Tony Abbott’s trillion dollar legacy
6 Oct 2015|


There’s only one question in defence circles today: Will Malcolm Turnbull retain Tony Abbott’s commitment to spend 2% of GDP on defence in 2023, and if so, in what form? Prior to the leadership change, there was no doubt that the forthcoming White Paper would plot a course to the 2% target. But what once seemed certain is now an open question.

Neither Turnbull, new treasurer Scott Morrison nor new defence minister Marise Payne were members of the National Security Committee (NSC) of Cabinet when the White Paper was drafted. Until they have a chance to consider the document, they can’t possibly form a view on the matter. To release the document without close scrutiny would be irresponsible.

Wisely, therefore, when the new minister was asked if she had received a guarantee that defence funding would continue at the level committed by the previous government, she replied ‘it is not a discussion that I have had yet’, adding that ‘without a strong economy we can’t possibly support that level of spending’. Herein lies the core issue; the financial demands of the yet-to-be-released defence white paper will have to be reconciled with the Turnbull government’s yet-to-be-formulated economic agenda.

On the eve of the 2015 budget, I argued that the government faced a dilemma dividing its response between mitigating economic risks on the one hand and strategic risks on the other. Since that time, developments on neither front have been encouraging.

In the economic realm, global growth continues to undershoot expectations—as it has every year since 2010. To make matters worse, China’s economy is struggling to boost domestic consumption transition so that it can move away from export and investment led growth. The problem is that China’s inadequate social safety net predisposes households to save rather than spend.

According to some analysts, a sustainable trajectory for the Chinese economy means something like 3-4% rather than 7.5% annual growth. But even that disappointing outlook might prove elusive; analysts at Citigroup believe that a recession is possible in China over the next two years, with dire consequences for the world economy. Given Australia’s sensitivity to commodity prices, a serious Chinese downturn would, to say the least, exacerbate our economic woes. Our first line of defence in such a circumstance is low debt, yet the Commonwealth’s debt burden continues to grow, and will do so until the budget is brought back into surplus.

Even if China manages to muddle through its present difficulties, Australia still faces the challenge of restructuring its economy to the post-resource boom reality. Hence Turnbull’s rapid convening of an economic reform summit. Here’s the thing: economic reform costs money. Significant changes create winners and losers, and losers have to be compensated—at least in the first instance. Nowhere is this truer than in the critical area of tax reform.

On the strategic front, troubles continue around the globe. Russia is in Syria. The Taliban controls parts of Kunduz. And the South China Sea boasts several thousand acres of artificial islands thanks to China. Nothing has changed to ameliorate the strategic uncertainty Australia faces.

The resulting dilemma is simple to understand; every dollar spent on reforming the economy or retiring debt can’t be used to boost defence spending, and vice-versa. If that weren’t enough, the electorate has proven itself both volatile and resistant to belt-tightening. The latter was reflected in the hostile reception accorded the relatively moderate savings measures in the 2014 budget, while the former explains the demise of the Abbot prime ministership less than 24 months after a landslide election win.

If the decision is taken to abandon or delay the 2% promise, there will be risks. Without careful management, the US might conclude that—as with the 2009 White Paper—we talk a big game but fail to deliver. It would also require Defence to go back to the drawing board and yet again delay the release of the White Paper. But it’s unlikely that voters would notice the difference, and the opposition couldn’t raise concerns given its policy of spending 2% only when economic circumstances allow.

When all is said and done, the 2% of GDP target was a political gesture rather than a reasoned response to the strategic risks Australia faces. What’s more, any arbitrary financial target is manifestly a poor basis for defence funding. Defence planning should be about the strategic outcomes sought rather than the financial inputs consumed. My instinct is that we could get by with spending less, especially if a more careful approach to major naval acquisitions is adopted (see here, here and here), and even more if hard decisions are made regarding the shape of navy.

It’s possible, and perhaps likely, that the Turnbull government will simply rubber stamp the draft white paper and accept the 2% of GDP funding model. If that happens, in excess of a trillion dollars will be spent on defence over the next 20 years without any pretence of the expenditure being determined by the strategic risks we face—let alone balanced against the mounting risks to our economy.