David Watt and Alan Payne
This Budget Background Brief provides a historical perspective in which to view the 2013–14 Defence budget by setting out some long-term trends in the funding of defence in Australia and highlighting some key factors underlying these trends.
The 2012–13 Budget saw Defence funding cut by $5.5 billion across the forward estimates. These cuts and the continued deferral of expenditure to fulfil the 2009 Defence White Paper’s ambitious capability program prompted a great deal of commentary which, amongst other things, stated that Australia’s defence spending, expressed as a percentage of GDP, was at its lowest point since 1938. A good deal of this commentary was critical of the Government:
When the Labor government was elected in 2007 it did so on a platform of maintaining the Coalition's long-running trajectory of 3 per cent real growth in defence spending a year. Then in the 2009 Defence White Paper the government committed itself to 3 per cent real growth to 2017-18 and 2.2 per cent real growth from then until 2030. However, the reality is that since the government was elected it has delivered 3 per cent real growth in only three of the six defence budgets it has brought down. What is worse is that in 2010-11 it cut the defence budget by almost 5 per cent and then in the recent budget it cut defence spending again by 10.47 per cent. This reduces Australian defence spending to 1.56 per cent of GDP, the lowest it has been since 1938. By contrast the US is spending 4.7 per cent of GDP on defence, Britain 2.6 per cent, South Korea 2.5 per cent and Singapore 3.6 per cent.
In light of this sort of commentary, it is useful to look at some of the longer term historical trends in defence spending. As Graphs 1 and 2 indicate, Australia spends more on defence during times of war, most strikingly during the two World Wars, but also to some extent during the Korean War and the Vietnam War. Defence spending also increased during the conflicts in Iraq and Afghanistan but because GDP and total government expenditure rose over the same period this increase does not show as a bump in the graph. It is also striking how quickly expenditure falls at the end of both the World Wars as the large numbers of people serving are discharged from the services.
Another notable trend is that defence spending has been in gentle decline since around 1988. The 2013 Defence White Paper states that the Government’s ‘long term objective’ is to move defence funding towards a target of 2 per cent of GDP. This would imply, based on 2011–12 funding, an increase of $7.8 billion. It is notable that the last time the defence budget was at 2 per cent of GDP was in June 1995. The 2010 Intergenerational Report stated that, based on the funding model contained in the 2009 Defence White Paper, spending on defence was expected to be 1.8 per cent of GDP by 2029–30.
Graph 1: Defence expenditure as a proportion of GDP and total expenditure
Source: Parliamentary Library
Graph 2: Defence expenditure 1901–2015 expressed in real terms
Source: Parliamentary Library
Spending on defence has risen in dollar terms since 1995 (when it was $9.7 billion), but as the Australian Strategic Policy Institute (ASPI) points out:
… the observed growth in defence spending largely reflects the rising intrinsic cost of delivering modern military capability.
ASPI has in the past estimated that real growth of around 2.65 per cent in the defence budget was necessary in order to maintain capability levels. This estimate was obtained by extrapolating from historical trends, a method which ASPI acknowledges cannot claim to be definitive and ‘is at best indicative of the likely cost of maintaining a force of the sort we have today’. In 2010, ASPI estimated that in order for Australia to substantially improve its defence capabilities, a minimum of 3.1 per cent annual growth in the Defence budget would be required.
Graph 3: Budget expenditure for selected functions as a percentage of total outlays
Source: Parliamentary Library
Spending on defence tends to fall when economic conditions are less good, such as in the 1930s, the late 1980s–early 1990s, and since the Global Financial Crisis (GFC). Graph 3 above contrasts defence expenditure against other major areas of government expenditure, illustrating that spending on defence declined somewhat while at the same time expenditure on welfare increased during the economic recession of the early 1990s, and then again in 2008–09 in response to the impact of the GFC.
White Paper funding models
The change in the funding models between the 2009 and 2013 Defence White Papers reflects the Government’s concerns about the current fiscal environment.
The funding for the 2009 Defence White Paper was to be derived from three elements:
- 3 per cent real growth in the Defence budget to 2017–18
- 2.2 per cent real growth in the Defence budget from 2018–19 to 2030
- 2.5 per cent fixed indexation to the Defence budget from 2009–10 to 2030 (instead of continuing to use the non-farm GDP implicit price deflator) and
- reinvested savings from the Strategic Reform Program.
In contrast, the 2013 White Paper makes no such commitments. It simply states that Defence funding will be based on the standard four-year Forward Estimates Budget cycle and will be determined on an annual basis. The target of 2 per cent of GDP is described as ‘a long-term objective that will be implemented in an economically responsible manner as and when fiscal circumstances allow’.
. M Thomson, The cost of Defence ASPI Defence Budget brief 2012–13, Australian Strategic Policy Institute (ASPI), Barton, 2012, pp. vi–vii. ASPI states that $10.6 billion in expenditure had been deferred at May 2012.
. Total budgetary expenditure is funds used from ordinary consolidated revenues. Since this does not include extraordinary defence expenditure such as that from war loans the effect has been to make defence expenditure as a proportion of total expenditure look greater in some years (most notably during the First and Second World Wars) than it actually was. Sources for GDP: 1901–1949: W Vamplew, Australian historical statistics GF8-14 (public debt series), p. 257 multiplied by 0.002 to convert from thousands of Australian pounds into millions of Australian dollars; 1901–1959: W Vamplew, Australian historical statistics ANA 119–129 (GDP, current prices series), p.139; 1960–2012: ABS, Annual National Accounts, cat.no. 5204.0 Table 2; 2013–2016: MYEFO—Commonwealth Government Securities on Issue (estimated/projected nominal GDP growth rates applied).
. Reference year for real terms is 2011–12. Defence expenditure includes monies taken from consolidated revue, trust accounts and loan accounts. Expenditure from 1965 onwards does not include repatriation expenditure. Prior to 1966–67 pounds have been converted using 1 pound = 2 AUD. Sources for expenditure: Australian Bureau of Statistics Year Books from 1908; selected commonwealth budget papers.
. M Thomson, op. cit., p. 164.
. M Thomson and A Davies, ibid., p. 7.
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