Just as humour is good provided it’s funny, promises are good provided they’re kept. This year’s defence budget was about a promise; the Prime Minister’s election promise to boost defence spending to 2% of GDP within a decade.
I reported the headline figures for Defence the morning after the budget. Briefly, defence spending will increase by $2.3 billion next financial year to an all-time high of $29.3 billion amounting to 1.8% of GDP. On current plans, spending will remain more or less at that level in real terms for the next three years before increasing in the fourth. In a federal budget dominated by fiscal consolidation, it was as good an outcome for defence as could have been expected.
There’s no doubt the government demonstrated a strong commitment to defence in this budget. Although much of the year-on-year increase reflects a combination of pre-existing funding programmed by the previous government and foreign exchange supplementation, it was always open to the government to add Defence to the list of portfolios reeling under cuts. But aside from a $75 million efficiency dividend spread over four years, the promise of no further cuts to the defence budget was kept.
Apart from helping to alleviate near-term budget pressures, the funding granted to Defence provides a credible path to achieving 2% of GDP in 2023-24 as promised. The path isn’t an easy one; to meet the target on the basis of the funding disclosed for the next four years, expenditure will have to increase at a rate of 5.3% above inflation for the six years after that. But with three to four years to plan and prepare, it would be learned helplessness to suggest that it can’t be done.
In the meantime, there are some serious challenges for Defence to surmount. To start with, the recovery in defence spending next year will deliver a surge in major equipment investment (because that’s the part of the budget that accommodated most of the cuts of the past few years). Equipment investment will grow from around $3.5 billion this year to $6.1 billion next year.
Normally, such a massive year-on-year increase would be unachievable but the high number of off-the-shelf purchases will help make it manageable. And even if money ends up being handed back, it will have been worth the risk to regain momentum in the investment program.
At the same time, Defence needs to get its workforce numbers into better health. There’s no point buying equipment if there are insufficient people to crew the assets. For three years in a row, permanent numbers in the ADF have fallen despite plans to the contrary. Numbers for this year stand at around 56,400, with a target of 59,600 four years hence.
Assuming that those near-term hurdles can be surmounted, the path to spending 2% of GDP is clear—provided the government makes good on its promise. Sometime in the next several years the imperative to return the federal budget to surplus has the potential to perturb but not necessary derail progress. If the government wants to spend 2% of GDP on defence, there’s no fundamental economic reason it can’t. From a fiscal perspective, however, it’ll have to find a way to convince taxpayers to accept the higher taxes and/or reduced services necessary to fund the venture.
If it can, the question is where the path leads in terms of the future development of the ADF. 2% of projected GDP in 2023-24 is a lot of money; around $42 billion in today’s terms. Extrapolating current trends in personnel and operating costs, there’ll be around $112 billion available for capital investment in the forthcoming decade as a consequence, compared with only $66 billion for the decade just past (both measured in today’s dollars). It appears, therefore, that the ADF will need to grow to accommodate the additional money that’s been promised.
If capital investment is capped at 30% of the budget (compared with a historical average of 27%) there’ll be enough money in 2023-24 to increase the size of the ADF by around 10,000 people.
The risk in providing such generous funding to Defence is that proposals of progressively diminishing merit will be brought forward in coming years—for both new equipment and personnel. The challenge for the government will be to ensure that generous funding doesn’t translate into wasteful spending.
Our first insight into what the government has in mind is likely to be the 2015 Defence White Paper, which hopefully will tell us why it’s necessary to spend so much money, and explain what sort of defence force it will buy.
You can read the Cost of Defence here.
Mark Thomson is senior analyst for defence economics at ASPI. Image (c) ASPI 2014.