Ponying up: Has the government met its defence funding commitments?
16 Apr 2019|

In my initial analysis of the 2019–20 Defence budget, I suggested that in the four budgets since the 2016 defence white paper, the actual funding that the government has provided to Defence has come remarkably close to its white paper commitment. In the interests of full disclosure and accountability, I should note that in ASPI’s 2018–19 The cost of defence budget brief I stated the opposite, namely that the government had fallen short of its commitment. So which is it?

Let’s first look at what the commitment actually is. While a lot of attention is paid to the government’s commitment to increase the defence budget to 2% of GDP by 2020–21, the white paper also presented a 10-year fixed funding line to avoid the defence budget going up and down as GDP predictions fluctuated. It stated that ‘this de-coupling from GDP forecasts will avoid the need to have to regularly adjust Defence’s force structure plans in responses to fluctuations in Australia’s GDP’.

In essence, the government guaranteed funding stability so Defence could get on with delivering the future force. This is what the first four years of the white paper funding model look like (page 180):

Table 1: White paper funding model ($ million)

2016–17 2017–18 2018–19 2019–20 Total
White paper funding 32,374 34,199 36,769 39,086 142,428

Historically, governments don’t have a great record of meeting their white paper funding commitments. We’ve now reached the final year of the 2016–17 budget’s forward estimates period. That was the budget that immediately followed the 2016 white paper and started the delivery of its commitments. That means we have a four-year body of evidence to examine what the picture looks like this time around.

The first thing that changes our analysis from last year is the fact that the appropriation for the Defence portfolio (that is, both the Department of Defence and the Australian Signals Directorate)  has changed. If we compare the 2018–19 portfolio budget statements with the 2019–20 PBS, the actual allocation has increased by a total of $1,882 million in 2018–19 and 2019–20 (see table 2). So we should bear in mind that 2019–20’s funding could still change.

Table 2: Defence funding—2018–19 PBS versus 2019–20 PBS ($ million)

2018–19 2019–20
Allocation in 2018–19 PBS 36,356 38,070
Allocation in 2019–20 PBS 37,566 38,742
Increase 1,210 672

But answering the question is not quite as simple as comparing Defence’s actual funding presented in successive budget statements to the white paper line. That’s because lots of variations to Defence’s funding occur. Some can be neutral in effect even if the numbers are big; others are the result of the government deciding to reprioritise and move funds into or out of Defence. The variations for Defence are laid out in tables in the PBS and mid-year portfolio additional estimates statements (PAES).

To give a complete picture, we need to take all variations into account. Last year we only took supplementation for operations into account, which resulted in an incomplete assessment.

So, the second factor that changes our analysis is that this time we have gone through all variations in the Defence PBS and PAES since the white paper. At least, we have gone through all of the ones that are made public; the PBS and PAES include variations that are marked ‘not for publication’ for either security or commercial reasons for which no numbers are given.

The total visible variations for the Defence portfolio are as follows:

Table 3: Total variations to the Defence budget since the 2016 white paper ($ million)

2016–17 2017–18 2018–19 2019–20 Total
Foreign exchange adjustments –548 –724 –192 –90 –1,554
Supplementation for operations 652 850 752 704 2,958
Reprofiling –500 1,000 414 –714 200
All other variations –49 –221 –240 –251 –761
Total variations –445 905 734 –351 843

This list doesn’t factor in the transfer of $1.67 billion over 2018–19 and 2019–20 from Defence to ASD when the latter was established as a separate agency within the Defence portfolio. While these are a variation for the Defence Department budget, we are interested in a portfolio view because that’s what the white paper presented, and those ASD funds remain within the portfolio.

If we adjust the original white paper funding line to incorporate those variations, we get:

Table 4: Adjusted 2016 white paper funding line ($ million)

2016–17 2017–18 2018–19 2019–20 Total
White paper funding line adjusted for variations 31,929 35,104 37,503 38,735 143,271

For the government to meet its funding commitments, actual funding has to equal or exceed the adjusted white paper funding line. And it comes pretty close:

Table 5: Defence funding surplus against 2016 white paper ($ million)

2016–17 2017–18 2018–19 2019–20 Total
White paper funding line adjusted for variations 31,929 35,104 37,503 38,735 143,271
Actual allocation 31,999 34,926 37,566 38,742 143,233
Actual surplus against white paper 70 –178 63 7 –38

It misses by only $38 million total over the forward estimates (that’s 0.03%), and most of that was in 2017–18. The other three years were a little over. By historical standards, that’s very good.

It’s reasonable to ask whether the variations are legitimate. So let’s look at them a little more closely, starting with table 3.

Foreign exchange adjustments preserve Defence’s buying power on a no-win, no-loss basis, so even the reduction of $1.5 billion isn’t effectively a budget cut. The nearly $3 billion in operational supplementation covers the actual cost of operations beyond Defence’s usual activities and is also no-win, no-loss, so it’s not effectively a budget increase.

The reprofiling of funds simply moves money forward or back. We haven’t seen any of the big reprofiling of money out into the distant future that has sometimes occurred in the Defence budget. In fact, over the four years we’re looking at, Defence comes out a little ahead in reprofiling terms. So, despite some big numbers, all three of those categories are essentially neutral.

That leaves $761 million in other variations. This is where things get a little subjective. They can be broken down as follows:

Table 6: Other Defence budget variations ($ million)

2016–17 2017–18 2018–19 2019–20 Total
(2016–17 PBS)
–24 –34 –33 –32 –122
Public sector transformation and the efficiency dividend
(2016–17 PAES)
0 –58 –102 –130 –289
Department of Defence–efficiencies
(2017–18 PBS)
–70 –72 –76 –86 –304
Remaining variations 44 –57 –30 –3 –46

Under the first of these measures, Defence had to provide $122 million to fund the government’s cybersecurity strategy. In the 2016–17 PAES Defence had to give up $289 million as an efficiency dividend, and in the 2017–18 budget (page 79) Defence had to achieve $304 million in efficiencies, mainly through ‘reductions in the number of consultants and contractors’. So that’s a total of $593 million in reductions to be funded through ‘efficiencies’. The remaining $46 million is small beer.

You can argue whether these variations are legitimate or just Defence being used as the cash cow to fund other government priorities. But cybersecurity is important and many other agencies have had to accept previous efficiency rounds that Defence escaped.

Legitimate variations or not, actual funding missed the target by only $38 million over four years, as noted in table 5. But if you think the variations represent cash stripped out of the Defence budget, then the white paper target should have been $761 million higher. In that interpretation, actual funding fell short by $799 million, or about 0.5%. Either way, though, actual funding is still extremely close to the white paper target. Any secretary of defence or chief of the defence force would be very happy with that outcome.

One limitation in this analysis is the variations marked ‘not for publication’. Some of these could be quite large, such as equity injections into Australian Naval Infrastructure Pty Ltd, which was split off from ASC to build and manage the naval shipyards in Adelaide. The government has consistently given a cost of $535 million for the frigate shipyard (the submarine yard will be additional to that), but it’s not clear how much of that is being funded by Defence and how much by the Department of Finance, which owns ANI. So the analysis here is not complete. These variations could also go some way to explaining the discrepancy between the white paper and actual funding.

That caveat aside, from the evidence we can see, over the four budget years since the 2016 defence white paper, the government has delivered on its funding commitment.

Of course, how much funding Defence gets is a different issue from whether that funding is being spent effectively. I’ll look at that question in detail in ASPI’s The cost of defence budget brief for 2019–20, which will appear after the election, on Wednesday 5 June.