{"id":72369,"date":"2022-05-05T12:50:38","date_gmt":"2022-05-05T02:50:38","guid":{"rendered":"https:\/\/www.aspistrategist.ru\/?p=72369"},"modified":"2022-05-05T16:07:51","modified_gmt":"2022-05-05T06:07:51","slug":"the-corrosive-effect-of-inflation-on-australias-defence-budget","status":"publish","type":"post","link":"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/","title":{"rendered":"The corrosive effect of inflation on Australia\u2019s defence budget"},"content":{"rendered":"
<\/figure>\n

A key challenge for the defence budget is inflation, which eats into not just the average Aussie family\u2019s buying power, but also the government\u2019s. The higher the rate of inflation, the more the defence budget will be eroded in real terms. Analysts in the US, where inflation is running at around 8%, have expressed<\/a> concern about its impact on the nation\u2019s defence budget. But Australia\u2019s Department of Defence won\u2019t be immune from inflation\u2019s debilitating effects either.<\/p>\n

Over the past two decades, Australia has had relatively low rates of inflation, with 2.25\u20132.50% being the norm (using the consumer price index). We can assume that the 10-year funding lines included in the 2016 defence white paper and 2020 defence strategic update were developed using that rate of inflation.<\/p>\n

But the Covid-19 pandemic has changed that stable picture. First, we had a year of deflation in 2019\u201320, but since then inflation has increased beyond the norms of recent history. It hit 3.5% in 2020\u201321.<\/p>\n

The government predicted 1.75% for 2021\u201322 but had to revise that up to 4.25% in the 2022\u201323 budget. That may need further revision; on 27 April the Australian Bureau of Statistics reported<\/a> that inflation had risen by 5.1% over the 12 months to March. The governor of the Reserve Bank of Australia said<\/a> this week that it could hit 6% before it moderates.<\/p>\n

Australian government inflation, actual and predicted, 2019\u201320 to 2025\u201326 (%)<\/strong><\/p>\n

<\/figure>\n

Source: Budget paper no. 1.<\/em><\/p>\n

In fairness to the government, accuracy hasn\u2019t been a feature of anybody\u2019s economic predictions in the age of Covid. At the moment, a lot of money (in part generated by various Covid relief measures) has been seeking a reduced amount of goods and services (caused by supply-chain disruptions, lack of workers, sanctions in the energy sector and so on), driving inflation. The government is assuming those disruptions will end and inflation will decrease to 3.0% in 2022\u201323 and eventually back to a more \u2018normal\u2019 2.5% by the end of the forward estimates. I\u2019m not going to argue for any particular number, but when we\u2019re thinking about risks, it can be helpful to consider scenarios.<\/p>\n

Let\u2019s start with the government\u2019s own numbers. Already, the rise in inflation in 2021\u201322 from the government\u2019s prediction of 1.75% at the start of the financial year to its current estimate of 4.25% has had the effect of eroding more than $700 million from the defence budget in real terms. Using the inflation predictions in the 2022\u201323 budget papers results in a further loss of $1.4 billion in 2022\u201323. By the end of the forward estimates in 2025\u201326, the defence budget will be 3.7% lower in real terms. That might not sound like much, but it represents a cumulative loss of buying power of around $6.8 billion over the forward estimates and $15.2 billion over the decade.<\/p>\n

To give a sense of scale, this year the planned spending on naval shipbuilding is $1.6 billion. Nearly that much has already evaporated this year alone even before the shortfalls compound over time.<\/p>\n

That\u2019s if we use the government\u2019s official inflation predictions. But we can generate more worrying scenarios. One in which inflation hits 5% but returns to \u2018normal\u2019 more slowly, not getting there until late this decade, produces a cumulative reduction in real terms of $16 billion over the forward estimates and $45 billion over the decade (scenario 1 in the figure below). A second scenario in which inflation of 5% becomes the new normal results in a 20% annual reduction in real terms by the end of the decade and a cumulative reduction of $54 billion. A reduction in real buying power of that scale will have a huge impact on Defence.<\/p>\n

Effects of inflation on the defence budget (2021\u201322 real $ million)<\/strong><\/p>\n

<\/figure>\n

Source: ASPI modelling.<\/em><\/p>\n

We should also bear in mind that around two-thirds of Defence\u2019s equipment acquisition budget goes overseas, largely to the US. So even if inflation moderates here, Defence\u2019s buying power can still be eroded by cost increases overseas.<\/p>\n

