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Boring is the new black: Defence budget 2019–20

Posted By on April 3, 2019 @ 11:19

The Defence budget continues to deliver as expected. As forecast last year, there will be a modest increase in 2019–20 of around 1.2% in real terms, to $38,742 million (including both the Department of Defence and the Australian Signals Directorate).

That won’t get defence funding any closer to the promised land of 2% of GDP. It’s still hovering a little over 1.9%, leaving it to the next government to commit to a final jump of a further $3 billion in 2020–21— an increase of more than 5% in real terms—to hit the magical 2%.

But we should remember that the 2016 defence white paper laid out a 10-year fixed funding line (page 180) to avoid the ups and downs and resultant planning headaches that can arise from tying funding to a flighty thing such as GDP. The 2019–20 budget year corresponds to the final year of the forward estimates period in the 2016–17 budget, the one that presented the first four years of the funding plan to deliver the white paper, so it’s fitting to examine whether the government has met that funding commitment.

The short answer is, it has. Once all the myriad variations that were made between then and now are taken into account—including supplemental funding for operations; no-win, no-loss foreign exchange rate adjustments; and dollars reprofiled left and right—actual defence funding has come in remarkably close to the government’s 2016 commitment: an initial analysis suggests it’s within 1%.

Some of the funding moving left or right might not have been optimal for Defence, but it’s manageable. This year’s budget, for example, moves $620 million from 2019–20 into 2018–19. With the F-35 joint strike fighter program spending around $2 billion last year and $2.5 billion this year (page 109), Defence can handle that simply by adjusting the payment date on a cheque by a month or two. It’s hard to think of a time when Defence, and by default its industry partners, have had the luxury of such consistency and reliability in the department’s funding. A boring budget is good for planning and delivering.

Shipbuilding and other key projects are continuing to ramp up methodically. The future frigates’ spend goes from $222 million in 2018–19 to $468 million in 2019–20 (page 117) and offshore patrol vessels from $221 million to $349 million (page 118). The only hitch in a document otherwise devoid of drama appeared to be the future submarines going backwards from $456 million to $289 million (page 118), but Defence advises that the published number doesn’t include the latest government funding approvals. Once those numbers are added in, the predicted spend for 2019–20 is in the order of $750 million.

Defence and industry are going to need all of that funding. Australian shipbuilding projects now total $2 billion in annual cash flow, and that’s before the two big kids on the block, the future frigates and submarines, have cut steel. Including recent government approvals, those two projects’ approved budgets now total around $12 billion—and that’s just for design and mobilisation. Construction is on top of that. In last year’s Defence budget brief (page 22), ASPI predicted that Defence will have spent over $20 billion between those two programs before the first of each class becomes operational. It’s looking like we underestimated that number.

Capital spending continues to grow. Overall facilities spending has virtually doubled between the first and second halves of the current decade. Nevertheless, one area of consistency which is a cause for concern is that over each of the past four years Defence has underachieved against the big capital funding increases built into the budget. It will come up around $5 billion, or 11%, short against the 2016–17 budget’s forward estimates. Exchange rate variations can account for some of that, but certainly not all. Setting up and delivering major projects takes time. The government and Defence have done well to achieve actual capital spending growth of 6.3% and 8.8% over the past two years, but the leaps of 21.8% growth in 2020–21 and 18.4% in 2021–22 planned for the capital budget seem quixotic (should the next government stick with that plan).

Personnel numbers are slowly but steadily increasing. The army seems to have suffered a slight hiccup in 2018–19 but, importantly, the navy has turned things around and is heading in the right direction. Sustainment spending also continues to ramp up at a steady rate.

On sustainment, last year ASPI argued (page 43) that one of the big risks was the cost of the F-35A. The JSF program was aiming for a sustainment cost similar to that for legacy aircraft such as the classic Hornet. But if the cost of sustaining the JSF turned out to be more like the costs for the Super Hornet and Growler electronic attack aircraft, the sustainment budget would be under pressure. The 2019–20 budget sheds some light on things: for the first time, the F-35A puts in an appearance in the top 30 sustainment products table. At $41,800 per flying hour in 2019–20, it’s between the classic Hornets at $22,200 and the Super Hornets/Growlers at $79,000 (that’s derived by dividing the sustainment costs (pages 122–123) by annual flying hours (page 65)). It’s early days, so hopefully that will come down as the sustainment system matures.

The picture with operations is also stable. Operations funding decreases from $792.7 million in 2018–19 to $703.6 million in 2019–20, mainly accounted for by moderate decreases in Operations Accordion (Middle East) and Okra (Iraq), and the one-off outlay of $40.1 million for Operation Augury (support to the Armed Forces of the Philippines during the siege of Marawi) not continuing. There are no operations with substantial funding growth, which indicates that the government isn’t currently planning any increased operational commitments.

Kudos should go to the hard-working public servants across Defence who brought together the budget despite losing five weeks of what is already a hectic schedule. It appears as solid and reliable a document as ever.

But with the ANAO having recently announced an audit of the ‘Commonwealth resource management framework and the clear read principle’, is it churlish to ask whether the document conforms to that principle?

On Tuesday, the ministers for defence and defence industry announced an allocation of $38.7 billion to Defence in 2019–20, but nowhere in the portfolio budget statement tables is there a single line item where that number can be found.* Surely more can be done to give the public a clearer, more accessible understanding of how their defence dollars are being spent?

Note: ASPI will release its annual The Cost of Defence budget brief on 5 June. It will include analysis of the next government’s election commitments in addition to our standard Defence budget analysis.

* In case you’re wondering, it’s derived from serial 4 of table 1, which is the Defence Department’s top-level resourcing table, combined with two lines from table 66, namely ‘Appropriations’ and ‘Appropriations—contributed equity’, which is the Australian Signal Directorate’s cash-flow table. Fortunately, I had three helpful Defence Department officials in the budget lock-up to guide me. The average citizen isn’t so lucky.

Article printed from The Strategist: https://www.aspistrategist.org.au

URL to article: https://www.aspistrategist.org.au/boring-is-the-new-black-defence-budget-2019-20/

[1] Defence budget: http://www.defence.gov.au/Budget/19-20/2019-20_Defence_PBS_00_Complete.pdf

[2] 2016 defence white paper: http://www.defence.gov.au/whitepaper/docs/2016-defence-white-paper.pdf

[3] 2016–17 budget: http://www.defence.gov.au/Budget/16-17/PBS.asp

[4] foreign exchange rate adjustments: https://www.aspistrategist.org.au/defence-budget-pump-priming-or-trickle-down/

[5] last year’s Defence budget brief: https://www.aspi.org.au/report/cost-defence-aspi-defence-budget-brief-2018-2019

[6] an audit: https://www.anao.gov.au/work/performance-audit/commonwealth-resource-management-framework-and-the-clear-read-principle

[7] announced: https://www.minister.defence.gov.au/minister/cpyne/media-releases/safer-australia-budget-2019-20-defence-overview