To have any chance of raising enough taxation revenue (without going into an ever increasing deficit) to fund the ambitious $195 billion in Defence capability outlined in the 2016 Defence White Paper, the 2016/17 Federal Defence Budget has adopted ambitious Forecasts for Nominal GDP growth in 2016/17 of 4.25%, rising to five per cent for each of the three financial years spanning 2017/18 to 2019/20.
This is despite an international economic outlook that Treasurer Morrison admits is worse than anticipated in last year’s Mid Year Economic and Fiscal Outlook (MYEFO). According to the Budget Papers, lower growth is forecast in the United States, while China’s near-term growth is dependent upon a rebalancing towards more consumption-led growth. Further, a return to stronger growth is not assured in Europe or Japan, thus putting a dampener upon overall budget projections, and the potential for Australia to achieve the growth forecasts outlined in the budget for the next four financial years.
Assisted by low inflation outcomes that cap out at 2.5% through to the end of the Forward Estimates (2019/20) in bolstering real GDP growth forecasts, the Government has constructed a deficit reduction outlook that sees real GDP growth of 2.5% in 2016/17 rising to three per cent in each of the three financial years spanning 2017/18 to 2019/20. Over this time, the budget deficit (or Underlying Cash Balance) is projected to retreat from a peak of -$39.9 billion in 2015/16 to -$37.1 billion in 2016/17, and then falling substantially to -$6.0 billion in 2019/20 to achieve a small surplus in 2020/21 – the same year Defence funding is projected to achieve 2% of GDP.
The implications for current year Defence expenditures are therefore clear. The current list of Top 30 Defence acquisition projects remains jam packed with historical approvals for items such as the Joint Strike Fighters, Growler electronic attack aircraft, MH-60R Future Naval Aviation Helicopters, MRH 90 Multi-Role Helicopters, additional KC-30 Multi-Role Tankers, medium/heavy and related field vehicles, Hawkei protected military vehicles and Air Warfare Destroyers, which will take several more years to clear out existing Defence capital expenditure profiles before increased 2016 Defence White Paper funding kicks-in to enable a start to substantive funding of the new Defence Integrated Investment Program.
The 2016/17 Defence Budget presented on May 3 acknowledges this fact by moving to increase the previous budget estimate for Current Year Defence Funding (known as Serial 4) by three per cent from the Portfolio Additional Estimates Statements (PAES) finalised at the end of calendar 2015, in order to deliver a 2016/17 Budget Estimate of $32,337.9 million that is consistent with the target initially set in the Defence White Paper.
This figure is then set to increase by 6.8% in 2017/18 ($34,550.7m), a further increase of 6.4% in 2018/19 ($36,776.0m), and then another increase of 6.7% in 2019/20 – to reach a current year Defence appropriation of $39,225.7m. A further increase of 6.1% (outside of the Forward Estimates provided in the 2016/17 Budget Papers) would then take annual Defence appropriations to $41,604.0 million in 2020/21 – which is consistent with the Defence White Paper projections to achieve Defence funding of 2% of GDP in the 2020/21 financial year.
Also consistent with Defence White Paper projections of Defence needing a $700m financial injection in 2016/17 to achieve a roughly $32 billion Defence appropriation (including Operations), the 2016/17 forecasts include additional funding of $700m in 2016/17, a further $60m in 2018/19, and a further $600m in 2019/20 – amounting to an addition $1,360.0m over the Forward Estimates.
Defence, however, is still in the early stages of the redesign of its capability development processes and there is concern about its ability to deliver on the Government’s requirements. Transition to the new end-to-end model only commenced on 1 April 2016, and there has only been a gradual transition of projects and processes into the new model. As such, Defence says it will not be until July 2016 onwards that the focus of work will be on “embedding the new model and consolidating its as business as usual.”
With an early (Double Dissolution) election likely to further disrupt the availability of Executive Government to consider and approve new military capability acquisition projects, Defence has therefore taken $500m (of the $700m Defence White Paper additional funding inserted into 2016/17) and shifted this into the 2017/18 financial year. Despite the rephrasing of Defence White Paper Funds, Departmental officials nevertheless anticipate ten project/project phases will be considered for ‘First Pass’ approval over the course of 2016/17, along with 23 ‘Second Pass’ project/project phase considerations, supplemented by three more project phases to be put up for interim approval consideration.
The balance of the $938.3m of funds comprising the 2016/17 Budget Estimate over the 2015 PAES is predominantly consumed by a $323.6m increase in funding (to $335.4m) for an extension to Operation OKRA (Australia’s support for the coalition response to the Iraq crisis) for another year, as compared to the $11.8m budgeted last financial year.
The ADF’s commitment to the Middle East continues to grow through extensions to: Operation ‘Accordion’ (broader ADF activities in the Middle East); Operation ‘Highroad’ (the ADF’s contribution to NATO’s train, advise and assist ‘Resolute’ support mission in Afghanistan; and Operation ‘Manitou’ – the ADF’s support to international efforts to promote maritime security, stability and prosperity in the Middle East Region. Overall, these above-reference Operations will consume $599m in 2016/17 and one billion dollars over two financial years.
Forecast expenditure on the Top 30 approved new military capability projects for 2016/17 is $5,963.0m, with the largest expenditures allocated to: P-8 Maritime Patrol and Response Aircraft System ($1,047.0m); New Air Combat Capability ($726.0m); the Air Warfare Destroyer program ($726.0m); and medium/heavy and field vehicles ($686.0m) – accounting for some 53% of total estimated expenditures. To this is added a further $1,125.0m in recently-approved projects presumably to see the light of day during the forthcoming federal election campaign.
After a negative $884m allowance for projected expenditure slippage, and a further $921.0m anticipated to be expended over 2016/17 as a result of recent announcements relating to Offshore Patrol Vessels, Future Frigates and Future Submarines, total Top 30 acquisition project expenditures in 2016/17 are estimated at $7,125.0m.