The Cost of Defence

The Cost of Defence ASPI Defence Budget Brief 2009-10 Seventy-two million, nine hundred & ninety thousand, three hundred & seventy-five dollars & thirty-four cents per day. Prepared by: Mark Thomson Program Director Budget and Management Selected Major Projects edited by Andrew Davies and compiled by: Gregor Ferguson Tom Muir Senior writers at Australian Defence Magazine Cover graphic courtesy of Department of Defence © The Australian Strategic Policy Institute Limited 2009 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. First published May 2009 Published in Australia by: Australian Strategic Policy Institute (ASPI) Level 2, Arts House, 40 Macquarie Street Barton ACT 2600 Australia Tel: + 61 (2) 6270 5100 Fax: + 61 (2) 6273 9566 Email: [email protected] Web: http://www.aspi.org.au Note on title: The figure of $72,990,375.34 represents one three-hundred-and-sixty-fifth of reported Total Defence Funding for financial year 2009–10. This does not include funds appropriated to the Defence Housing Authority, those administered by Defence for military superannuation schemes and housing support services, nor the additional funds provided directly to the Defence Materiel Organisation. CONTENTS Director’s Introduction v Executive Summary vi Section 1 – Background 1 1.1 Strategic Context for the Budget 1 1.2 Economic Context for the Budget 4 1.3 Defence Organisation and Management 7 1.4 National Security Spending 12 1.5 Measuring Defence Spending 14 Section 2 – Defence Budget 2007–08 PBS Explained 19 2.1 Strategic direction 20 2.2 Resourcing 20 2.3 Other information 29 2.4 Capital Investment Program 30 2.5 People 34 2.6 Outcomes and Performance 51 2.7 Financial Statements 81 2.8 Defence Materiel Organisation 81 Section 3 – Defence Funding and the White Paper 89 Section 4 – Strategic Reform Program 107 Section 5 – Defence Economics 125 Section 6 – The Cost of War 141 Section 7 – The Impact of the Global Financial Crisis 147 Section 8 – Selected Major Projects 163 Section 9 – Australia’s Foreign Aid 213 About the Australian Strategic Policy Institute 222 Glossary 224 iii iv EXECUTIVE DIRECTOR’S INTRODUCTION This is ASPI’s eighth annual Defence Budget Brief. Our aim remains to inform discussion and scrutiny of the Defence budget and the policy choices it entails. As has been the custom in the past, we explore new areas in this year’s brief. Two entirely new sections have been added; Australian Aid, which explores Australia’s foreign aid program, and The Impact of the Global Financial Crisis, which examines the potential consequences of the present crisis for Australia’s security. In addition, the existing Defence Economics section has been expanded to cover regional defence economic trends and our usual section on Defence Management has been given over to the recently announced Strategic Reform Program. But perhaps the most important innovation in this year’s brief is the replacement of our usual ASPI Top Twenty Projects with a more in-depth examination of nine selected projects that we think have important lessons for future defence acquisitions. This new section, called Selected Major Projects, contains articles from our colleagues at the Australian Defence Magazine, Gregor Ferguson and Tom Muir. This new section was conceived and edited by ASPI’s Andrew Davies. Finally, the not inconsiderable task of preparing the document for publication has been ably taken care of by Janice Johnson and Zoe Spinocchia. Many others have helped by providing comments, offering advice, and checking facts. Our thanks go out to them all. Also, Defence was kind enough to look over a preliminary draft of this brief and provide valuable comments. This helped clarify some important points and resulted in improved accuracy in many areas. Of course this does not in any way imply that Defence endorses this document or even supports its conclusions. My colleague Dr Mark Thomson, who is the Manager of ASPI’s Budget and Management Program, has once again pulled together the brief in the short time available. For this I extend my sincere thanks. As always, responsibility for the judgements contained herein lie with Dr Thomson and me alone. Lastly we should acknowledge that we at ASPI are not disinterested observers of the Defence budget. Our funding from government is provided through Defence at the rate of seven thousand, eight hundred and twenty-seven dollars and forty-five cents ($7,827.45) per day. Details can be found in our 2007-08 Annual Report. Peter Abigail Executive Director v EXECUTIVE SUMMARY Budgets are important because words are cheap. It is only by