Increase in funding but no surprises

In a Federal Budget focused on national recovery from the COVID-19 pandemic, Defence didn’t rate much of a mention in the Treasurer’s 2021-22 Defence Budget speech. Treasurer Josh Frydenberg left any reference to Defence to the very end of his speech to parliament, well behind the many sweeteners.

But, as expected, its funding did increase substantially. Defence will receive $44.618 billion in 2021-22, a comfortable increase of 4.37 per cent on last year’s funding. That takes Defence funding to 2.1 per cent of GDP.  

And while there were no big announcements of new capabilities, nor were there any surprises.

With Australia withdrawing from Iraq and Afghanistan, Defence operational funding falls substantially, although in this uncertain world, there is no guarantee it will stay that way. 

On the political principle that major infrastructure works spending can’t be announced too often, the government repeated for the third time its plans for the upgrade of Robertson Barracks, Kangaroo Flats, Mount Bundy, and Bradshaw Training Areas in the Northern Territory, and the expansion of HMAS Cairns naval base.

Frydenberg said that while we have been fighting COVID other threats to our security had not gone away, and we needed to be prepared for a world that was less stable and more contested.

“This is why we are investing $270 billion over 10 years in our defence capability,” he said. “The Australian Defence Force continues to protect and uphold our national interests abroad and at home. Our Defence Forces are always there for us and we are forever indebted to them.”

Defence Minister Peter Dutton said in the 2020-21 budget last year, the Government had delivered on its commitment to grow Defence funding to two per cent of GDP, along with a 10-year funding model which provided Defence with a total $575 billion over the decade to 2029-30. “This includes
$270 billion investment in the capability and potency of our Defence force,” Dutton said in a statement.

Minister Dutton also said government continued to build a more secure and resilient Australia through a $59.2 million investment in Operation Resolute to support protection of Australia’s borders and offshore maritime interests through surveillance and response.

There is also a $66.1 million commitment to upgrade RAAF Base Williamtown through improving the runway to accommodate long-range aircraft and facilitate international flights. This runway is part of Newcastle Airport, and the improvements will support dual use for Defence and civilian aircraft. 

Defence continues to ramp up outlays for new equipment. Budget papers show capability acquisition spending rising from $12.658 billion in 2020-21 to $15.766 billion in 2021-22 and to $17.804 billion in 2022-23.

By forecast outlay, the top project for 2021-22 is the ongoing acquisition of the Lockheed Martin F-35A. During 2021-22, 17 aircraft are planned arrive, taking the fleet to 56 of 72 – including two aircraft which were programmed for last year but with production delayed by COVID. To date, some $8.878 billion of the F-35 acquisition budget of $15.6 billion has been spent.

On the maritime front, $982 million will be spent on design of the new SEA 1000 Attack class submarine. Up to the end of June, $2.041 billion had been spent from the so-far-approved budget of $5.8 billion.

Budget papers show funding for some overseas operations – which Defence terms “operations supporting wider interests” – falling substantially, from $764.8 million in 2020-21, to $279.5 million in 2021-22, and just $35.5 million in 2022-23. Despite the draw down from Iraq, Afghanistan, and the Middle East, Defence continues to participate in smaller international operations, some involving just one or a few personnel. 

Conversely, Defence is ramping up spending on activities closer to home, which it terms “operations contributing to the security of the immediate neighbourhood”. After a COVID-induced slowdown, the Defence Cooperation Program (DCP), Defence’s headline program for assisting regional nations, is ramping up again. From $176.9 million in 2019-20, DCP spending dropped to $126.9 million in 2020-21 but will rise to $155.3 million in 2021-22. 

Defence personnel numbers continue to rise, though not by much. The total permanent ADF is forecast to increase from 60,486 in 2020-21, to 61,468 in 2021-22, and 62,063 in 2022-23.

The Navy, which will eventually need to crew 12 new submarines and nine new frigates, looks like it managed to recruit just eight additional sailors in 2020-21. They will take the uniformed force to 15,449 in 2021-22. Navy does do better over the forward estimates period, with a forecast uniformed workforce of 16,010 in 2024-25.

