Page 47 - Australian Defence Magazine June 2022

JUNE 2022 | WWW.AUSTRALIANDEFENCE.COM.AU
BUDGET 2022
FUTURE DEFENCE BUDGET 47
So, there are good reasons to spend more of defence, but also great pressure to spend less. The government will be confronted with many other funding priorities. Structural deficits are built into the government’s budget for years to come. There will be increasing competition for resources, whether to fund other government programs, provide tax cuts or reduce the deficit more quickly.
A desperate attempt to get the budget back into surplus was what led the last Labor government to dramatically re- duce defence spending in 2012-13 — for which Labor has paid a heavy price in subsequent national security debates. But the mood of the electorate has changed towards deficit spending, particularly if it is seen as addressing key priori- ties, so surpluses are perhaps not seen as the key indicator of good economic management.
In opposition, the ALP supported the previous govern- ment’s defence funding, and its election policies endorsed the $270 billion in capability in the DSU funding model. So, there’s nothing to say the new government will cut de- fence spending. Nevertheless, it’s important to understand the potential impact of any model that reduced funding growth, for example, by linking the defence budget to 2 per cent of GDP.
AN APPROPRIATE LEVEL OF FUNDING
Predicting GDP is difficult but, according to the GDP esti- mates in the 2022-23 Budget papers, the DSU funding line will sit between 2.1 and 2.2 percent of GDP over the next few years. That means defence funding will exceed two per cent of GDP by around $3-4 billion per year.
Since Defence’s planning is based on spending every dol- lar the government gives it, should the government decide to limit spending to, say, two per cent of GDP, Defence will need to adjust its spending plans downwards by around $4 billion per year—there simply isn’t $4 billion worth of fat or ‘hollow logs’ in the budget to absorb that cut.
To illustrate the scale of reprioritisation that would re- quire, the cost of sustaining Defence’s 10 most expensive capabilities this year is $3.4 billion, so a $4 billion cut
would have real, unavoidable impact on capability. And of course, it will have a huge impact on Australian defence industry. It’s no secret that small businesses, such as those that make up much of our defence industry, have great dif- ficulty absorbing abrupt swings in cash flow.
Should GDP growth falter, two per cent of GDP will be lower in dollar terms and the difference from the DSU funding will be even greater. A year and a half ago, when the GDP outlook was decidedly less rosy, the annual differ- ence looked like it could grow to $7-9 billion. A reduction of that scale would be devastating to the defence budget.
The new government has indicated that it will release a new budget in October. That will give Defence portfolio min- isters several months to read themselves into an extremely challenging brief. In the short term it would be useful for the government to compensate Defence for lost buying power caused by inflation. Over the next few months ministers can understand the implications of any changes to the defence funding, whether it be the impact of cuts, or alternatively the sweet spots for targeted increases that can produce new capability rapidly. And there are also potential mixed ap- proaches that maintain the DSU funding but cut programs that can’t deliver quickly to fund those that can. ■
Dr Marcus Hellyer is ASPI’s senior analyst for defence economics and capability.
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