In sum, if inflation remains above historical levels, it will quickly eat into Defence\u2019s buying power even if whichever government is formed after the election adheres to the funding outlined in the 2020 defence strategic update. To manage that, the government will need to accept reductions in capability or increase the defence budget just to acquire and support Defence\u2019s currently planned capability. That\u2019s before it even considers any increases to meet our worsening strategic circumstances.<\/p>\n","protected":false},"excerpt":{"rendered":"

A key challenge for the defence budget is inflation, which eats into not just the average Aussie family\u2019s buying power, but also the government\u2019s. The higher the rate of inflation, the more the defence budget …<\/p>\n","protected":false},"author":767,"featured_media":72371,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"footnotes":""},"categories":[1],"tags":[120,1823,26,433],"acf":[],"yoast_head":"\nThe corrosive effect of inflation on Australia\u2019s defence budget | 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-corrosive-effect-of-inflation-on-australias-defence-budget\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The corrosive effect of inflation on Australia\u2019s defence budget | The Strategist\" \/>\n<meta property=\"og:description\" content=\"A key challenge for the defence budget is inflation, which eats into not just the average Aussie family\u2019s buying power, but also the government\u2019s. The higher the rate of inflation, the more the defence budget ...\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/\" \/>\n<meta property=\"og:site_name\" content=\"The Strategist\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/ASPI.org\" \/>\n<meta property=\"article:published_time\" content=\"2022-05-05T02:50:38+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-05-05T06:07:51+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.aspistrategist.ru\/wp-content\/uploads\/2022\/05\/inflatables050522.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"802\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Marcus Hellyer\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@ASPI_org\" \/>\n<meta name=\"twitter:site\" content=\"@ASPI_org\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Marcus Hellyer\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"4 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebSite\",\"@id\":\"https:\/\/www.aspistrategist.ru\/#website\",\"url\":\"https:\/\/www.aspistrategist.ru\/\",\"name\":\"The Strategist\",\"description\":\"ASPI's analysis and commentary site\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/www.aspistrategist.ru\/?s={search_term_string}\"},\"query-input\":\"required name=search_term_string\"}],\"inLanguage\":\"en-AU\"},{\"@type\":\"ImageObject\",\"inLanguage\":\"en-AU\",\"@id\":\"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/#primaryimage\",\"url\":\"https:\/\/www.aspistrategist.ru\/wp-content\/uploads\/2022\/05\/inflatables050522.jpg\",\"contentUrl\":\"https:\/\/www.aspistrategist.ru\/wp-content\/uploads\/2022\/05\/inflatables050522.jpg\",\"width\":1200,\"height\":802},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/\",\"url\":\"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/\",\"name\":\"The corrosive effect of inflation on Australia\u2019s defence budget | The Strategist\",\"isPartOf\":{\"@id\":\"https:\/\/www.aspistrategist.ru\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/#primaryimage\"},\"datePublished\":\"2022-05-05T02:50:38+00:00\",\"dateModified\":\"2022-05-05T06:07:51+00:00\",\"author\":{\"@id\":\"https:\/\/www.aspistrategist.ru\/#\/schema\/person\/87e4e7561c0d7071411d7d635b9e32c1\"},\"breadcrumb\":{\"@id\":\"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/#breadcrumb\"},\"inLanguage\":\"en-AU\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/www.aspistrategist.ru\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"The corrosive effect of inflation on Australia\u2019s defence budget\"}]},{\"@type\":\"Person\",\"@id\":\"https:\/\/www.aspistrategist.ru\/#\/schema\/person\/87e4e7561c0d7071411d7d635b9e32c1\",\"name\":\"Marcus Hellyer\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-AU\",\"@id\":\"https:\/\/www.aspistrategist.ru\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/ab3d49a0ff8e79106b3af65880612804?s=96&d=mm&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/ab3d49a0ff8e79106b3af65880612804?s=96&d=mm&r=g\",\"caption\":\"Marcus Hellyer\"},\"url\":\"https:\/\/www.aspistrategist.ru\/author\/marcus-hellyer\/\"}]}<\/script>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"The