The annual defence budget has cracked $50 billion for the first time: predicted defence funding in 2023-24 will be $52,559 million between the Department of Defence and the Australian Signals Directorate. Moreover, it will continue to grow, totalling $223.6 billion over the four years of the forward estimates.
The Department’s share will be $50,086 million. That’s a significant amount of money in anybody’s language. Defence should be able to deliver substantial new military capability for that. But the fundamental question is, is it enough?
The answer, quite simply, is no. It may seem strange to say it only months after the Defence Strategic Review (DSR) was completed, since that exercise was meant to tell the government what military capabilities Australia needs and what they will cost. But there’s no way around the conclusion that there is a serious misalignment between the capabilities in Defence’s acquisition plan and the resources available to acquire and operate them. And when that’s the case, you don’t have a viable strategy.
Capability vs Cost
Let’s unpack the mismatch. The first point to make is that in the budget, defence funding over the forward estimates is still basically the same line of funding set down by the former government in its 2016 Defence White Paper and extended in its 2020 Defence Strategic Update. Certainly, that funding line is growing steadily, but it is growing on a trajectory set out over seven years ago. While the government states ‘Australia is facing the most difficult strategic circumstances since the Second World War,’ that strategic assessment has not yet resulted in a bolstered funding line.
Secondly, those funds have already experienced many rounds of reprioritisation. Some measures simply moved money out of Defence, such as this year’s $631.9 million in efficiencies over the forward estimates. There’s also $923.9 million that Defence has to provide from its existing funding for additional Pacific engagement measures over the forwards. And last year the previous government moved around $3.6 billion over the forward estimates from the Department of Defence to the Australian Signals Directorate, a transfer of funds that likely extends across the decade. Granted, it’s still in the broader Defence portfolio, but it’s not available to acquire and operate military equipment. Governments are entitled to reprioritise funding – that’s their job, after all – but it’s unreasonable to move funding and expect agencies to still deliver all of the original plan.
Thirdly, even before the DSR, Defence’s investment program was over-filled. It contained many entirely new capabilities (e.g., ballistic missile defence, long-range fires, sovereign space capabilities), or was replacing existing capabilities with much larger and therefore more expensive capabilities (such as 10,000-tonne Hunter-class frigates in place of 3,600-tonne Anzac-class frigates). No provision had been made for the substantially higher cost of SSNs compared to the cancelled Attack-class submarine. The DSR notes that the investment program was over-programmed by 24 per cent over the forward estimates.
Fourth, inflation has seriously eroded Defence’s buying power. With inflation at around 6 per cent in both 2022-23 and 2023-24 – compared with an expectation of around 2-2.5 per cent per annum when the current funding line was generated – Defence will lose around 8-10 per cent of its buying power. Since inflation is worse in some overseas countries where Defence buys much of its equipment, the effect is exacerbated.
And fifth, the DSR has recommended accelerating the delivery of some capabilities, or even adding new ones. We don’t know from the public DSR precisely what they are, but government has said they included more long-range strike, domestic guided weapons production and strengthening northern bases. All up, the cost of the DSR in the forward estimates is meant to be $19 billion. The government has said Defence has to find $7.8 billion of that (presumably the other $11.2 billion was measures that were happening anyway). So that’s $7.8 billion of additional pressure on the budget. Cancelling self-propelled howitzers and sharply reducing the number of infantry fighting vehicles is unlikely to free up any funds in the forward estimates.
An exploding suitcase
So even before the DSR, the defence budget was an exploding suitcase, with too many aspirations packed into too small a container. Since the DSR started, the container has gotten smaller and even more wishes have been packed into it.
So how is it going to work? The short answer is, we just don’t know. Defence hasn’t done the work to align aspirations and resources. The budget papers say in several places that Defence will spend the next year rebuilding the investment program. The Defence budget states openly that it represents the program before the DSR was delivered. In essence, the budget statements are already out of date.
But to free up the amount of funding necessary to cover the DSR and other priorities over the forward estimates, Defence is going to have to dig deep. And that means it will likely have to cut into approved projects, that is, ones that are in contract and acquisition. That is always the means of last resort due to the capability and reputational damage it causes, but it’s hard to see how it can be done any other way.
So that means further insecurity for industry. After a year of uncertainty following the election of a new government with different priorities and the conduct of the DSR, industry now has to wait until the next budget in May 2024 to see how implementation of the DSR will play out and which programs will be cut, delayed, or cancelled. So, despite the record defence budget, there are nervous times ahead.
There is a glimmer of budgetary hope at the back end of the decade, beyond the forward estimates. The budget papers say that ‘the Government has made a provision in the Contingency Reserve for increased Defence funding over the medium term to implement the Defence Strategic Review.’ It doesn’t state exactly how much that is, but officials have said it is in the order of $30.5 billion. One might question how committed the government is to that funding if it is not prepared to put it down on paper. Still, it would be useful funding should it come through. However, since the government has also said that the difference between the Attack-class and SSNs over the decade is around $20-28 billion, it may only cover the additional cost of nuclear submarines with little left over to address other pressures.
After that preamble, we can briefly go through Defence’s major cost categories, or the Big 3 of acquisition, sustainment, and personnel.