In the same period, Army will increase in size from 30,281 uniformed personnel in 2020-21 to 31,246, while the RAAF will grow from 14,764 in 2020-21 to 15,649 in 2024-25.

The key budget document – the PBS or Portfolio Budget Statements – does provide some information on anticipated flying hours and sailing days for defence platforms.

This is indicative only. For example flying hours for F/A-18A/B Hornet fall to zero in 2022-23 as does AP-3C Orion hours in 2023-24 as both types are programmed for retirement. Hours for their replacements, the F-35A Lightning and P-8A Poseidon rise steadily as they approach full operational capability (FOC). F-35A hours are planned to hit 14,900 in 2024-25, while P-8A hours reach 7,200 in the same period.

Declared navy vessel deliverables – defined as unit availability days – aren’t that useful, as they are only disclosed across entire fleets. For example, we’d really like to know days achieved/estimated for the Collins-class subs, but these are lumped in with major surface combatants – the Hobart class DDGs and ANZAC class frigates.

On the plus side, days for this fleet are planned to rise from 2,982 in 2020-21, reaching an estimated 3,920 in 2024-25.

For an arms-length assessment of the Defence budget, ADBR called on Australian Strategic Policy Institute (ASPI) senior analyst Dr Marcus Hellyer who produces its annual defence budget brief.

Dr Hellyer says the good news is that the government has delivered the cash precisely as promised. But the not so good news is that Defence is simply unable to spend all its wealth, principally because industrial capabilities have lagged. COVID hasn’t helped.

Dr Hellyer said Defence’s funding starting point was the 2016 White Paper funding line, now the Defence Strategic Update (DSU) funding line.

“As far as they are concerned Defence has got exactly what was promised in the DSU,” he said. “There are no surprises there. Defence is getting what the government promised, just as for the four years, five years before, Defence received what was promised in the White Paper.”

But this record could soon be at risk, particularly with weapons stocks. In the past, US Foreign Military Sales (FMS) announcements have disclosed a number of acquisitions of munitions coinciding with the end of financial year. The problem now is the US is also boosting its inventory and gets first dibs on production by US companies which, for many types of munitions, would appear to be at capacity.

“What I’m hearing now is you cannot buy a US missile for love nor money because the US is also increasing its war stocks because of the situation in the Western Pacific,” Dr Hellyer said.

Not for nothing has the government embarked on a program to create a domestic guided missile industry, but that still won’t see a missile with significant Australian Industrial Content (AIC) in ADF service any time soon. 

The first is likely to be the Israeli Spike-LR2 anti-tank guided missile (ATGM) produced by Varley Rafael Australia and used by dismounted troops on Boxer and Infantry Fighting Vehicles and likely also on new Apache attack helicopters. Lockheed Martin also has plans to jointly develop a booster section for a surface-launched version of the AGM-158C LRASM anti-ship missile.

Moving forward, the big question is whether Defence can spend this ever-increasing largesse: “They can’t,” Dr Hellyer said. “They missed by $1 billion – it’s pretty much in the capital program.

“They were aiming at a very big spending increase in 2020-21, $3 billion, a 27 per cent increase, which would have been really hard even in a non-COVID year,” he added. “Not surprisingly in the middle of a COVID year which was playing havoc with supply chains globally, there was an impact.”

Dr Hellyer said, on paper, the underspend was about $1.5 billion, but much of that related to foreign exchange variations. The Australian dollar has strengthened, meaning Defence has to pay less for foreign equipment.

“The issue is, the government did give Defence the money,” he explained. “But it hasn’t been able to spend it. That in theory rolls over into future years and is available if Defence needs it and the government says yes you can have it. But in practice, it’s gone.”

Defence’s problem is that in 2021-22, there is another big increase in capital spending planned, and that continues across the decade as it acquires new warships, submarines, aircraft, vehicles, and much else.

“That is a small symptom of the broad issue of what Defence is facing,” Dr Hellyer said. “Over this decade there is a huge ramp-up in capital spending. Developing the capacity in Defence to run all those programs and the capacity in industry – particularly in Australian industry – to absorb that money and deliver capability is going to be very challenging.” 

This article appeared in the May/June 2021 issue of ADBR.