The Australian Defence Strategic Review: The Missing Defence Budget

By Marcus Hellyer

The bottom line up front:

The Albanese government’s May Defence budget is disconnected from its own Defence Strategic Review. Defence funding and the plan for spending is business as usual when instead we need urgent action. Simply committing to the now seven-year-old budget line set by the former Coalition government in the 2016 Defence White Paper for the next four years is defence policy on autopilot.

The budget papers show that the Defence Strategic Review is not yet integrated into Defence’s budgets and plans. So compounding problems, competing priorities and challenges–like how AUKUS will be funded; the impact of the nuclear submarines on the rest of the budget, force structure and acquisition program; and the worsening failure to recruit and retain the numbers of military people to operate the force that’s being built—have been left unresolved.

To paraphrase Hegel, the heart of the problem in the 2023-24 Defence budget is a failure to start at the beginning: from a thesis setting out the defence force the country ideally needs to meet its strategic circumstances, then confronting it with an antithesis¬—the amount of money the government would prefer to spend on defence, and then synthesising these into an affordable but effective force structure somewhere in between.

To many defence-watchers, the government’s current strategic conversation is jarring because it’s not working that way. The starting point for the conversation and decisions from it should be the outlook and approach set out in the Government’s Defence Strategic Review, but it’s not. Instead, this conversation is starting with the amount of money the government would prefer to spend. Moreover, the conversation is not moving. To butcher Hegel again, we’ve jumped straight to the antithesis and are not developing a synthesis.

What’s jarring is that the government said just three weeks ago, and repeated with the release of the budget, that ‘Australia is facing the most difficult strategic circumstances since the Second World War’. But its response to its own pronouncement is to devote an amount of resourcing to the preservation of our security that is substantially less as a percentage of national wealth than we have spent at many times over the 78 years since that war. That’s an amount of money that was set out by the previous government in its 2016 Defence White Paper (that was developed in 2015).

The biggest story in the 2023-24 Defence budget is the wholly expected news that there’s no new money in the forward estimates beyond the previous government’s funding trajectory. In essence, this government has constrained itself to a funding envelope that was defined eight years and four Defence Ministers ago. And the recommendations of the DSR team seem to have to somehow fit into that dusty old envelope.

For 2023-24 the envelope is $52,559 million in consolidated funding for the Department of Defence ($50,086 million) and the Australian Signals Directorate ($2,472 million). That’s a 7.0% nominal increase on 2022-23. Should the government’s prediction of moderating inflation pan out (which is credible but not bankable), that would be a 3.0% increase in real terms. That would definitely be an improvement on 2022-23 when a substantial increase of 8.0% in nominal terms was effectively wiped out by inflation, resulting in a real increase of less than 1.0%. It’s hard to increase capability if your budget is stagnant in real terms.

Defence spending as a percentage of GDP continues to fall, not because the budget is being cut, but because GDP is growing rapidly (largely in nominal terms driven by inflation). 2022-23 will end up at 1.93%, down from predictions as high as 2.35% back in the GDP doldrums of the Covid-19 pandemic. Similarly 2023-24 will be 2.04%, based on the GDP predictions in this year’s budget, down from earlier predictions of 2.38%. Once again, we are reminded defence spending as a percentage of GDP is a very crude metric.

Broadly speaking, this budget delivers the funding set out in the 2016 Defence White Paper. But aside from the fundamental issue of whether that number is the right target in the first place, more and more has been shoved into that envelope over the past seven years that it is bursting at the seams.

This year the government has added a new raft of measures and adjustments over the forward estimates (PBS Table 2) that Defence has to absorb under its existing funding line. These include $923.9 million for enhancing Pacific engagement; that essentially doubles the Defence Cooperation Program’s support to Pacific Island countries. There’s $631.9 million given up through efficiencies through savings in contractors, advertising, travel and legal expenses—the $144.6 million in the October budget last year was just the starting point. The list goes on. In essence, after seven years of accretions, absorptions, and deductions the current funding line bears little relationship to what it’s meant to be paying for.

Moreover, Defence has not yet done the work of incorporating the broad recommendations of the DSR into its investment plan. The budget papers note that ‘over the next 12 months, Defence is undertaking work to reshape the Defence Integrated Investment Program, in line with the findings and recommendations of the [DSR].’ Put another way, the 2023-24 PBS represents an investment program that predates the DSR.

