On 3 May 2009, the Prime Minister released the long-awaited 2009 Defence White Paper.
Entitled Defending Australia in the Asia Pacific Century: Force 2030 the 138-page document included one and half pages—585 words to be precise—on how the government planned to fund Defence over the next 21 years. The plan had two parts.
First, a funding model with the following elements:
• 3 per cent real growth in the Defence budget to 2017-18
• 2.2 per cent real growth in the Defence budget from 2018-19 to 2030
• 2.5 per cent fixed indexation to the Defence budget from 2009-10 to 2030
• that Defence will reinvest savings from its [$20 billion decade-long] Strategic Reform Program back into priority Defence capabilities as agreed by the Government
• shortfalls against the White Paper funding plan will be offset by Defence.
Second, ‘Defence [will] undertake a substantial program of reform, efficiencies and savings to underpin the achievement of White Paper objectives... [and] correct long-term
hollowness and remediate the enabling functions of the Australian Defence Force’. This is, of course, the aforementioned $20 billion Strategic Reform Program.
Further detail was provided eight days later in the 2009-10 Budget. And, while the wording of the funding commitment in Defence 2009 was retained, the government stopped short of handing over the money. Instead, a substantial wedge of promised funding was deferred into the future. As best we can work out (the 2009-10 budget was less clear than it could’ve been) the net result was an $8.8 billion reduction in funding across the forthcoming decade.
In addition, Defence was directed to ‘absorb’ additional new budget measures amounting to
$585 million over four years and $1.7 billion over the decade in the 2009-10 Budget.
The initial deferral of funds in 2009 was only the start of the steady erosion of the money available to Defence to deliver Force 2030. Table 3.1 collects together the key measures.
Each of the categories has a different impact on the availability of funds.
The $10.6 billion of deferrals didn’t necessarily represent lost money, but rather money that was shifted (reprogrammed) to mostly unknown points in time in the second half of the 2010s or beyond.
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Table 3.1: Key budget actions impacting the Defence budget 2009-2012
Year Initiative Cost
Deferrals
2009 Budget Deferral of funding to beyond 2015-16 $8,810 million
2010 Budget Deferral of investment funding to beyond 2015-16 $521 million
2011 Budget Deferral of investment funding to beyond 2014-15 $1,281 million
Total $10,612 million Savings
2011 Budget Increased efficiencies and savings (over 10 years) $3,837 million
2011 mid-year Efficiency dividend (over 10 years) $670 million
2012 Budget Expenditure reduction measures (over 10 years) $5,455 million
Total $9,962 million Absorbed costs
2009 Budget Costs absorbed 2009-10 to 2018-19 $1,680 million
2010 Budget Cost of force protection ($912 m) – Cost of existing projects ($402 m)* $510 million
2012 Budget Cost of Moorebank-Holsworthy relocation $332 million
Total $2,522 million
Hand backs
2009-10** $131 million unspecified $131 million
2010-11 $1.1 billion in capital investment $1,100 million
2010-11 $400 million in recurrent expenses $400 million
Total $1,631 million
Source: DAR and PBS. *Senate question on notice #140, September 2010. **SLC Hansard 30 May 2011.
The $10 billion dollars of savings represented cuts to defence funding for which there was no suggestion of the money ever being returned at some point in the future. Around
$4.5 billion of the savings were supposedly the result of efficiencies, the remainder were outright cuts. Defence has no one to blame but itself for most of the former, having handed back money in 2010-11 and advised the government of additional savings available from shared services reform (an area that subsequently had to be supplemented with additional funds in the 2012-13 budget).
Absorbed costs are an additional impost put on Defence to deliver something extra without additional funding. The figure we’ve used is actually only a subset of the measures that have technically been absorbed for reasons explained in Chapter 3 of last year’s Brief. Similarly, the hand back of money in 2010-11 is complicated by the inter-year shift we also explained last year.
