The Cost of Defence: ASPI Defence Budget Brief 2019–2020
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The Cost of Defence The Cost of Defence ASPI Defence Budget Brief 2019–2020 ASPI Defence Budget Brief 2019–2020 The Cost of Defence: of Defence: The Cost ASPI Defence Budget Brief 2019–2020 ASPI Defence $105,853,573.77 $105,853,573.77 $105,853,573.77 $105,853,573.77 $105,853,573.77 $105,853,573.77 $105,853,573.77 One hundred & five million, eight hundred & fifty-three thousand, five hundred & seventy-three dollars & seventy-seven cents per day ISSN 2200-6613 The Cost of Defence ASPI Defence Budget Brief 2019–20 One hundred & five million, eight hundred & fifty-three thousand, five hundred & seventy-three dollars & seventy-seven cents per day. Prepared by: Dr Marcus Hellyer Senior Analyst Defence Economics Cover graphic drawn by Geoff Pryor. Reproduced courtesy of the artist. © The Australian Strategic Policy Institute Limited 2019 This publication is subject to copyright. Except as permitted under the Copyright Act 1968, no part of it may in any form or by any means (electronic, mechanical, microcopying, photocopying, recording or otherwise) be reproduced, stored in a retrieval system or transmitted without prior written permission. Enquires should be addressed to the publishers. Notwithstanding the above, educational institutions (including schools, independent colleges, universities, and TAFEs) are granted permission to make copies of copyrighted works strictly for educational purposes without explicit permission from ASPI and free of charge. First published June 2019 Published in Australia by: Australian Strategic Policy Institute (ASPI) Level 2, 40 Macquarie Street Barton ACT 2600 Australia Tel: + 61 (2) 6270 5100 Email: [email protected] Web: https://www.aspi.org.au/ Blog: https://www.aspistrategist.org.au/ Note on title: The figure of $105,853,573.77 represents one three-hundred-and-sixty-sixth of the consolidated Defence appropriation (including the Australian Signals Directorate) for 2019–20. This does not include funds appropriated to the Defence Housing Authority, nor those administered by Defence for military superannuation schemes and housing support services. Contents Executive Director’s foreword 5 Executive summary 6 Defence in 10 tables 10 Chapter 1: The context 16 1.1 The strategic context 16 1.2 The ‘fourth industrial revolution’ 22 1.3 The economic context 24 Chapter 2: How much money is it? 27 2.1 This year’s budget 27 2.2 The big three 31 2.3 What’s the balance between personnel, capital and operating costs? 35 2.5 Comparisons 36 Chapter 3: Where does the money go? 38 3.1 How is the money divided up among groups and services? 38 3.2 Personnel 42 3.3 Capital 42 3.4 Operating and sustainment costs 47 3.6 Where’s the money spent? 50 Chapter 4: How is Defence delivering? 52 4.1 Implementation of the First Principles Review of Defence 52 4.2 Defence’s self-assessment for 2017–18 53 4.3 People 55 4.4 How is Defence going at delivering capability? 59 4.5 Key projects 62 Chapter 5: Shipbuilding stocktake 69 5.1 The Naval Shipbuilding Plan 69 5.2 Overview of the shipbuilding streams 70 5.3 Programmatic elements 77 5.4 What’s it costing? 81 Chapter 6: How to hedge in maritime (and other) capability 85 6.1 Will the Naval Shipbuilding Plan deliver the required capability? 85 6.2 How to not to hedge 91 6.3 How to hedge 92 Chapter 7: After the election 95 7.1 Election issues 95 7.2 The post-election policy agenda 95 Appendix 1: Long–term tables 99 3 Appendix 2: Has the government met its defence funding commitments? 103 Appendix 3: Approved projects 106 Notes 111 About The Australian Strategic Policy Institute 116 Acronyms and abbreviations 117 4 Executive Director’s foreword This is ASPI’s eighteenth annual The cost of Defence. When ASPI published the first edition, it started a tradition of printing the average daily defence spend on the cover. Back then, in 2002–03, it was a little under $40 million per day. The defence budget has now passed $100 million per day, as Geoff Pryor’s wonderful cover cartoon notes. That’s a substantial increase. Even taking inflation into account, the defence budget has increased by 83% since 2002–03. There’s no doubt that the increased funding has delivered an ADF that’s much more capable than it was 18 years ago. But there’s also no doubt that Australia is now facing a more challenging strategic environment than it was then. The new government will face a range of difficult policy choices in order to navigate Australia safely through this environment. ASPI has proposed policy options for defence and security in its recent Agenda for change 2019. Whichever strategic policy choices the government makes, they will require funding and have implications for the defence budget, so it’s important