Is the money for Defence’s new force structure old or new?

The big question heading into the defence strategic update that Prime Minister Scott Morrison launched yesterday was what impact the Covid-19 crisis would have on the defence budget. The answer is none whatsoever. Ministers had said that despite the crisis, the government was committed to the funding model set out  in 2016 defence white paper. The government has now put that down on paper.

To recap, in the 2016 white paper the government provided a 10-year funding line that would not change, regardless of fluctuations in GDP. Granted, the defence budget would hit 2% of GDP in 2020–21, but it wasn’t pegged mechanically at that level beyond then. In fact, even before the double whammy of bushfires and Covid-19, it was looking like the defence budget would hit around 2.2% of GDP towards the back end of that 10-year funding model. Depending on the size and duration of the hit to the economy caused by Covid-19, the funding line could reach 2.4% of GDP even if the Defence Department didn’t get a single dollar more than the government promised in 2016.

As I’ve noted before, if the government changed its policy and pegged the budget strictly at 2% of GDP, Defence would take a massive funding cut in coming years, rendering its force structure plans unachievable.

So those who favour a robust defence force will be pleased to see that the 2020 update preserves the 2016 funding model out to 2025–26 and extends it for a further four years. As table 1, shows, the new model is virtually identical to the old one out 2025–26. If we extrapolate the old model for four more years at the same rate of growth shown in its last three years, we can see that it’s virtually identical to the additional four years provided in the update. In fact, over the 10 years, the two models are within 0.14% of each other.

Table 1: 2016 white paper funding model versus 2020 update funding model

2020–21 2021–22 2022–23 2023–24 2024–25 2025–26 2026–27 2027–28 2028–29 2029–30
2019–20 budget/2016 white paper (A$m) 42,151 46,037 50,182 52,877 55,733 58,742 61,914 65,257 68,781 72,496
Nominal growth rate (%) 7.2 9.2 9.0 5.4 5.4 5.4 5.4 5.4 5.4 5.4
2020 strategic update (A$m) 42,151 46,037 50,170 53,318 55,567 58,175 61,239 64,639 69,986 73,687
Nominal growth rate (%) 7.2 9.2 9.0 6.3 4.2 4.7 5.3 5.6 8.3 5.3

Note: Italicised figures represent a hypothetical projection of 2016 white paper funding model.

So, in short, despite the massive budget deficit caused by the government’s Covid-19 stimulus spending, there has been no reduction to the planned defence budget.

Does that mean there’s no ‘new money’? Well, yes and no. It’s the same funding model as before, so there’s nothing new there. But as shown in table 1, the funding line grows at a robust rate that’s highly likely to exceed inflation, so as we go through time the defence budget will grow in real terms. For example, the update confirms that the defence budget will grow in nominal terms by 7.2%, 9.2% and 9.0% over the next three years. What other portfolio can boast such largesse? Near the end of the decade, the growth isn’t as strong, but it should still comfortably exceed inflation.

The question is, will this funding be enough to afford the force outlined in the new force structure plan that accompanies the strategic update? The government appears to have realised that the best defence is a good offence, and that, to quote the update, ‘requires Defence to develop a different set of capabilities’. That means new or enhanced equipment (such as more robust long-range strike weapons and larger stocks of guided munitions).

Prioritisation is always necessary, regardless of how much money there is. In his launch speech, the prime minister noted that, in preparing the update, the government had ‘directed Defence to prioritise, to make choices [on], [the] ADF’s geographical focus on our immediate region’.

That focus and the new capabilities are the right approach for these times. But it’s hard to see how that strategic prioritisation has flowed through to the shopping list of capabilities. While there are a lot of new things on that list, there are only a few minor deletions from the previous investment plan. Defence isn’t giving any existing things up. Overall, there’s no meaningful divestment of capabilities.

Moreover, the listed cost of some very large projects appears to have gone up. The design and development estimate for the Hunter-class frigates was ‘>$30 billion’ in the 2016 investment program; that’s now $45.6 billion, apparently due to the extended build process needed to sustain continuous naval shipbuilding. LAND 400 Phase 3’s infantry fighting vehicles were ‘$10–15 billion’; they’re now $18.1–$27.1 billion. It’s not explained whether these differences result from a change in accounting approach, an increase in scope, or an actual increase in costs. But with the focus of the new strategy on Southeast Asia and the Pacific, a project acquiring 450 40-tonne vehicles would have to be a candidate for a reprioritising budget haircut, not more money.

The 2016 investment plan was already crammed full before the additions revealed in the 2020 force structure plan. The only way to acquire new things without increasing the funding model is to delay the acquisition of things that were already in the plan. And despite the update’s assessment that we can no longer rely on 10 years’ warning time, many of the key elements of the future force were already well in the future.

To acquire these capabilities, the capital budget hits around 40% of the total defence budget by the middle of the decade and then remains there. Personnel, historically the largest of the triumvirate of capital, operating and personnel, falls to 26% over the decade. I’ve suggested previously that this split may be unachievable—there’s no point acquiring equipment if you can’t crew or sustain it.

The new plan does note that there’s unfinished business in the personnel space. It acknowledges more people will be needed, but the government won’t consider exactly how many until 2021. The 800 new uniformed personnel and 250 new public servants provided in the plan are simply a stop-gap. More people may require shifting the balance of funding.

Overall, confirmation and extension of the 2016 white paper’s funding model is welcome news and demonstrates the government’s commitment to upholding Australia’s sovereignty and security in uncertain strategic and economic times. But if, as the update says, our strategic circumstances are changing much more rapidly than the 2016 white paper assessed and we can’t rely on 10 years of warning time, it hasn’t cracked the nut of how to get capability faster while so much of Defence’s funding is locked up in megaprojects with long delivery timeframes.

Virtually every high-level strategic document over the past two decades has admitted its predecessor underestimated the rate of change in the region. The strategic update is no different. How is Defence changing its thinking to get ahead of the curve?