Acquisition: $17,661 million (34.6 per cent)
The acquisition program continues to grow, but not at the rate predicted in the White Paper, the DSU or earlier budget statements. For example, back in the 2020-21 PBS, the military equipment spend for 2023-24 was predicted to be $15,539, but it’s now down to $12,356. That’s a decrease of over $3 billion. In fact, this year’s military equipment spend is down by a billion from what was predicted only in the October budget last year. You can’t keep shifting money to other priorities and it not have an impact.
The acquisition program seems to have plateaued out at around 33-34 per cent of the total budget. That’s significantly less than the 39-40 per cent the 2016 White Paper aimed for; there seems to be ‘natural limits’ to how much you can invest in new stuff if you still want to be able to crew and operate it. Still, that’s well above the historical average of around 25 per cent. There’s no denying acquisition spending is growing and providing the ADF with better equipment.
Because the table of Top 30 acquisition projects in this year’s budget doesn’t reflect the DSR, it has a rather familiar look to it with a lot of the usual suspects grinding away. But there are a few fast movers; the replacement tank fleet looks like it will be delivered very quickly with nearly a billion dollars going out the door this year. Some of the new long-range strike weapons are also showing up in the Top 30 list.
But the Hunter-class frigate is ramping up achingly slowly – and the Australian National Audit Office’s recent report on the program doesn’t fill one with confidence. The DSR’s observation that we should consider larger numbers of smaller ships might have the Hunter’s supporters nervous, but reducing the number of ships to be delivered won’t free up cash until deep into the 2030s. So, unless the government takes the dramatic step of cancelling the Hunter program completely it won’t help fund new classes of small combatants – and it’s hard to see the government doing that to the AUKUS partner that will be providing our SSNs.
The PBS also contains two new programs. The first is Naval Shipbuilding and Sustainment, which reflects the separation of these activities from Capability Acquisition and Sustainment Group. Whether that’s enough to turn the Hunter program around is another matter. The second is Nuclear-Powered Submarines and reflects the government’s recent announcement that it was establishing the Australian Submarine Agency to deliver and manage Australia’s nuclear submarines. This will be a separate agency within the Defence portfolio (like the Australian Signals Directorate). This means the funding for SSNs will be held and managed outside of the Department of Defence.
Operating (including sustainment): $18,516 million (36.3 per cent)
The biggest piece of Defence operating budget is the capability sustainment program ($15,360 million), but there’s a couple of other lines including operations funding ($229 million). The sustainment program shows the opposite dynamic to acquisition – almost every year it grows beyond earlier estimates. The operating budget is consistently over 35 per cent of the budget and that isn’t set to change over the forward estimates.
Like the acquisition Top 30, the sustainment Top 30 looks pretty familiar this year. There’s little sign of the cuts to sustainment budgets that were rumoured in the media before the budget was released. But since the PBS doesn’t yet reflect the DSR that’s not surprising. It’s entirely possible the razors are yet to come out. Of course, if the likelihood of conflict in near term is increasing, we’ll be going with the force we have, so running down its training and readiness could well be short-sighted.
Workforce: $14,851 million (29.1 per cent)
Defence’s workforce takes 29.1 per cent of the budget this year – a historically low percentage. But if we roll into that the $2.5 billion that Defence’s 8,000+ contractors cost (who essentially do the same work as public servants and Defence force personnel), then it’s more like 34 per cent. Defence’s use of external workforce distorts its budgeting since they show up in acquisition and sustainment programs, not as workforce. Moreover, since contractors cost more than public servants, Defence is probably paying around a $1.25-1.5 billion annual overhead for those 8,000 people. The government has indicated it wants to turn that situation around, and the PBS shows planned growth in Defence’s public servants from 16,991 to 19,310 over the forward estimates. That, however, will not be enough to bring the bulk of those contractors back into the Department (even assuming they want to go).
But that’s not Defence’s biggest people problem. The challenge with ADF personnel is not that there’s not enough money, rather there’s not enough people to spend it on. Ever since the 2016 White Paper the ADF’s personnel allocation has been on a growth trajectory. Between making up its starting shortfall, the numbers in the White Paper and then the DSU, and the 14,500 additional ADF positions announced by the previous government in 2022, the ADF needs to grow by around 18,000 from 2015. In the last seven years, however, it has grown by only 412. That’s less than 60 per year. At that rate it’s going to take 300 years.
This year, presumably acknowledging that situation, Defence has revised its ADF target downwards from 62,735 to 59,673, a decrease of more than 3,000. That will mean the ADF will miss its target by less, but it does nothing to help it reach its long-term goal.
And since people are Defence’s most important resource, this is probably Defence’s key challenge. Even if Defence can afford its planned capabilities, there are fundamental questions about whether it will have the people to operate them. It may be time to stop hoping that if you build it, they will come and instead design the ADF’s suite of capabilities around an achievable number of people. That wouldn’t bode well for some key programs; the SSNs, for example, will require around three times as many submariners as the Collins fleet.
In sum, Defence’s funding continues to grow, but it’s not growing at the rate needed to afford its capability ambitions. Moreover, it is a document already overtaken by events as it doesn’t reflect the DSR. So, Defence still has a lot of work to do to align its plans with its resources, and that will extend the uncertainty felt by defence industry.
A final note
The Portfolio Budget Statements are not a very user-friendly document, so it’s not surprising that readers have trouble determining what the Defence budget is. Indeed, there are several different numbers that could be regarded as the Defence budget. But the simplest place to look is Table 4a: Defence and ASD funding from Government.
Dr Marcus Hellyer is Head of Research at Strategic Analysis Australia.