corrosive effect of inflation on Australia\u2019s defence budget | The Strategist","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/","og_locale":"en_US","og_type":"article","og_title":"The corrosive effect of inflation on Australia\u2019s defence budget | The Strategist","og_description":"A key challenge for the defence budget is inflation, which eats into not just the average Aussie family\u2019s buying power, but also the government\u2019s. The higher the rate of inflation, the more the defence budget ...","og_url":"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/","og_site_name":"The Strategist","article_publisher":"https:\/\/www.facebook.com\/ASPI.org","article_published_time":"2022-05-05T02:50:38+00:00","article_modified_time":"2022-05-05T06:07:51+00:00","og_image":[{"width":1200,"height":802,"url":"https:\/\/www.aspistrategist.ru\/wp-content\/uploads\/2022\/05\/inflatables050522.jpg","type":"image\/jpeg"}],"author":"Marcus Hellyer","twitter_card":"summary_large_image","twitter_creator":"@ASPI_org","twitter_site":"@ASPI_org","twitter_misc":{"Written by":"Marcus Hellyer","Est. reading time":"4 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebSite","@id":"https:\/\/www.aspistrategist.ru\/#website","url":"https:\/\/www.aspistrategist.ru\/","name":"The Strategist","description":"ASPI's analysis and commentary site","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/www.aspistrategist.ru\/?s={search_term_string}"},"query-input":"required name=search_term_string"}],"inLanguage":"en-AU"},{"@type":"ImageObject","inLanguage":"en-AU","@id":"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/#primaryimage","url":"https:\/\/www.aspistrategist.ru\/wp-content\/uploads\/2022\/05\/inflatables050522.jpg","contentUrl":"https:\/\/www.aspistrategist.ru\/wp-content\/uploads\/2022\/05\/inflatables050522.jpg","width":1200,"height":802},{"@type":"WebPage","@id":"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/","url":"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/","name":"The corrosive effect of inflation on Australia\u2019s defence budget | The Strategist","isPartOf":{"@id":"https:\/\/www.aspistrategist.ru\/#website"},"primaryImageOfPage":{"@id":"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/#primaryimage"},"datePublished":"2022-05-05T02:50:38+00:00","dateModified":"2022-05-05T06:07:51+00:00","author":{"@id":"https:\/\/www.aspistrategist.ru\/#\/schema\/person\/87e4e7561c0d7071411d7d635b9e32c1"},"breadcrumb":{"@id":"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/#breadcrumb"},"inLanguage":"en-AU","potentialAction":[{"@type":"ReadAction","target":["https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/www.aspistrategist.ru\/the-corrosive-effect-of-inflation-on-australias-defence-budget\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/www.aspistrategist.ru\/"},{"@type":"ListItem","position":2,"name":"The corrosive effect of inflation on Australia\u2019s defence budget"}]},{"@type":"Person","@id":"https:\/\/www.aspistrategist.ru\/#\/schema\/person\/87e4e7561c0d7071411d7d635b9e32c1","name":"Marcus Hellyer","image":{"@type":"ImageObject","inLanguage":"en-AU","@id":"https:\/\/www.aspistrategist.ru\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/ab3d49a0ff8e79106b3af65880612804?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/ab3d49a0ff8e79106b3af65880612804?s=96&d=mm&r=g","caption":"Marcus Hellyer"},"url":"https:\/\/www.aspistrategist.ru\/author\/marcus-hellyer\/"}]}},"_links":{"self":[{"href":"https:\/\/www.aspistrategist.ru\/wp-json\/wp\/v2\/posts\/72369"}],"collection":[{"href":"https:\/\/www.aspistrategist.ru\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.aspistrategist.ru\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.aspistrategist.ru\/wp-json\/wp\/v2\/users\/767"}],"replies":[{"embeddable":true,"href":"https:\/\/www.aspistrategist.ru\/wp-json\/wp\/v2\/comments?post=72369"}],"version-history":[{"count":19,"href":"https:\/\/www.aspistrategist.ru\/wp-json\/wp\/v2\/posts\/72369\/revisions"}],"predecessor-version":[{"id":72401,"href":"https:\/\/www.aspistrategist.ru\/wp-json\/wp\/v2\/posts\/72369\/revisions\/72401"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.aspistrategist.ru\/wp-json\/wp\/v2\/media\/72371"}],"wp:attachment":[{"href":"https:\/\/www.aspistrategist.ru\/wp-json\/wp\/v2\/media?parent=72369"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.aspistrategist.ru\/wp-json\/wp\/v2\/categories?post=72369"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.aspistrategist.ru\/wp-json\/wp\/v2\/tags?post=72369"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}