Budget Review 2020–21 Index

David Watt and Nic Brangwin

Defence was in the relatively unusual situation of having some certainty about its budget well ahead of the actual Budget day. This is because the Government set out its funding plans for Defence through the rest of the current decade in the 2020 Defence Strategic Update (DSU), which was released on 1 July 2020. Effectively, the DSU was an update to the 2016 Defence White Paper and took the 2016 DWP’s ten-year defence funding model out to 2029–30. If fulfilled, the ten-year funding model will provide Defence with $575 billion to 2029–30. The Government provides Defence with this enviable level of certainty about its funding in part because, as the DSU makes clear, Australia’s strategic situation has deteriorated in recent years, but also because the range of complex acquisition programs that Defence is running requires long-term financial commitment to see them to fruition.

This year (2020–21) also marks the point at which the Defence budget surpasses 2 per cent of GDP. This number has been a largely symbolic target and, as set out in the 2016 DWP and repeated in the DSU, will now be abandoned in order to ensure that defence funding will not be subject to fluctuations in Australia’s GDP.

As has been the case since in recent years, the Government has continued to adhere, with only minor fluctuations, to the funding model set out in the 2016 DWP and the 2020 DSU. The following table sets out the DSU’s projected funding against this year’s PBS figures.

Table 1: total defence funding—Defence Strategic Update and Portfolio Budget Statement (PBS) ($ million)

	2020–21	2021–22	2022–23	2023–24
DSU	42 151	46 037	50 170	53 318
PBS 2020–21	42 746	45 609.9	49 406.3	52 467.3

Source: Department of Defence, 2020 Defence strategic update, 2020, p. 54; Australian Government, Portfolio budget statements 2020–21: budget related paper no. 1.3A: Defence Portfolio, p. 21.

Government funding to Defence has risen by around $3.5 billion between 2019–20 and 2020–21. This is an 8.9 per cent rise in nominal terms and once the forecast for inflation is taken into account, 7 per cent in real terms (calculated by deflating the nominal expenditure figure by the June quarter Consumer Price Index, which may differ from the methodology used in the budget papers).

Defence receives a little more than the DSU funding line in the current year (largely because of funding for operations), but gets a little less across the forward estimates. This seems mainly to relate to a reduction in funding to compensate for foreign exchange fluctuations—which amounts to $2,227.6 million across the forward estimates. The nature of this funding means there is no impact on Defence’s buying power.

One new and useful table in the PBS is Table 4b on page 21, which provides a breakdown of Defence’s budget by ‘key cost categories’. The table makes clear the growth in the proportion of the Defence budget that is going into capability acquisition. The Force Structure Plan that accompanied the DSU stated that capability acquisitions would reach 40 per cent of the Defence budget by 2029–30. As the Australian Strategic Policy Institute (ASPI) has pointed out in volume one of its Cost of Defence 2020–21, this is a historic high and represents a 148 per cent nominal increase from 2019–20.

This growth is apparent in Figure 1 below, which sets out the breakdown of the amounts for 2023–24.

Figure 1: key cost categories forecast for 2023–24

Source: Parliamentary Library estimates; Australian Government, Portfolio budget statements 2020–21: budget related paper no. 1.3A: Defence Portfolio, p. 21.

Capability

There are no new major capabilities announced in the Budget, but with so many large capability acquisitions underway and promised funding of $270 billion across the decade, this is not surprising. Table 55 in the PBS (pp. 113–22) outlines the top 30 acquisition projects by 2020–21 forecast expenditure and reveals:

• By the end of 2020–21 the Royal Australian Air Force (RAAF) should have accepted 41 of its proposed 72 F-35A Joint Strike Fighters and more than half of the approved budget of $16.7 billion budget will have been spent.
• The Air Warfare Destroyer program expects to declare final operational capability by June 2021 and most of its $9.1 billion budget will have been spent by that time.
• The purchase of the two replenishment vessels from Spanish shipbuilder Navantia is expected to take a major step with the delivery of both ships to Australia and the bulk of the $1.1 billion budget spent during the current financial year.
• Other major shipbuilding projects—in particular the Hunter Class Frigates and Attack Class Submarines—are much closer to the start than they are to completion, with the bulk of the expenditure still very much in the future.
• Construction of the Offshore Patrol Vessels, the evolved Cape Class Patrol Boats and the replacement Pacific Patrol Boats, is underway with forecast expenditure of $464 million during the current year.

In relation to the Attack Class submarines and Hunter Class Frigates ASPI’s Marcus Hellyer points out that both underspent against their targets last year, particularly the frigates. Earlier in 2020 there were suggestions that the Hunter Class project is experiencing schedule slippage. Defence has denied there is a problem and it appears the first steel will be cut in 2022 at South Australia’s Osborne shipyard for what will become HMAS Flinders. However, given the importance of the frigate build to the Government’s plans for continuous shipbuilding, even a potential delay must be of concern.