In summary, over the life of the 2009 Defence White paper (May 2009 to April 2013)
Defence handed back $1.6 billion, of which $780 million it was unable to spend. $10.6 billion of planned investment was deferred and $10 billion of promised funding was returned to Treasury, including from areas that were supposed to be delivering efficiencies but which subsequently encountered cost pressures that were exacerbated by the need to absorb $2.5 billion worth of unfunded measures.
Setting aside the hand backs, Defence’s financial bottom line was impacted by two
categories of government decision; deferrals and savings cuts. The aggregate effect of these
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measures is plotted in Figure 3.2 atop the underlying cash balance for the Commonwealth as estimated at the time of the 2012-13 Budget. Note that if Defence spending had been held at the levels promised in Defence 2009, in May 2012 the Commonwealth would have been projected to remain in deficit for two additional years until 2014-15.
Figure 3.2: Reduced Defence funding and the underlying cash balance
Source: DAR, PBS and the 2012-13 Budget Overview.
The clear correlation between reduced defence expenditure and the return to surplus isn’t a surprise. Back in 2007-08, the ASPI Budget Brief (p. 135) included a precautionary risk analysis of factors that could impede the progress of Defence 2000, including the risk posed by a recession. The conclusion at that time, based upon the experience of the recessions in the early 1980s and 1990s, was that the threat to defence funding occurred not at the outset of an economic downturn, but around the time when the government was striving to return to surplus. Events between 2009 and 2012 confirmed that analysis.
Figure 3.3 is our best attempt to isolate the underlying real trends in personnel costs, capital investment and operating costs at the time of the 2012-13 budget, resulting from the cuts and deferrals in the preceding three years. (Supplementation for deployments has been accounted for via a methodology explained in Chapter 3 of last year’s budget brief.) As is apparent, and as might be expected, capital investment bore the brunt of the cuts.
It’s a matter of opinion whether the potential political gains of delivering a surplus in 2012-13 justified the cuts to defence funding. As it happened, the effort was for naught and the
0 1 2 3 4 5
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21
Billion dollars Deferrals
Savings cuts Reductions in Defence Spending since the 2009 Defence White Paper
-5 -4 -3 -2 -1 0 1
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21
per cent GDP
Underlying cash balance as budgeted May 2012
? ? ? ? ?
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Commonwealth fell into deficit by $19.5 billion that year due to a collapse in revenues resulting from deterioration in the terms of trade.
Figure 3.3: Underlying trends in defence costs circa May 2012
Source: ASPI analysis of 2012-13 PBS and earlier Annual Reports.
On 3 May 2013, the Prime Minister and Defence Minister released the 2013 Defence White Paper—four years to the day after its predecessor and one year earlier than planned.
Entitled simply Defence White Paper 2013, the 132-page document includes one and a half pages—675 words to be precise—on how the government plans to fund Defence. Although it devoted 90 more words to the topic than its predecessor, it actually managed to say somewhat less. Key points include:
• The government ‘remains committed to maintaining an ADF workforce of approximately 59,000 permanent members’.
• In addition to the annually updated four-year Forward Estimates funding model there’ll also be a ‘subsequent six-year general guidance [i.e. a single aggregate figure] for Defence planning purposes’. The 2013-14 PBS gave that figure as $220 billion.
• The ‘Government is committed to increasing Defence funding towards a target of 2 per cent of GDP. This is a long-term objective that will be implemented in an economically responsible manner as and when fiscal circumstances allow’.
More importantly, by May 2013 the prospects of achieving a surplus were long gone and the way was open for the government to alleviate Defence’s budget dilemma by providing additional funding. And it did. As best we could estimate using the fragmentary information available in May 2013, around $3 billion was brought forward from the then fourth year of the Forward Estimates and the years beyond, and around $10.7 billion of funding was cut from those same years. So while short-term pressures were partially addressed, the longer-term picture was made even less favourable. (Note that the estimate of $10.7 billion being removed is based on the inadvertent disclosure of long-term funding in the 2010
Intergenerational Report.)
