The cost of Defence: ASPI Defence Budget brief 2014-2015

29 May 2014

Defending Australia costs $80,281,391.78 per day, finds this report which about the complex workings of the Defence Budget.

Executive summary

This year’s federal budget was dominated by budget repair. Yet amid the spending cuts and tax increases, Defence did very well. Nominal defence spending will grow by $2.3 billion next financial year (2014-15) to $29.3 billion, representing 1.8% of GDP. In real terms, the year-on-year increase amounts to a 6% boost.

The increase would have been larger still but for extra funding provided for the current year (2013-14) by the Gillard ($359 million) and Abbott ($500 million) governments in response to mounting funding pressures.

Critically, this year’s budget establishes a credible base from which the government can deliver its promise to spend 2% of GDP on defence by 2023-24.

Key initiatives in this budget included the shifting of $2 billion of funding previously planned for 2017-18, of which $1.5 billion was brought forward to address immediate pressures, and $520 million was deferred until 2019-20 and 2020-21. By doing so, near-term budget pressures have been reduced and the medium-term funding profile has been smoothed.

Funding was also provided to reintroduce the ADF gap-year program ($192 million) and provide more generous indexation arrangements for some legacy military superannuation schemes—each an election pledge made good. At the same time, the existing defined benefit military superannuation scheme is being closed to new entrants and a new accumulation scheme introduced.

Despite a promise of ‘no further cuts to Defence spending’, an increase to the efficiency dividend on non-operational areas will see $75 million returned to Treasury over four years.

Next year’s boost to defence spending was not entirely, or even predominately, the result of funds brought forward by the new government. The previous government had already budgeted for a substantial recovery in defence spending in 2014-15. Setting aside automatic supplementation for foreign exchange movements and operational costs, and allowing for the additional funds provided by the previous government mid-year, this government’s first budget only boosted the GDP share in 2014-15 from 1.78% to 1.80% of GDP. In fact, the largest contributions to the result relative to the estimate from May 2013 were slower than expected nominal GDP growth leading to a 0.05% increase in the defence GDP share and foreign exchange supplementation leading to a 0.04% increase.

Nonetheless, the government clearly demonstrated a strong commitment to defence in the 2014 budget; every extra dollar allocated to Defence meant deeper cuts to social programs and higher increases to taxes than would have otherwise been the case to achieve its fiscal goals.

Over the next three years, defence spending is slated to remain largely steady in real terms before jumping up in the fourth year. Because the economy is expected to grow in the intervening period, on current plans the share of GDP will decline to 1.75% in 2017-18.

Defence will face two challenges over the next several years; accommodating rapid growth in capital investment, and rebuilding ADF numbers after three successive years of unplanned decline.

Recent cuts to defence spending fell disproportionately on the capital investment program. So although total spending will only rise in real terms by around 6% next year, investment in new equipment will grow from $3.6 billion this year to $6.1 billion. Experience shows that such rapid growth will be very difficult to achieve. Hopefully, the relatively large number of off-the-shelf purchases in the portfolio will lessen the challenge. But even if money is handed back, it’ll have been worth the risk to regain momentum in the investment program.

On the personnel front, the size of the permanent ADF has fallen three years in a row despite attempts otherwise. Several factors are likely at play, including a higher than anticipated separation rate and overly conservative recruiting targets. Given the stubborn persistence of the problem, it may be that Defence’s workforce analysis and planning capability needs a revamp.

Finally, and as usual, this year’s budget announced yet another round of savings and efficiencies. According to the budget night press release; ‘$1.2 billion in back office savings over the Forward Estimates will be reinvested into Defence capability’. So the good news is that funding will not be lost. However, looking to the Treasury Papers for more detail, it turns out that the savings include a delayed investment in military accommodation ($300 million), reduced Smart Sustainment initiatives ($64 million) and reduced use and support of military trucks ($60 million). In terms of what might be labelled ‘back office’, civilian numbers will fall by 1,200 and there’ll be 300 fewer service provider staff ($606 million), although the latter does not accord with figures given elsewhere for the contractor workforce. Again, as usual, we’ve been given an incomplete and confusing picture of what’s happening with internal savings.

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