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Defence budget climbs to $44.6 billion

Posted By on May 12, 2021 @ 15:22

The 2021–22 budget was a ‘no surprises’ one for Defence. The government set out its plan in the 2016 white paper, reaffirmed it in last year’s defence strategic update and is now providing Defence with the funding it promised to deliver the plan. The size of the budget is as expected and that’s good news, but it’s how it can be spent to acquire more offensive firepower well before the 2030s that matters most. The budget tells us little new here.

Because defence ministers no longer state the size of the defence budget in their budget night media release, here it is: $44.6 billion. You can find it in Table 4a in Defence’s portfolio budget statements. That’s the consolidated number for the Department of Defence ($43,560.7 million) and the Australian Signals Directorate ($1,057.9 million). That’s an increase on 2020–21 of 6.1% in nominal terms and 4.1% in real terms.

Once we take into account things such as foreign exchange adjustments and funding supplementation to conduct operations, that amount is pretty much bang on the government’s funding commitment set out on page 54 of the defence strategic update. That’s consistent with the government’s history of delivering on its funding commitments stretching back to the white paper. In short, the defence budget is continuing its solid growth.

Despite the lack of surprises, there are a few significant things to see here. One is that Defence’s acquisition program is continuing to move a lot of money. I’ve noted several times that much of the growth in the budget is focused on that program. If we take a step back to the 2020–21 budget, the government was planning a huge $3 billion (27%) increase in Defence’s acquisition budget, from $11.2 billion to $14.3 billion. Considering Defence had only achieved roughly 5% increases in preceding years, that was very ambitious, particularly in the middle of Covid-19 pandemic that was interfering with global supply chains. Was it overly ambitious?

In the mid-year budget update, it looked like Defence was going to get very close. Alas, it was not to be. On paper, Defence has come up $1.6 billion short. But a big part of that can be accounted for by significant foreign exchange adjustments that reduced the acquisition budget (as the Aussie dollar strengthens, Defence doesn’t need as much cash to acquire equipment from overseas). Regardless, Defence still exceeded its 2019–20 achievement by more than $1.4 billion. That’s 12.9% growth, not a bad achievement for a pandemic year.

It’s a good sign for Australia’s ability to rapidly develop defence capability in the face of increasing strategic uncertainty. Put another way, when the government and Defence send clear and consistent (and funded) demand signals, industry has shown it can respond. That demand signal continues with a $3 billion (25%) increase in the acquisition budget planned for the coming year.

Defence hasn’t yet provided us with the split between local and overseas spending for 2020–21 and 2021–22, but it will be interesting to see if Australian defence industry is finally managing to absorb more of the acquisition budget than its historical one-third share. That will be crucial to boosting sovereign industry and military capability and mitigating supply chain risks.

For those who monitor defence spending as a percentage of GDP, this year’s budget is a lesson in why it’s wise not to obsess about minor changes in those figures. Even though the government is providing the funding set out in the defence strategic update, that doesn’t look as good as a percentage of GDP as it did a year ago. There are two main factors: GDP has recovered much faster than was anticipated in last year’s budget and Defence has received some big nominal reductions to its funding due to exchange rate adjustments. In essence, the denominator has grown while the numerator has shrunk.

In last year’s budget, Defence spending looked like it would be around 2.19% of GDP for 2020–21; it’s come in around 2.04%. Similarly, this year was forecast to be 2.27%; it’s now looking like 2.09%. Don’t fret, those percentages mean nothing; Defence is still getting the money set out in the strategic update (and before that in the 2016 white paper).

As operations in the Middle East wind down, the cost of operations is the lowest it’s been since before the 1999 East Timor intervention, going from $751.4 million in 2020–21 to a predicted $271.5 million in 2021–22. Taking into account that $136.2 million of that in 2020–21 was Operation Covid Assist, it’s dramatic ramp down.

The naval shipbuilding enterprise continues its inexorable rise. It didn’t hit its $1.9 billion target for 2020–21, but still got to $1.6 billion. This year it’s aiming for nearly $2.5 billion. It won’t get there but should comfortably exceed $2 billion.

The two biggest spenders in the enterprise for 2021–22 are, not surprisingly, the future submarine ($982 million) and future frigate ($655 million) programs. With both some time away from the start of construction, those numbers have a long way still to grow, so the enterprise will most likely exceed $4 billion per year in a few years’ time—and that’s before we take the new shipbuilding programs announced in the strategic update into account.

Much uncertainty remains around the sustainment cost of the air combat fleet (Tables 27 and 55). The forecast operating cost for the F-35A seems impossibly low. The air force wants to more than double the F-35A’s flying hours in 2021–22 while decreasing its total sustainment cost. On paper that results in a decrease from around $49,000 per flying hour in 2020–21 to around $18,000 per hour in 2021–22. Tell ‘em they’re dreamin’.

Meanwhile, the flying cost of the combined Super Hornet and Growler fleet already seemed impossibly large at over $61,000 per hour, but that’s predicted to grow even further to $76,000. Granted, those numbers include spiral upgrades that traditionally would be treated as capital acquisition, not sustainment. But it’s still a very expensive capability.

Points like that may be individually interesting, but they are all part of the larger and most fundamental question for Defence—and new minister Peter Dutton—of how can $575 billion in projected spending over the decade deliver more capability faster? It’s increasingly clear that procurement projects that won’t deliver until the 2030s need to be supplemented by much faster initiatives that deliver offensive capability in the 2020s (like production of advanced missiles). And that means changed plans and different approaches to capability development and delivery.

We don’t get many insights from the budget papers into how or even whether this shift is occurring. No doubt Dutton will reveal more around this as he gets to grips with the huge Defence machine and properly aligns acquisition and budget plans with the urgency demanded by our strategic environment.

Finally, credit where credit’s due. Following on from some significant improvements in the presentation of the portfolio budget statement last year (discussed here on page 24), Defence has provided some further additions this year that enhance transparency. The first is that the top 30 acquisition projects table (Table 54) now also includes spending on capability elements other than military equipment such as facilities, information and communications technology (ICT), and science and technology support. This provides a more complete view of the total cost of acquiring capability. In some cases, the cost of the other elements is a very significant component of the total cost. Take the offshore patrol vessel, for example. It’s budgeted at $3.7 billion for the ships themselves, but there’s another $981 million for the other elements, mainly enhanced infrastructure.

The other addition is that for the first time in any of Defence’s reporting, there’s some information on its ICT program (Table 59). It’s only the top five ICT projects, but that’s a big improvement on nothing at all. Some of those projects are very large by any standard; the Enterprise Resource Planning program that is intended to transform Defence’s business functions has an approved budget of $604 million and a planned spend for this year of $146 million. Since it’s crucial to the success of Defence’s transformation strategy, it’s good that there is finally a modicum of transparency around it.

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[1] portfolio budget statements: https://www.defence.gov.au/Budget/21-22/PBS.asp

[2] defence strategic update: https://www1.defence.gov.au/sites/default/files/2020-11/2020_Defence_Strategic_Update.pdf

[3] mid-year budget update: https://www.defence.gov.au/Budget/20-21/PAES.asp

[4] here: https://s3-ap-southeast-2.amazonaws.com/ad-aspi/2020-10/ASPI%20Cost%20of%20Defence%202020-2021_Part%202_0.pdf?U5s_5wCGv4k530JPKJTsmnkbWlyTZU55

[5] Defence’s transformation strategy: https://www1.defence.gov.au/strategy-policy/transformation