The Budget that was
25 May 2017|

The 2017 ASPI Cost of Defence will be launched tonight. Here’s the executive summary, and here’s a copy of my remarks at the launch event in Canberra. Regular readers of The Strategist will have seen my analysis of several issues over the past 16 days, beginning here the morning after the budget. For those who want the CliffsNotes version, this post recaps the key points.

Defence funding will rise by 6.5% in real terms next year to reach $34.7 billion, representing 1.9% of GDP. Expenditure is budgeted to reach 2% of GDP in 2020–21, as promised in the 2016 Defence White Paper. Investment in new capital equipment is the main beneficiary, with purchases slated to rise from $7.2 billion in 2016–17 to $11.6 billion in 2020–21. Although the budget provides no visibility of funding beyond that date, all signs are that the government remains committed to its White Paper funding pledge.

Two efficiency dividends have been imposed on Defence since the 2016 Budget; neither appears onerous or unreasonable. After several years of difficulty retaining personnel strength, the ADF appears to have gotten recruitment and retention under control. The same cannot be said of Defence’s APS workforce, in which morale is low and numbers fell 600 below the budget target for this year. A restoration of pay rise parity with the ADF might help.

Progress is being made on the government’s plan to establish continuous ship and submarine construction programs in Australia. The government’s Naval Shipbuilding Plan was released in the week following the budget. It draws together prior announcements into a credible narrative, even if some of the numbers failed to make sense. More importantly, we’re still left to guess about the contractual arrangements under which the resulting monopoly shipbuilders will operate.

Reforms flowing from the First Principles Review continue within Defence, with 63 of 69 recommendations implemented. As best can be told, the reforms have been thoughtfully and systematically managed. Central to the reforms is a revamp of the capability development process.  While the new arrangements appear to have led to a surge in project approvals (we can’t be sure given Defence’s new-found shyness on the matter), the acceleration has been achieved by adopting a different tradeoff between time and risk. Under the old system, we expended time to reduce risks. Now we accept greater risks to save time. While today’s challenges justify greater risks in procurement, it would be penny wise and pound foolish now to shortchange the management of the initial stages of the costly and militarily critical projects now being developed.

The nurturing of defence industry has become a key component of the government’s economy-wide ‘jobs and growth’ policy. However, not only is the standard of economic advice going to the government on such matters questionable, but there’s been precious little economic modelling done to substantiate the claimed myriad economic benefits. If the government wants to avoid accusations of pork-barreling, it should commission comprehensive economic modelling to ensure that our domestic defence investments deliver maximum returns to the economy.

Finally, this year’s Budget invited the perennial question: how much defence is enough? Are the plans and funding in the 2016 Defence White Paper adequate in the face of our deteriorating global security outlook? The White Paper was designed to boost Australia’s defence for the perceived challenges of the 2020s and beyond, but those challenges look set to manifest themselves much earlier than expected. I think that we can and should do more, beginning with making the most of the platforms and capabilities we already own.

There you have it, $34.7 billion of spending in just over 600 words.