{"id":48052,"date":"2019-06-05T06:00:37","date_gmt":"2019-06-04T20:00:37","guid":{"rendered":"https:\/\/www.aspistrategist.ru\/?p=48052"},"modified":"2019-06-05T18:57:29","modified_gmt":"2019-06-05T08:57:29","slug":"the-cost-of-defence-beyond-2-of-gdp","status":"publish","type":"post","link":"https:\/\/www.aspistrategist.ru\/the-cost-of-defence-beyond-2-of-gdp\/","title":{"rendered":"The cost of defence: beyond 2% of GDP"},"content":{"rendered":"
<\/figure>\n

The first question that people ask me about the defence budget is, \u2018Will it reach 2% by 2020\u201321 as the government promised?\u2019 The short answer is yes. According to the budget papers<\/a>, the consolidated defence budget (that is, the budget for the Department of Defence and the Australian Signals Directorate) will reach 2% of GDP next financial year. That will require an increase of around $3 billion on 2019\u201320\u2019s $38.7 billion, but that\u2019s not particularly extraordinary or unachievable. And there\u2019s no reason to doubt that the government will meet this 2016 white paper commitment\u2014in the four budgets since the white paper, the government has delivered<\/a> the promised funding.<\/p>\n

The longer answer, as explained in ASPI\u2019s annual budget brief, <\/a>The cost of defence<\/a><\/em>, released today, is that defence planning has already passed it. The government did not say that the defence budget would be mechanically set at 2% ad infinitum<\/em>. In fact, according to the budget papers, defence funding continues to grow beyond 2% over the forward estimates, reaching roughly 2.2% by 2022\u201323. And after that, it stays there for the rest of the white paper\u2019s funding model<\/a>, which goes out to 2025\u201326 (page 180<\/a>).<\/p>\n

That means that the government\u2019s planned funding line for defence and a hypothetical 2% of GDP funding line diverge after 2020\u201321. While a difference of 0.2% of GDP might not sound like much, in dollar terms that gap quickly reaches $5 billion per year based on ASPI\u2019s modelling of GDP using the budget papers\u2019 growth predictions. The difference totals $22.4 billion over the second half of the white paper decade. That difference will be even bigger if the economy doesn\u2019t grow at the 2.75% rate (and 3% from 2021\u201322) forecast<\/a> in the budget papers. Since GDP growth has hovered stubbornly around 2.6% on average since the global financial crisis, and recent indications suggest a slowing economy, 3% is ambitious.<\/p>\n

Defence\u2019s investment planning<\/a> extends well into the future so we can be pretty sure that the department is planning on spending all of the money that the government said it would give it. That\u2019s essentially what a fully costed white paper means. In summary, the plan already assumes the budget is going beyond 2%. Therefore, if this or a future government decides that something closer to 2% is what it\u2019s willing to pay for defence, it will inevitably have an impact on capability.<\/p>\n

The next question is, \u2018Where is that funding going?\u2019 The short answer is, the capital budget. Traditionally, it\u2019s the smallest of the three main components of the budget (alongside personnel and operating costs). But over the forward estimates, capital investment is forecast to grow to nearly 40% of the total defence budget.<\/p>\n

If we take into account the fact that GDP is growing, the defence budget is growing as a percentage of GDP, and capital is growing as a percentage of the defence budget, that compounds into a massive increase. By the end of the forward estimates, the capital budget alone reaches $19 billion. That\u2019s a 155% increase in real terms since the Coalition came to power in 2013\u201314. By the end of the white paper decade it\u2019s $23 billion.<\/p>\n

So does that mean the big shopping list in the white paper that includes the naval shipbuilding and armoured vehicle megaprojects is affordable? We suggested in last year\u2019s<\/a> The cost of Defence<\/em> that naval shipbuilding alone will cost $3.5\u20134 billion per year. You\u2019d think that a capital budget of $19\u201323 billion would cover it.<\/p>\n

There are reasons to be cautious. First, operating costs are also rising sharply. For example, by the end of the transition from the F-111\/Classic Hornet fleet to the F-35\/Super Hornet\/Growler fleet in 2022\u201323, the annual air combat sustainment cost will have gone from $260 million to around $1.1 billion based on ASPI\u2019s projections.<\/p>\n

And it\u2019s not just platforms themselves. As Defence becomes increasingly \u2018network-centric\u2019, the cost of the ICT backbone that holds it together is also going up steeply, from around $450 million in 2008\u201309 to $1.6 billion in 2022\u201323. It\u2019s not surprising, then, that since the white paper, Defence has underachieved against the predicted capital spend but overspent on sustainment by a similar amount (roughly $4 billion).<\/p>\n

Another cause for concern is that some costs, such as for personnel, are not rising much, but perhaps they should be. Personnel spending is traditionally the biggest of the three, but it will fall below 30% of the total. The white paper allocated the ADF an additional 4,400 personnel, an increase of around 8% (page 146<\/a>). It\u2019s hard to see how Defence can acquire all that capital equipment and develop new capabilities with only that small increase. And it\u2019s already having trouble meeting the relatively modest white paper targets\u2014it\u2019s only managed to grow the ADF by around 600 since the white paper, about 1,100 short.<\/p>\n

There\u2019s no \u2018ideal\u2019 balance between personnel, operating and capital spending that fits all organisations. But it\u2019s unlikely there are many defence forces that can sustain capital spending at 40% of their budgets. NATO is aiming to get its members above 20%, and only a very few members are over 30%<\/a>. Interestingly, Defence\u2019s capital budget has stuck fairly stubbornly at around 30% for five years now.<\/p>\n

So it may be that as the defence budget grows past 2%, a \u2018natural equilibrium\u2019 between personnel, operating and capital may assert itself and Defence won\u2019t reach 40% in capital spending. That\u2019s probably good if it wants to be able to crew and operate its equipment. But it could also mean that it won\u2019t be able to get everything on that shopping list.<\/p>\n","protected":false},"excerpt":{"rendered":"

The first question that people ask me about the defence budget is, \u2018Will it reach 2% by 2020\u201321 as the government promised?\u2019 The short answer is yes. According to the budget papers, the consolidated defence …<\/p>\n","protected":false},"author":767,"featured_media":48056,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"footnotes":""},"categories":[1],"tags":[44,17,1823,26],"class_list":["post-48052","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-australian-defence-force","tag-australia","tag-defence-budget","tag-defence-spending"],"acf":[],"yoast_head":"\nThe cost of defence: beyond 2% of GDP | The Strategist<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.aspistrategist.ru\/the-cost-of-defence-beyond-2-of-gdp\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The cost of defence: beyond 2% of GDP | The Strategist\" \/>\n<meta property=\"og:description\" content=\"The first question that people ask me about the defence budget is, \u2018Will it reach 2% by 2020\u201321 as the government promised?\u2019 The short answer is yes. 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