But how is Defence meant to bring the DSR and its investment program into alignment? The DSR said that Defence’s acquisition program was already 24% overprogrammed over the forward estimates, but it also recommended bring acquisitions forward (though what exactly they are we haven’t seen) increasing that pressure. Meanwhile, significant funds are being put to other priorities (such as enhancing Pacific engagement) and are not available for acquisitions that might create the ‘impactful projection’ force Richard Marles has advocated. Over a billion dollars has been removed from the 2023-24 acquisition budget compared to the forecast in the October PBS.

The 70% reduction in the number of infantry fighting vehicles and the cancellation of the second tranche of self-propelled howitzers have attracted headlines, but they won’t free up funds in the forward estimates. Similarly, the DSR’s thought bubble about developing a fleet consisting of a larger number of smaller ships won’t help unless the government actually stops the Hunter-class frigate program now; dropping the last few ships off the end in the 2040s does nothing now.

And that gets us to the crux of the matter. The only way Defence can find the scale of funds it needs to start the SSN program and reshape the investment program along the lines recommended by the DSR is to go looking where the bulk of the money is in the four years of the forward estimates, namely the approved capital program—projects that are already in contract and delivery.

That’s normally a place the government and Defence won’t go (with the noteworthy exception of the Attack-class submarine) due to inertia, sunk cost and reputational damage. But it’s hard to see how it can be done any other way.

What that means is that the Portfolio Budget Statement we just got is already a historical relic. Its lists of the Top 30 acquisition projects and Top sustainment products represent a force structure that has been turned upside down by SSNs and the DSR but their spending continues regardless.

So Defence will hunker down over the next year and rebuild the investment program. That’s another year that defence industry will be in limbo. And even the traditional certainties of approved projects and contracts can’t be taken for granted.

In the medium term, namely the remainder of the decade beyond the forward estimates, there are some faint glimmers of relief. The budget papers say that ‘the government’s commitment to implement the DSR will include increased spending over the medium term, with spending estimated to rise above 2.3 per cent of GDP in 2032-33, based on current GDP projections.’

We’ve already noted that predictions of defence spending as a percentage of GDP are worthless, so how many actual dollars are we talking about? The government hasn’t spelled that out in black and white, but it has suggested it in purple. On page 98 of Budget paper number 1, a chart illustrates ‘revisions to major payments since the 2022-23 October budget.’ There we see a series of purple blocks illustrating additional defence funding nominally held in the government’s contingency reserve. According to Defence officials, those purple blocks add up to $30.5 billion.

So what’s that $30.5 billion for? It’s not stated, but I was reminded of the numbers that the government briefed to the media when it announced the ‘optimal pathway’ to an SSN capability a couple of months ago. Over the decade, the Attack class would have cost around $30 billion; the SSN pathway is going to cost $50-58 billion. That gap is pretty close to $30 billion.

Coincidence or not, any new funding in the back half of the decade will be largely consumed by the SSN program, which still leaves Defence with the problem of how it will afford all of the other DSR priorities. That’s if the money shows up; while the government revenue got an unexpected revenue windfall this year pushing it into surplus, the budget paints a picture of enduring structural challenges for Australian government revenue and spending outside defence. If the government doesn’t think it is in a position to spend more on defence today, it’s not at all certain it will be in a better position in five years’ time.

Of course, much of this is largely academic since Defence still hasn’t solved its people problem. In fact, it’s going backwards. According to the PBS’s people numbers, the ADF shrank by 1,330 over the past year. Overall since the 2016 White Paper—a period of unconstrained personnel resources—the ADF has grown by a grand total of 412, or around 60 people per year. Yet Defence needs to grow by 26,000 to be able to operate the force embodied in its existing acquisition plan. Does anybody think it will get there?

It’s long past time to have the Hegelian conversation we have to have that starts with the key issues. What is the force structure we need? What force structure can we actually crew? How can we deliver it in a meaningful timeframe. And then we need to rebuild the funding line from the ground up rather than constraining ourselves to a historical relic.

This article was first published by Strategic Analysis Australia and is republished with the permission of the author.