seeing where money actually goes that a government’s true intentions are known. It’s disappointing, therefore, that ‘the most comprehensive White Paper of the modern era’ has been followed by the least comprehensive Defence budget papers of the past decade. Between the White Paper and the Defence budget papers we are offered only the barest details of how the government will fund its expansive plans for the defence force. Despite claiming to have a ‘fully costed’ and ‘affordable’ financial plan stretching twenty-one years out to 2030, actual funding has only been disclosed for the first four. Mindful of the White Paper’s exhortation that ‘[t]axpayers and their elected representatives should have a clear idea of where their defence dollars are going’ we have done our best to fill in the gaps. Our best estimate is set out below. A new funding model It was on 2 May 2009 that the Prime Minister stood on the wharf at Garden Island, with a frigate for backdrop, and released the long awaited 2009 Defence White Paper, Defending Australia in the Asia Pacific Century: Force 2030. Central to the ambitious plans laid out in that document was a new funding model that had three essential elements: 3% real annual growth in the Defence budget to 2017-18, 2.2% real annual growth in the Defence budget from 2018-19 to 2030, and 2.5% fixed indexation to the Defence budget from 2009-10 to 2030. In addition, Defence was directed to undertake a Strategic Reform Program to free-up $20 billion of savings for redirection to priority areas. On 12 May 2009, the Treasurer stood at the dispatch box and tabled a Budget which reneged on the commitment the Prime Minister had made only ten days earlier. Not only were the benefits of the new indexation regime deferred by four years, but $2 billion of existing spending was cut from the next four years and deferred into the future, as was $1 billion from 2015-16 and $500 million from 2016-17. The deferral of indexation funding is particularly important because it’s mainly the new indexation that provides extra money. As best we can estimate (the budget papers do not disclose the total size or timing of the deferrals), around $8.8 billion of funding has been taken from the first six years of the Defence budget. Of this amount, some money is returned in the last three years of the forthcoming decade and some is deferred into the next decade. We cannot say how much falls into each category. It is no accident that the deferrals push spending to the other side of the tipping point where the government’s finances are projected to go from deficit to surplus in 2015-16. All signs are that defence spending has been deferred in this budget to hasten a return to surplus. In the present economic and fiscal environment, this is neither unreasonable nor surprising (especially when you see how much money vi Defence will get anyway). What is surprising is that the Defence budget papers assiduously fail to explain what’s happened. With only four years of funding visible, it is impossible to say anything about the 3% real growth commitment. But because the deferrals suppress funding growth over the next three years, the pace of growth in the years that follow will have to be rapid to deliver the promised average 3% out to 2017-18. The trouble is, that’s exactly when the government will be trying to get back into surplus. If there was pressure on the defence budget this year, imagine what it will be like when the political Holy Grail of a surplus is within reach. How much money will Defence get? Despite the deferrals, defence funding will reach an historic high of $26.8 billion next year, representing fully 2.3% of GDP. The year-on-year nominal increase is a stunning $4.3 billion, amounting to a 16% real increase (relative to the 2.5% indexation). Several factors contribute to the jump. First, there’s $1.7 billion of extra operational supplementation (last year Defence absorbed $1 billion of operational costs from within their base funding). Second, the depreciation of the Australian dollar has seen $1.5 billion extra pumped into the budget to maintain the buying power of the Defence dollar. Third, the underlying 3% real growth from the 2000 White Paper is working its way through. Finally, there was close to a billion dollars of capital investment deferred out of last year’s budget. The high share of GDP accounted for by defence funding—a figure not seen since 1986—has been inflated by the recession and will fall back to 1.9% over the next four years as the economy recovers and defence spending moderates.

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