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The new normal: a decade of stagnant real wages for defence personnel?

Posted By on March 8, 2016 @ 06:00

Source: 2016 DWP. Note: All growth rates are compounding rates calculated between initial and final year.

The Defence workforce is often viewed through the Orwellian lens of
uniformed personnel good, civilian personnel bad [1]. It’s as if the former are the equivalent of fine bottles of Grange Hermitage, while the latter are cartons of savings-brand milk past their use-by-date. The 2016 Defence White Paper firmly rejects this erroneous and simplistic view. Instead, it talks about an ‘integrated workforce of ADF and Australian Public Service (APS) personnel who work together to deliver defence capability’. No previous DWP has embraced the notion of an integrated workforce so fully.

An expanded defence force will require a larger integrated workforce. To this end, the DWP sets out plans to grow the uniformed workforce by 4,400 and the civilian workforce by 300 above current levels over the next decade. But the changes don’t end there. There’ll also be a rebalancing of 2,300 existing uniformed positions to higher priority areas, and previously planned civilian reductions will be offset by 1,200 new positions in priority areas.

The expansion and rebalancing of the integrated workforce will create the new jobs needed to build a high-tech Defence organisation for the 21st century. In part, this represents the need to crew the new advanced platforms being acquired, such as the Joint Strike Fighter. At the same time, there’ll be more people (including 800 civilians) as a result of the White Paper’s stated ‘emphasis on intelligence, space and cyber security capabilities to meet our future challenges’. Other areas of growth include engineering, logistics, force design and analysis, and additional military and civilian overseas postings. The DWP is clear about the net impact of the changes: ‘As Defence adopts new and more complex capabilities, the demands on the integrated workforce will increase.’

To achieve this larger and more highly skilled workforce, the DWP sets out a range of initiatives, including taking advantage of enhanced workforce diversity, improving ‘its comprehensive program of professionalisation and development to support careers in the ADF and the APS’, and ensuring that ‘the employment offers to Defence staff remain competitive to attract and retain the right number of people with the skills Defence requires’.

In Figure 5 of page 182 of the DWP (reproduced with annotations above) the funding for employees is set out alongside that for other components of the Defence budget. Surprisingly, the forecast nominal (i.e. including inflation) growth in employee spending is only modest a 2.71% p.a.slower than any of the other categories of expenditure. The picture becomes even more curious when per-capita employee expenditure is calculated taking account of the additional 4,700 new positions. On that basis, nominal per-capita expenditure will grow by a glacial 2.24%. Given that long-run inflation is expected to track at 2.5%, it means that Defence is planning on real per-capita expenditure falling by 0.26% each year. For the average employee this must be a dismal prospect—especially with nominal growth pushing more of their earnings into higher tax brackets each year. The net result will be falling real income and a rising tax liability. There are several factors which might account for this seemingly dire outlook.  

First, structural changes within the workforce might result in a greater number of lesser paid employees. If so, wages could grow while overall expenditure falls. But that’s hard to reconcile with the upbeat story in the DWP about new high-tech capability and the explicit assessment that ‘demands on the integrated workforce will increase’. There may be some offsetting impact of the First Principles Review pruning of middle level positions. But even if that’s the case, it means that some people will be doing the same work for less pay than in the past. One way or another, it’s a reduction in real wages.

Second, it may be that Defence’s financial planners have assumed that the Australian economy will deliver stagnant, or even falling, real wages over the next decade. Sadly, in the near term, that might actually be a reasonable assumption. Consider the sub-inflation wage outcomes imposed on the ADF and offered to the APS. Moreover, the latest ABS wage data reports [2] an annual nominal rise of only 2.2% across the Australian economy, which is the lowest wage growth since records began in 1998. But there may be a dim light at the end of the tunnel; according to the government’s latest projections [3], wage growth should recover to a nominal rate of 2.75% next year and reach 3% in 2018–19. While this economy-wide projection isn’t spectacular, it’s better than what Defence is planning for its workforce.

Where does this leave us? Even taking account of the uncertain impact of structure changes within the Defence workforce, there has to be a significant risk that, in the years ahead, Defence will be forced to either divert more money to employee expenditure or compromise on the quality of people they employ. Of course, it’s also possible that Defence will get the highly skilled workforce it needs on the cheap because wage growth across the Australian economy will stagnate for the next decade. If so, welcome to the new normal.



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URLs in this post:

[1] uniformed personnel good, civilian personnel bad: http://www.smh.com.au/business/federal-budget/defence-civilians-to-be-cut-in-budget-20140512-zraea.html

[2] latest ABS wage data reports: http://www.abs.gov.au/ausstats/[email protected]/latestProducts/6345.0Media%20Release1Dec%202015

[3] government’s latest projections: http://www.budget.gov.au/2015-16/content/myefo/download/MYEFO_2015-16_Final.pdf

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