Budget 2011: Force 2030 face perfect storm | ADM June 2011

Mark Thompson | Canberra

Slashed and burned. Not only did this year’s Federal budget defer $2.4 billion of investment to beyond 2014, but the government clawed back $3.9 billion that had been promised in the 2009 White Paper from across the forthcoming decade.

None of this would have come as a surprise to anyone wondering how the government would preserve its wafer thin surplus in 2013 in the face of revenues ravaged by cyclones and floods. Yet the explanation lies elsewhere. All signs are that the cuts and deferrals came about because there was little prospect of Defence being able to spend the money had they retained it.

So what happened? Incredibly, Defence found itself in the embarrassing position of handing back $1.5 billion at the close of the 2010-11 financial year—including $1.1 billion earmarked for capital investment plus another $400 million from recurrent spending. And the situation could easily have been worse. Without the last minute opportunity purchases of an additional C-17 Globemaster aircraft and ex-RFA Largs Bay to replace the abruptly decommissioned HMAS Manoora, the underspend would have been closer to $2 billion. Faced with such a situation, the government arguably had little choice.

Of course, none of this is the fault of Defence or DMO. At least that’s what we are asked to believe. The budget night media release is unequivocal; ‘reprogramming is necessary to ‘better reflect realistic milestone delivery payments by industry’ and this ‘accommodates anticipated delays in project delivery from industry’. But while industry does have to shoulder a sizable share of responsibility for what’s been a dismal year for the long-term development of the ADF, such claims fail to tell the whole story.

The fact is that the approval of new projects is also running badly behind schedule. This is especially true of first-pass approvals which are the lead indicator of the major capital investment program. In the twenty-four months since the 2009 White Paper a mere nine projects have been given the nod, whereas something like four times that number were initially planned. Moreover, this year’s deferral of investment included $213 of funding for unapproved projects—a clear sign of problems beyond industry.

This year’s deferrals come on top of the massive reprogramming of around $8.8 billion of defence funding back in 2009 in the shadow of the Global Financial Crisis. The net result is that baseline defence spending will be on a downward trajectory for the next two years before recovering after the government returns to surplus. At least that’s the plan. Apart from the possibility of further defence cuts if the government’s fiscal projections falter, it is far from clear that present plans are feasible.

Even before the latest round of deferrals, Defence’s plans envisaged a greater than 75 per cent boost to major capital investment over four years. Leaving aside the question of industry’s capacity to ramp up so quickly amidst mining-boom Mk-2, on recent trends it is hard to see how so much new investment could be approved so quickly. This year’s budget further exacerbates this problem.

And it gets worse. Even if an accelerated rate of project approvals was possible and if industry capacity was somehow able to expand quickly enough, there will likely be an election in 2013 and a new Defence White Paper is promised for 2014. On past experience, these events will force a further substantial hiatus in the development of the ADF. The government’s plans for Force 2030 are going to be hit by a perfect storm.

So what about the $3.9 billion in cuts? These, we are told, mostly reflect increased efficiencies associated with the Strategic Reform Program (SRP). For example, the $2.4 billion in reform costs associated with the SRP have been revised down to $60 million, less than 3 per cent of the original figure. Further savings come from cutting the number of civilians in Defence by 1,000 across the next three years. But, as with the investment program, all is not what it first seems.

The cut to civilian numbers only came about after Defence failed to fill 1,205 civilian positions it budgeted for over the past year. And the same occurred in the previous year with civilian numbers falling 645 below planned levels. Cutting personnel numbers that aren’t needed isn’t efficiency; it’s an adjustment to bring poorly conceived plans back to reality.

Arguably, the remaining savings are of the same ilk. It was stretching credibility to claim that $20.6 billion of savings were possible over the decade from the Strategic Reform Program, but to add another $3.9 billion to the total in one hit goes beyond the realm of what’s plausible.

All indications are that the increased funding granted back in the 2009 Defence White Paper was simply beyond what Defence actually needed. Indeed, even after the cuts and deferrals, defence spending will account for 1.8 per cent of the nation’s GDP next financial year and amount to $26.5 billion—more than a billion dollars more than they managed to spend this year. The question has to be whether they will be able to spend next year’s budget.

Mark Thomson is program director at ASPI, these are his personal views.