Labor’s defence budget sets out some hard truths
8 Nov 2022|

The Albanese government’s first budget since its election win in May was not designed to focus on Australia’s security situation or defence spending. Tasked with sharing Australia’s difficult economic situation with the Australian public, the budget had more immediate fish to fry.

For those Australians who wanted to see increased defence spending, this wasn’t going to be that budget as it would have directly undercut existing defence reviews due within months. Certainly, Prime Minister Anthony Albanese has stated that the government will do whatever is necessary to ensure Australia has the defence force it needs in these strategically uncertain times.

But, as I explain in the latest edition of ASPI’s defence budget brief, the October budget papers give no indication of how much the government is willing to spend to do that. With the defence strategic review under Stephen Smith and Angus Houston conducting its work and not due to report until March next year, the government has stuck with the funding line it inherited from its predecessor’s March budget. That’s an artefact of the 2016 defence white paper—a document developed in a different era and quickly overtaken by events.

So Defence is in a holding pattern while the government keeps its powder dry and waits for Smith and Houston (noting that their interim report has recently been handed to the government). No doubt it has had conversations with the review leads indicating its comfort zone for additional spending, but that hasn’t been made public.

What we can say from the information set out in this budget is that any increase to defence spending will require difficult reprioritisation. While the government received a revenue windfall this year due to high commodity prices, those are forecast to return to normal. And with the government committing to deliver the tax cuts agreed by its predecessor, its income is under further pressure. At the same time, it’s facing five growing spending pressures: interest on the growing debt, the National Disability Insurance Scheme, healthcare, aged care and defence—and that’s before any increase to the existing defence funding line. The result is a forecast for deficit spending for the next 10 years.

That’s not a good situation for the review leads. They’re tasked with delivering new military acquisitions faster in the next decade, but the existing acquisition plan is probably already unaffordable (without increased spending), with many entirely new capabilities or expensive replacement projects. And with nuclear-powered submarines and frigates on the untouchable list, the challenge of delivering more sooner gets even harder, as those two programs will consume tens of billions of dollars over the coming decade even before they deliver their first vessels.

On top of this, inflation is rapidly eroding Defence’s buying power by billions of dollars every year. By the end of the forward estimates, Defence may have lost around $18 billion in buying power even if inflation rapidly returns to the Reserve Bank of Australia’s target rate. That’s the budget papers’ predictions, but those predictions haven’t been very accurate in recent years.

This year, despite nominal growth of over 7% in defence spending, real growth is under 1% once inflation is taken into account (although, with inflation difficult to predict, it’s also difficult to reliably quantify real growth). It’s hard to see Defence affording its ambitious acquisition program with a budget that’s essentially static in real terms.

Inflation is also driving nominal GDP growth at a predicted 8% this year. That means that defence spending is falling as a percentage of GDP for the second year in a row despite the government delivering the funding set out in the 2016 white paper and 2020 update. Predicted defence spending has also fallen significantly just since the March budget, from 2.11% to 1.96% of GDP, despite the funding line remaining fundamentally unchanged.

In summary, there’s no pot of gold available to cover increased defence spending. That doesn’t mean the government can’t or won’t increase defence spending, but any increase will require either higher taxes (which appears unlikely, since the government is proceeding with its predecessor’s planned tax cuts), greater borrowing (accelerating the vicious cycle of debts and deficits) or cuts to other priorities that have constituencies of their own.

When we look at Defence’s big three areas of spending—capital acquisitions, people and sustainment—there have been no significant changes since the March budget. With the Australian dollar at a 20-year low against the US dollar, the defence budget has received a large automatic top-up to maintain its purchasing, but there’s no adjustment to compensate for inflation.

There are a few changes to spending, but they’re broadly consistent with what we would see in a mid-year budget update. For those who follow capability, the top 30 acquisition projects and sustainment products hold some interesting information, but the lists are quite consistent with previous plans. We’ll have to wait for the outcomes of the strategic review to see anything new.

Similarly, there’s been no adjustment to Defence’s personnel allocation since March. But that still means the Australian Defence Force needs to find roughly 13,000 more people this decade to operate the capabilities on its shopping list, even though it’s only managed to grow by an average of 300 per year since the 2016 white paper. Smith and Houston may need to consider whether it makes sense to acquire capabilities that the ADF can’t crew, or at least how the ADF can maximise its combat power without many additional people. Of course, another HR strategy is one based on ‘If you build it, they will come.’

The situation is also difficult with Defence’s civilian and external workforce. To deliver its ambitious capability program, Defence has relied on growing numbers of contractors. They’ve helped Defence spend record amounts in its acquisition programs in recent years, despite the impact of Covid-19; however, they come at a cost. That growth may be over; in the October budget, the government is seeking $144.6 million in ‘savings from external labour and savings from advertising, travel and legal expenses’. That’s not a large percentage of Defence’s total budget, but, if it means the organisation can’t hire the people it needs to manage the acquisition program, it’s hard to see how Defence will deliver more capability sooner.

Overall, while there were no surprises, the budget hasn’t made the job any easier for Smith and Houston.