Budget measures

Defence is receiving supplementation of $80 million for the current year relating to deployments in support of the COVID-19 response. Defence itself has to find the $1 billion that the Government wants to spend to ‘accelerate defence initiatives to speed the COVID recovery’. This includes increasing the employment of Reservists who have lost their jobs as a result of the pandemic; a $300 million estate works program in regional Australia; accelerated sustainment programs across a range of Australian Defence Force (ADF) capabilities; and the acceleration of some capability platforms. This measure is listed in Budget Measures: Budget Paper No. 2: 2020–21, but was previously announced by the Government on 26 August 2020.

Defence has been given an additional $10.6 million (out of $17.7 million) across the forward estimates as a part of establishing the Joint Transition Authority to better assist ADF members as they leave military service and transition to civilian life. The creation of the Joint Transition Authority was recommended by the Productivity Commission in its 2019 report A Better Way to Support Veterans (for more details, see the Veterans’ Affairs article elsewhere in this Budget Review).

Other measures include $124.3 million across ten years for infrastructure in the Southwest Pacific as part of the Pacific Step-up program (see also the Budget Review 2020–21 brief, Australia’s Foreign Aid Budget 2020–21). The establishment of a Joint Strike Fighter Industry Program will support Australian businesses seeking work on the JSF support and sustainment. Both measures are to be funded from the existing Defence budget.

Operations

The last Ministerial Statement on Defence operations was delivered to Parliament on 5 December 2019. At that time the ADF was involved in ‘17 active operations and activities’. Outcome 1 in the 2020–21 PBS lists 21 international and domestic military operations; of which six are in the Middle East, six in the
Indo-Pacific, four in Australia, two in Africa (Mali and South Sudan), one in central Asia (Afghanistan), one in Europe (Cyprus), and one in the Antarctic.

Since the last Ministerial Statement, some operational deployments have begun to draw down. In the Middle East, Operation Okra Task Group Taji (Iraq) and the Air Task Group (Iraq and Syria) completed their missions, the number of ADF personnel deployed in Afghanistan halved to 150, and it remains to be seen whether or not the Royal Australian Navy (RAN) replaces HMAS Toowoomba in the Middle East maritime region.

Defence is supplemented for the cost of operations on a ‘no-win no-loss’ basis, meaning operations funding covers the additional costs required to conduct operations, such as operating costs and urgent equipment acquisitions. Forward estimates for operations funding is typically underfunded in the PBS due in some part to operational security and the unpredictability of military operations. Only those operations that receive funding on a no-win no-loss basis are included in the Budget; smaller operations, such as contributions to peacekeeping missions (up to $10 million), are funded from within the Defence budget.

The net additional cost of operations in 2020–21 is around $727.8 million. This includes funding for the COVID-19 response, but the largest proportion is attributed to Operation Okra in the Middle East. Given the drawdown of task groups in Iraq and Syria, operations funding for Middle East missions is likely to be significantly reduced in future years.

Workforce

In 2019–20 workforce was the most expensive item in the Defence budget, at a cost of more than $12.8 billion (see the key cost categories breakdown in the 2020–21 PBS). While workforce costs will continue to increase—totalling more than $55.7 billion over the forward estimates—capability acquisition and sustainment costs will surpass this, bringing the workforce share of the overall budget down from 32.9 per cent to 27.6 per cent over the forward estimates, as Table 2 below shows.

Table 2: workforce planned expenditure ($ million)

	2019–20	2020–21	2021–22	2022–23	2023–24
Workforce	12 877.9	13 410.5	13 766.9	14 108.3	14 481.3
Total Defence planned expenditure	39 157.7	42 612.4	45 590.6	49 508.4	52 457.6
Workforce share	32.9%	31.5%	30.2%	28.5%	27.6%

Source: Australian Government, Portfolio budget statements 2020–21: budget related paper no. 1.3A: Defence Portfolio, p. 21.

While Defence prepares a new Defence Strategic Workforce Plan (DSWP) for consideration by the Government in 2021, the 2020 Force Structure Plan (FSP), released with the DSU on 1 July, contains an initial ADF workforce increase of 800 permanent personnel (RAN 650; Army 50; RAAF 100) and an increase of 250 in the Australian Public Service (APS) civilian workforce (which excludes additional growth in the Australian Signals Directorate, ASD). The DSWP is expected to be released in late 2021 and will include plans to grow the workforce between the years 2024 and 2040. Developing the science, technology, engineering and mathematics (STEM) workforce appears to be a priority area for future workforce planning.

The current workforce total is:

• 59,109 permanent ADF
• 21,189 Reserves and
• 16,129 APS (excludes ASD personnel).

Tables 8 and 9 in the PBS (p. 26) reveal that by 2023–24 the planned workforce total is expected to be:

• 62,726 permanent ADF
• 22,040 Reserves and
• 16,456 APS (excluding ASD personnel).

The FSP earmarked investment of around $6.3 to $9.4 billion from 2030 to 2040 for the ‘recapitalisation of Reserves’ to boost training commensurate with the permanent force and develop the capacity to more rapidly deploy the Reserves.

 

All online articles accessed October 2020

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