Defence spending and industry policies must reflect dangerous strategic circumstances
30 Aug 2022|

Dominating the debate on Australia’s defence-capability development is a long list of expensive new weapons to buy. But there are two broader issues to consider: the likely cost of development substantially exceeding the Defence Department’s planned appropriations and a dearth of ideas on how additional funding can be found against the backdrop of Australia’s high public debt and poor productivity performance. Some of the implications of those issues for the defence strategic review are examined in my Strategic Insight report released today.

Affordability may ultimately determine the outcome of the review—remembering the adage that ‘strategic policy without money is not strategic policy’. In that context, the government appears reluctant to extend defence expenditure much beyond 2% of GDP for an economy whose prospects are difficult to predict.

The obstacles to Defence securing additional financial resources begin with intense competition from other public-policy priorities ranging from health care to environmental protection. They extend to whether the department’s existing budget is insulated fully from the effects of inflation, the real cost growth that accompanies an inexorable shift to more advanced weaponry, and the additional costs of stockpiling materiel to meet the demands of a more challenging strategic environment.

Adding to the hurdle of attracting additional funding is the high cost of potential new weapons programs. Those are led by the proposed acquisition of a fleet of nuclear-powered submarines. However, they extend to the possibility of purchasing of a bridging fleet of conventionally powered submarines, enhancing the firepower of offshore patrol vessels, and providing the navy with more destroyers.

Beyond the naval arena, any attempt to add to the Australian Defence Force’s arsenal by purchasing B-21 bombers and long-range land-based missiles would also be expensive. The money already set aside for the manufacture of missiles in Australia seems little more than seed funding for a more costly venture if domestic sourcing is to have an appreciable effect on defence self-reliance.

There are few signs of a willingness to offset outlays on those and other programs beyond Defence’s current financial reach by altering procurement of the Hunter-class frigates or infantry fighting vehicles. Expectations of job creation for both initiatives have already been ignited.

None of that necessarily precludes a significant increase in funding for Defence. But the obstacles to bolstering the department’s budget make the pursuit of value for money imperative across the capability spectrum. At the very least, a higher level of resourcing in response to the nation’s more immediate strategic needs should be accompanied by efforts to save money later.

Avoiding a significant price premium for preferring the domestic over foreign supply of major weapons platforms and systems—through a more targeted approach to Australian industry participation—might be among the few options available to Defence to boost its purchasing power. Conventionally powered submarines, destroyers and military vehicles are examples of where Defence should gain by accessing whatever spare capacity overseas suppliers possess.

As my report explains, that option need not detract from Australia’s independence or economic welfare. Available data indicates that much can be achieved if at least part of what’s saved can be channelled into other areas with a domestic focus. Those include the critical industrial capabilities that must be kept onshore for military–strategic reasons, technologies sponsored under AUKUS, and critical technologies in the national interest many of which are oriented towards the defence effort. To coordinate and expedite such a broad array of activities, the creation of an Australian version of the US Defense Advanced Research Projects Agency, or DARPA, might help.

If carefully administered, redirected domestic investment can deliver the spillovers of new knowledge that drive economic expansion. It can strengthen Australia’s role in international strategic partnerships focused increasingly on trade in military technologies—but dependent on reciprocity. Most reinvestment can commence within years rather than decades and favours innovative small to medium-sized enterprises. South Australia is well placed to attract much of the funding.

More broadly, avoiding price premiums for some materiel and putting what’s saved to better use could bolster the military preparedness and industrial productivity that jointly underpin Australia’s long-term security—while allowing necessary commitments to domestic assembly to be honoured. It could facilitate an increase in military spending now by demonstrating to taxpayers the enduring importance placed by Defence on avoiding waste, not only by ensuring the weapons platform and systems purchased are functional but ensuring those items are sourced in the most cost-effective manner. The economy should gain more jobs faster across a larger, more efficient and increasingly diverse advanced manufacturing base.

Realising those benefits depends on avoiding the defence industry policy pitfalls of the recent past. A short economic history of the cancelled Attack-class submarine program, provided in my report, points to where improvements can be made. When the current policy was formulated, Australia enjoyed a relatively benign strategic environment and a favourable fiscal climate. Much has changed since then. Linking an updated capability plan to an outdated industry policy is, at best, a high-risk venture. More realistically, it represents a path to disappointment on both fronts.

The work of the defence strategic review, including input from the nuclear-powered submarine taskforce, is an ideal opportunity to reset a poorly structured approach to defence industry development fuelled by misplaced optimism and geared to a bygone era. Tight reporting timeframes may prevent detailed solutions from being devised, especially by the review team. Nonetheless, establishing a set of guiding principles for reform should be achievable.