that we understand the current position of Defence’s budget and the cost of the path that Defence has been following since the 2016 Defence White Paper. The cost of Defence seeks to provide this understanding in a way that’s accessible to anybody with an interest in Australia’s security. As has been the custom in the past, this year’s edition explores particularly topical issues. This year we provide a progress report on the implementation of the Naval Shipbuilding Plan and consider whether a hedging strategy in navy capability is warranted. Acknowledgements are due. Michael Shoebridge reviewed and commented on the draft. The unflappable Steve Clark has once again prepared it for publication. ASPI intern Rhys de Wilde assisted in analysing data and developing charts and tables. ASPI was founded under a charter from the Minister for Defence to ‘provide alternative sources of input to Government decision-making’ and ‘to help nourish public debate and understanding’ of strategic and defence issues. We look forward to supporting the government, the Minister for Defence and the parliament by fulfilling that charter. The cost of Defence also contributes to both those ends. So that it can fulfil its purpose, ASPI receives funding from the Department of Defence, which contributes a little under half of ASPI’s overall funding. This is currently ten thousand, nine hundred and fifty-eight dollars and ninety cents ($10,958.90) per day. Details can be found in our annual reports, which are tabled in parliament and available online. Peter Jennings Executive Director 5 Executive summary Little has changed in the defence funding picture Defence budget 2019–20 since last year. This year’s budget continues to Defence (with Australian Signals Directorate) follow the trajectory of solid real annual increases funding, 2019–20: $38.7 billion set out in the 2016 Defence White Paper. The Share of GDP: 1.93% consolidated defence budget (that is, the budget Real growth on prior year: 1.3% for the Department of Defence and the Australian Defence Department (without Australian Signals Directorate) reaches $38.7 billion in 2019– Signals Directorate) funding, 2019–20: $37.8 billion 20. Real growth is only 1.3%—the smallest increase Expenditure shares under the Coalition government—and the budget Investment: $11.8 billion (31.1%) has actually decreased slightly as a percentage of Personnel: $12.3 billion (32.5%) Operating: $13.8 billion (36.4%) GDP (from 1.94% to 1.93%) because GDP has grown faster than the defence budget. Cost of operations Afghanistan and Middle East: $644.3 million But those figures are a little misleading. Late in the Border protection: $59.3 million previous financial year, $620 million was moved Key budget measures forward into 2018–19 from 2019–20, making the $600 million brought forward from 2019–20 into 2018–19. former a little bigger and the latter a little smaller than planned. If that hadn’t occurred, real growth would have been 4.6% and the budget would have been 1.96% of GDP. Ultimately, it makes no real difference to Defence which year it gets the money—it got it and has already spent it. The real story is that the government so far has delivered on its White Paper funding commitments. The White Paper presented a 10-year fixed funding line that would not vary as GDP fluctuated up and down. We’re now four years into that decade. Once we take all variations into account (such as adjustments due to foreign exchange rates and supplementation for operations), the $143.2 billion in funding Defence has received over those four years is within 1% of the White Paper funding line. Granted, Defence has had to fit more things into that envelope; it doesn’t seem to have received additional funding to cover its contribution to the Pacific Step-up announced by the government last year, for example. But it’s rare that Defence has had such funding certainty. The other key issue to note is that the defence budget, at least for planning purposes, has already moved well beyond 2% of GDP. According to the Portfolio Budget Statements (PBS), the budget will hit that milestone in 2020–21, meeting the government’s White Paper commitment. But after that the budget continues to grow, hitting almost 2.2% by the end of the forward estimates. In essence, the White Paper funding line and a 2% of GDP funding line diverge significantly. The difference is substantial, reaching $5 billion a year and totalling over $22 billion for the remainder of the decade after 2020–21. That gap is even bigger if GDP fails to grow at 2¾% or at 3% from 2021-22 as forecast in the budget papers. During the 2019 election campaign, the government reaffirmed its commitment to restoring the budget to 2% of GDP, but it was silent on whether it was committed to the White Paper funding line.