ADF command structure
1.7 Measuring Defence Spending
The amount a country spends on defence is a direct measure of its commitment to protect itself. Accordingly, a lot of attention is placed on comparing levels of defence spending between countries and on tracking the rates at which those levels are increasing or
decreasing. For example, here in Australia, a lot of attention was placed on achieving 3% real growth in the Defence budget during the 2000s. It’s important, therefore, that reporting of defence spending captures what’s actually going on.
Table 1.7.1 sets out the presentation in the 2014-15 Portfolio Budget Statement (PBS) [Table 2, p.16] excluding the administered appropriations. (We ignore the administered
appropriations for superannuation and housing because they aren’t controlled by Defence and are appropriated through the organisation for convenience.) The bottom line is Total Defence Funding which, in the past, has been presented in the PBS as ‘the most common way of presenting the Defence budget’ [2008-09 PBS, p.119].
Table 1.7.1 Total Defence funding FY 2014-15
2014-15
$’000 Departmental
1. Output Appropriation 25,882,986
2. Equity Injection 2,463,678
3. Prior Year Appropriation
4. Current year’s appropriation (1+2+3) 28,346,664 5. Drawdown of appropriations carried forward
6 Other appropriation receivable movements
7. Returns to Official Public Account (OPA) -853
8 Funding to/from OPA (5+6+7) -853
9. Funding from Government (4+8) 28,345,811
9. Capital Receipts 97,224
10. Own-source Revenue 859,673
11. Funding from other sources (9+10) 956,897 12. Total Defence Funding (9+11) 29,302,708 Source: 2014-15 PBS
The easiest way to explore what a better approach might be is to examine each of the elements appearing in Table 1.7.1.
Current year’s appropriations: This is the least ambiguous part of the problem. Each year the government formally appropriates money to Defence. The breakdown of the
appropriation in terms of outputs and equity is an artefact of accrual accounting that needn’t concern us. What matters is that this is the quantum of cold hard cash the
government plans to make available to Defence for the financial year. As such, any credible measure of Defence funding must include this money.
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Drawdown of appropriations carried forward: Because funding may either be spent or received in a year other than the appropriation year, an Appropriation Receivable account is utilised. This recognises that departmental Appropriations don’t lapse unless specifically extinguished by the Minister for Finance and shifts to this account represent either the expenditure of additional public funds by Defence or the return of unspent funds. To properly track the funding employed by Defence, it makes good sense to take account of increases and decreases to the Appropriation Receivable account. However, if this is accepted, it follows that changes to Defence’s cash holdings must also be accounted for (since that’s where the money in the appropriation receivable came from originally).
Capital Receipts: As custodian of more than $50 billion of public assets including land, buildings and military equipment, Defence inevitably receives cash from the disposal of items that are no longer needed. Some of this money is returned to government via a Return to the OPA. The remainder is retained by Defence and is called Net Capital Receipts. Given that Net Capital Receipts are generated from the sales of public assets, it’s correct to count this income as part of Defence funding.
Own-source Revenues: Defence receives revenue from a number of sources. These include the supply of goods and services to third parties such as Defence personnel, who pay a share of the cost of their food and lodging provided by Defence, and foreign governments that purchase items like fuel. It makes little sense to include this as part of Defence funding.
While it’s perhaps reasonable to include revenue raised by using public assets (like Defence accommodation), the vast bulk of Own-source Revenue reflects Defence acting as an intermediary that transfers goods between 3rd party providers and 3rd party customers.
For example, the sale of fuel to a foreign government or rations to personnel delivers no revenue to Defence that’s not at least equal to the cost of doing so. Or to put it another way, no one could seriously contend that Defence funding has risen by $50 million simply
because, for example, an extra $50 million of fuel was purchased and sold on to the United States.
Own-source Revenues also includes transfers from the Defence Materiel Organisation (DMO) to Defence. For example, DMO will pay Defence $266 million in 2014-15 [PBS page 137] primarily for the cost of the military personnel provided by Defence to DMO. The DMO is appropriated for civilian and military personnel as it requires the expertise of military personnel within its project delivery and equipment sustainment functions. The DMO then pays Defence to offset Defence’s cost of providing the military expertise. This works in a similar fashion to fuel sales where Defence 'sells' goods and services to DMO to offset the cost of providing those goods and services. This isn’t double counted in Table 2 (page 16) of the PBS as these figures are only those of Defence.
There are a number of tables that consolidate the Defence and DMO picture but another way of doing this is to combine Table 2 with DMO’s direct appropriations and any revenue received by DMO from sources other than Defence. Figure 1.7.1 is our best attempt to depict the situation graphically, though some simplification has been necessary.
34 Figure 1.6.1: Defence Cash and Resource Flows
To complicate matters further the estimated actual figure for the current financial year in PBS Table 2 includes payments to DMO that may eventually remain unspent (noting that some underspends have been dealt with by extinguishing appropriations). Indeed, over a four-year period last decade, more than $927 million accumulated in the DMO Special Account, including $414 million from 2007-08. In some years, the Special Account is drawn down while in others it grows.
From a strict accounting perspective, no rules have been broken. Defence reports its funding accurately, and DMO reports its cash flow properly. Yet there’s something surreal about failing to reconcile the net impact of the two things to show what’s actually going on, especially given the high prominence of Defence funding in recent years.
So what is the ‘Defence budget’?
While there’s an accounting distinction between Defence and DMO, any sensible calculation of the ‘Defence budget’ must reflect the total impost on the taxpayer in delivering defence capability. This is easily achieved by adding DMO funding to the calculation and ignoring the transfer back and forth of money in between. Once again, the PBS contains a consolidation of the Defence and DMO budgets but it isn’t especially illuminating.
In light of the foregoing discussion, it seems sensible to include Funding from Government, Net Capital Receipts (= Capital Receipts – Return to OPA), Net Bank Balance Shifts,
Appropriation Receivable and Special Account Shifts, but to exclude Own-source Revenue.
And then to do the same for DMO and then add the results together, safe in the knowledge
Output (via appropriations and shifts
in retained funds)
Appropriation Payments from
3rd Parties Goods and Service
to 3rd Parties
Public Assets
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that the accounting transfers between the two entities have been excluded (Table 1.7.2).
The addition of DMO appropriations is especially important because under present arrangements, DMO directly receives around $881 million which used to be provided by Defence.
Table 1.7.2: Total Defence resourcing FY 2014-15 Total Defence Funding
ASPI Net Defence Spending Departmental
1. Output Appropriation 25,882,986 25,882,986
2. Equity Injection 2,463,678 2,463,678
3. Prior Year Appropriation
4. Current year’s appropriation 28,346,664 28,346,664 5. Drawdown of appropriations carried
6 Other appropriation receivable movements
7. Returns to OPA -853 -853
8. Funding from Government 28,345,811 28,345,811
7. Capital Receipts 97,224 97,224
8. Own-source Revenue 859,673
9. Funding from other sources 956,897 97,224
10. DMO Appropriation 881,031
11. DMO drawdown of Special Account -4,088
12. Total Defence Funding 29,302,708
13. ASPI Net Defence Funding 29,319,987
The difference isn’t large. Our calculation of Net Defence Funding yields a figure only 0.06%
higher than Total Defence Funding. The difference would be larger if not for the almost complete (but entirely coincidental) cancellation of Own-source Revenues and direct appropriation to DMO. Nonetheless, we believe ASPI Net Defence Funding is a better measure of the ‘Defence budget’ than Total Defence Funding.
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