0 2 4 6 8 10 12
billion 2012-13 dollars
Personnel costs
Operating costs
Capital costs
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Critically, the $10.7 billion taken away in 2013 was in addition to the roughly $10 billion taken away (as opposed to deferred) in 2011 and 2012. Moreover, it doesn’t capture any funds deferred to beyond 2022 or the erosion of buying power due to absorbed costs. All up, this puts a lower limit of around $21 billion for the accumulated shortfall relative to 2009 promises.
An alternative estimate of the shortfall can be found by comparing explicit Defence 2013 funding with the growth promises made in Defence 2009. In Figure 3.4, post-Defence 2013 funding is explicitly compared with the Defence 2009 promise of 3% real growth to 2017-18 and 2.2% subsequently. To avoid overestimating the difference between current and past plans, 3% real growth has been projected relative to the underlying defence spending in 2008-09, exclusive of operational costs. That’s notwithstanding that Defence absorbed just over a billion dollars of operational costs in that year, which would make it reasonable to use the full figure. A much larger difference would have resulted from using the figure inclusive of the cost of operations, or even more so by commencing the projection from 2009-10 when spending was significantly higher.
Even with these conservative steps taken, the difference in funding between the promises of 2009 and those of 2013 come out to be $32.9 billion as measured in real 2013-14 dollars for the period 2009-10 to 2022-23.
Figure 3.4: Defence 2013 funding compared with the promises of Defence 2009
Source: Annual reports and various PBS and PAES (2012 = 2012-13 etc.)
The difference between the number derived from reconstructing Defence’s year-by-year funding guidance ($21 billion) and the figure from explicitly applying the 3%/2.2% real growth promise ($33 billion) is easily understood. From the very start, Defence wasn’t given a future-funding envelope consistent with what was said in Defence 2009. In effect, the
0 5 10 15 20 25 30 35 40
billion 2013-14 $
Operational supplemenation Baseline costs
Defence2009 funding
actual
spending budget
estimates $220 billion guidance
$33 billion less than promised in 2009
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commitment to 3%/2.2% real growth was taken to mean (within the corridors of government) that Defence’s pre-existing funding envelope out to 2017-18 would be maintained. And while that funding envelope may have originally been based on 3%/2.2%
real growth, by the time 2009 came around the funding envelope had been reshaped by reprogramming adjustments, foreign exchange movements, and additional funded initiatives such as the Super Hornet purchase. As an aside, this explains why it was necessary to
smooth out the future-funding envelope in this year’s budget to remove impractical chunks of funding that had accumulated in the 2017-18 FY as a result of reprogramming that occurred all the way back in the 2000s.
Regrettably, the difference between the funding that was promised in plain English in Defence 2009 and what was actually made available to Defence was never explained—hardly surprising given that there was around $10 billion less available than was ostensibly
committed to.
Confused yet? To be honest it’s taken me a while to work out what’s been going on. Of course, all of this could be avoided if the government simply published its explicit ten-year defence-funding envelope each year with the budget.
Perhaps the best way to describe the funding situation immediately after Defence 2013 was that for the period 2009-10 to 2022-23 funding was $33 billion less than promised in Defence 2009 and $21 billion less than Defence was planning on—not counting the substantial reduction in spending capacity due to absorbed measures. In a media release (16 May 2014), the current Defence Minister confirmed funding shortfalls commensurate in scale with the foregoing discussion.
When looking at the shortfall in funding—be it $20 or $30 billion—it’s important to
remember that the capability goals of Defence 2009 largely survived through into the 2013 document. With capability targets static and funding at least $2 billion a year less, the result was a yawning gap between means and ends.
It was hardly surprising therefore, that budget pressures emerged early. And in one of its last acts prior to the 2013 election, the outgoing Gillard government was forced to bring forward
$750 billion from 2016-17 into the period 2013-14 to 2015-16 to address near-term funding shortfalls (see 2013-14 PAES).