's contention. Navy has managed to keep a frigate on station in the Gulf for over a decade, but has conspicuously failed to maintain an acceptable level of capability in its amphibious and submarine fleets. Army and Air Force have both managed to do the jobs they've been called upon to do, but recapitalisation of the air combat fleet ($15 billion) and protected mobility for land forces (over $10 billion) at the same time as a new submarine fleet (potentially $30–40 billion) and replacement frigates (over $10 billion) is going to be a very big ask in the future fiscal environment we're likely to see.

It's not too hard to see how we got to this point. Defence spending has rarely increased at a rate that will allow the quantity and quality of capability to be maintained. As Mark Thomson's analysis has shown, maintaining military capabilities requires annual funding increases of about 2.5% above inflation. The 2009 Defence White Paper promised to do that (for a while) but never delivered on it.

As Jim rightly observes, a decline in capability, capacity, or both is inevitable if the funding isn't there. And the rising unit cost of military platforms doesn't help. It's meant that the numbers able to be fielded have steadily fallen over the years. For example, the Army had 143 Centurion tanks which were replaced by 103 Leopards, which in turn gave way to 59 Abrams. The RAAF and RAN operated over 400 combat aircraft between them in 1960. Today the RAN's fast jets are a distant memory and the RAAF is down to 71 'classic' Hornets and 24 Super Hornets.

When we argued about force structuring a few months back, Jim and I found ourselves agreeing that the overarching challenge is to align strategy and resources, and shape the force structure accordingly. Jim's preferred policy prescription is the development of a cogent strategy, preferably with increased spending to arrest the decline. (Jim suggests around 2% of GDP would do the job—a long way from where we are today.) That's certainly a workable solution—if the government and its successors in perpetuity are willing to provide the required funds. But it's not the only way.

History and the current fiscal situation suggest strongly that pursuing that top-down strategy is unlikely to be an appealing option for future Australian Governments, especially if it comes with a big price tag. So we need to find a different approach, by accepting the resource constraints as more or less fixed (in the absence of an external shock that changes the calculus) and find a strategy that suits the force structure that the funding envelope can afford.

That approach isn't likely to appeal to the Department of Defence or to those of us who make a living pontificating on strategic matters, because it's somehow less intellectually 'pure'. But I'd argue that we need to deal with the world we have rather than the world we'd like to have. If Jim's right that the ADF is in terminal decline, then drastic treatment might be called for.

We have a very good example available to us of setting strategy to deal with a resource limited environment. We need only to look across the Tasman. Our New Zealand neighbours have taken a deep breath, weighed up their resources and strategic circumstances and have taken some tough decisions, at the expense of some military sacred cows. The most visible such decision was deciding that it could do without fast jets.

Instead, NZ has decided that it will keep the ability to police its maritime jurisdiction (with only limited warfighting capabilities at sea), do long range airlift, participate in peacekeeping and stabilisation operations in the South Pacific (and lead small ones), make small contributions to US-led and UN mandated operations further afield—and not much else. The result is a force structure that is modest but well-suited to the equally modest strategy it supports.

One objection to this argument as a role model is that NZ can always rely on Australia for its defence. My response to that is twofold. First, why shouldn't they plan on that basis? It has the merit of being true because of geography and the realities of the scale of resources the two counties can bring to bear. And, second, we have a similar luxury of a bigger friend with more capability in the form of the United States. We mightn't like to look so obviously calculating, but the New Zealanders have mostly learned to live with it.

In my next post I'll tease out what these ideas and observations could look like applied to Australian strategy making.

Andrew Davies is senior analyst for defence capability at ASPI and executive editor of The Strategist.