Budget 2010: Budget 2010 - promises, promises | ADM Jun 2010

But how these are to be fulfilled, and when, can come down to some clever accounting and politics.

Mark Thomson | Canberra

In recent years, defence budgets have been all about keeping promises.

Particularly the iconic commitment to ‘three per cent real annual growth' in defence spending initiated by the Howard government and subsequently embraced with gusto by Kevin Rudd.

This time last year, the government tied itself in knots by insisting that the commitment had been kept, while at the same time slashing $8.8 billion of planned defence spending from the first half of this decade.

The argument was that the promise was intact because the funds had only been ‘reprogrammed' into the future.

In any case, given the dire fiscal and economic outlook at the time, the cuts were neither unexpected nor unreasonable.

Fast forward 12 months.

As the Treasury papers made clear in this year's budget; the economy has been going from strength to strength.

Not only is the deficit smaller than expected but the prospects for a return to surplus have moved forward three years.

Nonetheless, there was no attempt to reinstate the money cut from Defence in last year's budget.

What's more, this year Defence was directed to absorb $912 million of the $1.1 billion cost of improved force protection measures for ADF personnel in Afghanistan.

The comprehensive package of new measures covers everything from enhanced protection and firepower for vehicles to improved body armour and additional military working dogs.

There is no question whatsoever that the government is right to give its highest priority to protecting Australian troops that are being sent into harm's way.

And given the economic and political priority of returning the Commonwealth to surplus, it is hardly surprising that Defence has been told to absorb the cost.

Nonetheless, there are consequences to be reckoned.

Even though Defence's share of the cost of enhanced force protection only amounts to around 3.5 per cent of their annual budget, it comes on top of $1.7 billion of absorbed costs imposed in last year's budget-not to mention the $20 billion of savings planned under the Strategic Reform Program (SRP).

Realistically, however, the additional costs imposed on Defence in the last two budgets will only have a marginal impact on the long-term delivery of the ADF envisaged in the 2009 Defence White Paper.

It takes more than a couple of billion dollars to derail a multi-decade program worth well in excess of $100 billion. Whatever impact there is will be mainly felt over the next few years.

Pros and cons
Here's the problem.

Because the cost of the enhanced force protection measures is drawn predominately from the existing capital investment program, there will be less money to initiate the projects originally planned for the first couple of years of the Defence Capability Plan (DCP).

For those in defence industry hoping to bid for these projects, there are likely to be delays ahead.

Unfortunately, and in a marked departure from previous years, the Defence budget papers are decidedly vague about which projects are likely to go ahead in the next twelve months-most of them have a two-year ‘window' for approval.

But this is just the start; things are set to get even tighter for defence industry in the near future.

To start with, as a result of last year's cuts to the defence budget, the major capital equipment program is set to contract from $5.8 billion next year to $4.7 billion in three years time.

It's only after the Commonwealth returns to surplus in 2012-13 that defence investment will begin the long process of catching up.

And then there's the bad news about the SRP.

Over the past 12 months, Defence has been reexamining how it will deliver the $20 billion in savings promised over the next decade.

As a result, industry now has an even larger part to play in helping balance Defence's books.

Savings from so-called ‘smart sustainment' (that require either reduced purchases or higher productivity from suppliers) have been revised upwards by $430 million, at the same time as Defence has largely absolved itself from making substantial savings from within its own workforce.

Specifically, reductions due to ‘efficiency improvements' associated with the SRP have fallen from an initially planned 2,527 civilian and 1,266 military positions, to a mere 979 military and 404 civilian positions.

In fact, the situation is worse than even these revised figures imply.

Because of extra positions added to the Defence workforce by the White Paper, the net result will be an increase in the military workforce of around 3,800 positions and in the civilian workforce of around 1,500.

Industry standpoint
So while the prospects for Australian defence industry looked pretty good 12 months ago when the Government released its 2009 Defence White Paper, it will be a while before the benefits are felt.

In the meantime, it will require some belt tightening until mid-decade when the SRP will have largely been implemented and defence spending accelerates to meet the 3 per cent average real growth target-assuming that the latter actually occurs.

Nothing is assured.

For better or worse, the preoccupation with national security that saw the Howard government acquiesce to Defence's requests-and stump up extra money-for major new hardware like for C-17 transport aircraft and for new Super Hornet fighters is long past.

Gone also is any willingness by the government to make up for shortfalls caused by poor planning in Defence as might have occurred in the past.

Instead, the focus is squarely on recovering from the Global Financial Crisis and building prosperity to handle a graying population.

The national narrative has moved on.

Absent a strategic shock of some sort, it's likely that defence will continue to take a back seat to economic management in the future.

Mark Thomson is a defence analyst at the Australian Strategic Policy Institute (ASPI).

These are his personal views.