Defence planners don’t like surprises. Particularly those planners who are trying to match dollars to projects.
Managing cash flow is everything in Defence, so steady cash coming in allows its people to focus on the difficult task of ramping up major projects and not on working out how to slow projects down to match reduced cash flow without creating capability gaps.
So, Defence would have been very happy with the 2019-20 budget which delivers exactly what was expected with no surprises. I noted a year ago that the 2018-19 budget represented a moderate approach which is continued this year.
In short, the top-level numbers are $38,735 million (including both the Department of Defence and the Australian Signals Directorate). That’s a 1.2 per cent increase in real terms. Ironically, it’s a very slight decrease as a percentage of GDP to 1.93 per cent. That’s because GDP grew faster than 1.2 per cent in real terms.
Nevertheless, the budget’s forward estimates see Defence funding reach two per cent of GDP by 2020-21 in accordance with the government’s White Paper commitment. That will be a big jump for the next government to fund as it will need to increase the Defence budget by $3 billion next year, or over five per cent in real terms. Those sorts of increases can be hard for Defence to absorb even if the government can come up with the money. But again, that growth has been in the plan since the 2016 White Paper, so Defence can’t say it wasn’t warned.
Consistency is key
So rather than surprises, of which there were none, it is consistency that is the real story of this budget. In fact, it has been the story of Defence funding since the 2016 White Paper.
Governments in general don’t have a great track record of providing the funding needed to deliver the capabilities outlined in White Papers, so ASPI checked how the current government has done over the four budget years since the White Paper (ie 2016-17 to 2019-20).
Answering this question is a little more complicated that comparing the White Paper funding line (on page 180 of the White Paper) with the actual funding providing in annual budget statements. We also need to factor in adjustments such foreign exchange fluctuations, supplementary funding for operations, reprofiling, and so on.
But the short answer is, the government’s $143.6 billion in Defence funding over the past four years delivers the money promised in the White Paper, and even slightly exceeds it.
That has been good for Defence, and of course its industry partners. Consistent Defence funding means consistent revenue for industry. It’s not surprising then, that in my conversations with industry, the risk that keeps coming up is that the next government, whatever its colour, will not adhere to that policy of consistent, increasing Defence funding. We should note, however, that Labor has explicitly made a commitment to two per cent of GDP.
But providing funding is a somewhat different issue from spending it. One area for concern is that over those four years Defence has consistently come up short in spending its capital budget. The cumulative shortfall against the White Paper is now over $5 billion. Part of that shortfall, maybe a billion or so, can be accounted for by exchange rate variations (ie as the Australian dollar went up, Defence didn’t need to spend as much to acquire the same capability), but by no means all of it. Part of it could be that Defence simply couldn’t get the money out the door. Setting up major projects takes time and hitting schedule milestone can be difficult.
Sustainment pressures
But another reason may perhaps be found in the area of sustainment. Over the same period Defence has needed to spend over $4 billion more on sustainment than predicted in the White Paper. It’s no secret that Defence has consistently underestimated the cost of sustaining new capabilities and ageing ones. So capital funding may have been reprioritised to meet sustainment pressures. And as we enter the decades-long transition for submarines and frigates, Defence will not only need to fund the build of new ships and submarines (potentially $3.5-4 billion per year) but also simultaneously fund the sustainment of overlapping new fleets and ageing ones, plus potential life-of-type extension programs.
And on sustainment pressures, this year’s budget provides some early evidence on the cost of operating the F-35A. It’s not as much as the Super Hornet and Growler, but it’s still nearly twice as much per flying hour as the classic Hornet – $41,000 versus $22,200.
Providing funding is also a different issue from whether it is being spent on the right things. In my budget essay in this publication a year ago, I noted that a growing proportion of the capital budget was being spent on major conventional platforms like frigates and submarines that would not be delivered for a long time. Meanwhile the innovation programs, while much publicised, made up less than half a percent of the Defence budget.
A year on, despite the schedules for both of those programs moving right, the big picture hasn’t changed – increasing investment in big, conventional platforms, small investment in innovative technologies.
But as both ASPI and ADM have repeatedly noted, it’s hard to tell how the government is adjusting the investment program to meet a changing world when they haven’t met their White Paper commitment to release updated, more detailed versions of the Integrated Investment Program (IIP). One suspects a new public IIP is in the too hard basket and is being kicked down the road for the next government.
Suggestions for government
Given that we are in election season, here’s some suggestions for the next government. First, reaffirm the White Paper funding commitment. Coming up with the additional $3 billion in 2020-21 will demonstrate this commitment. And any reductions to the 2019-20 budget will be fatal to the government’s credibility and industry confidence.
Secondly, provide the transparency that was promised in the 2016 White Paper and IIP but never delivered. If the government and Defence seriously regard industry as a partner and a Fundamental Input into Capability, they have to treat industry like a partner and share the information industry needs. Defence recognises the importance of planning, so the government and Defence must acknowledge that industry also needs accurate, timely information to plan.
Finally, the next government needs to think seriously about how Defence can acquire capability quickly. The next international crisis is not going to politely wait until our future frigates and submarines are delivered. Hopefully behind the scenes those Defence planners are thinking imaginatively about how to leverage the advances of the fourth industrial revolution acquire real capability that will arrive soon. But I’m not confident. This would mean embracing disruptive innovation. And disruptive innovation is one of those surprises that makes Defence planners very uncomfortable.
Dr Marcus Hellyer is ASPI’s senior analyst for defence economics and capability.
This article first appeared in the May 2019 edition of ADM.