Australia’s long-awaited defence strategic update and force structure plan have been released by the prime minister and defence minister. After minimal recital of the continued rightness of the 2016 defence white paper judgements, the government gets frank with the Australian public, saying, ‘Our region is in the midst of the most consequential strategic realignment since the Second World War.’

This change comes from US–China strategic competition, together with China’s assertion of influence and use of coercive activities. Now prominent are ‘grey zone’ activities designed to coerce in ways that stay below the threshold of military conflict—think of China’s militarisation of the South China Sea.

It’s big news to recognise that the region is undergoing a fundamental strategic realignment, because it kills the idea that Australia now has a decade of ‘warning time’ to prepare for credible military conflict. It also tells us that we don’t yet know the outlines of the new international order that will develop. It’s an experiment that’s underway, and Australia has a part in shaping the results.

With further refreshing frankness, the update acknowledges that the 2016 approach of giving equal priority to events around the globe, the region and the near neighbourhood is no longer appropriate. Instead, ‘Australia [intends to] take greater responsibility for its own security.’ That means the military must focus its plans and resources on our near region—which is still a huge expanse, stretching from the northeastern Indian Ocean through Southeast Asia and across the South Pacific—as well as be able to contribute to domestic priorities.

This return to clear priorities for force structure planning is a very welcome recognition of Paul Dibb’s mantra that without them, it’s impossible to build an effective force. And it’s a welcome return to remembering that, because we live in a particular place in the world, geography really does matter.

None of these insights seem to have led to any major changes to the big, slow capability programs at the heart of the 2016 white paper, though. The submarines, frigates, F-35s and large armoured vehicles will all be acquired for the Australian Defence Force as planned.

That’s probably best described as the expected bad news. Not because these platforms won’t be powerful things, but because they are taking so long to get into ADF service, and because they absorb huge amounts of the defence budget, both before they turn up and once they’re in service. If Australia no longer has 10 years’ warning time to prepare for potential major conflict, the fact that much of the new force structure won’t be ready for at least 10 years is simply not good news.

But it was always unlikely that a defence update would have the mandate to change these mega-programs, or that Defence would propose a change so soon after getting government agreement to them. And, even if these things had happened, it was equally unlikely that the government that put so much political capital into long-term ship- and submarine-building industries would step away from these iconic programs.

So, within the constraints of what is politically and organisationally possible, the update has done some very good work. It will start the creation of a more lethal military with the capabilities to strike adversaries at considerably longer ranges, and to sustain military combat for considerably longer periods, than the ADF can do now. This is to be achieved through acquisition of a number of different strike weapons, including the Lockheed Martin long-range anti-ship missile (LRASM), which can be launched from the ADF’s aircraft or naval ships and other surface-to-air missiles. In a few years, this strike power will no doubt include hypersonic missiles able to be launched from land, from ships and, later, from aircraft. The LRASMs will probably turn up first, giving a major lift to the ADF’s offensive strike power.

As important as getting such new offensive weapons into service is the update’s commitment to build the logistics capacity to support high-intensity warfighting for extended periods. This is big new news. Defence has taken the lessons from the pandemic—and US–China strategic and technological competition—to heart in this area. It sees the urgent need to increase Defence’s ability to mobilise and support military operations by fixing vulnerabilities in critical supplies, from fuel to munitions and missiles.

The plans for plugging these gaps are not all that clear in the update, and it’s obviously an area in which much work is to be done now that there’s the political direction. If Defence is smart, it will connect these plans to the new economy the government must create in the post-Covid-19 world. These logistics improvements will also be very useful for contributing to domestic disaster relief, as they will enable Defence to operate effectively when other institutions can’t.

The increase in offensive strike weapons is being complemented by some clever ‘area denial’ capabilities—underseas sensors in our maritime approaches, a further Jindalee over-the-horizon radar system focused out into the Pacific Ocean, and defensive systems like smart sea mines. Modest references to exploration of ‘optionally crewed’ or ‘uncrewed’ undersea systems are as close as the update gets to embracing autonomous systems as essential complementary capabilities to the large, manned, future submarines. An optimist would see these indicators as the start of further real change. It’s at least an admission that technological change is forcing a shift. So this is probably a ‘watch this space’ reference for later government consideration.

All this works with the enhanced cyber capabilities announced yesterday by the prime minister, because cyber is not just a defensive capability focused on protecting Australia’s critical digital systems, it’s also an offensive capability that can be used to disrupt and penetrate adversary systems during times of conflict.

What else is foreshadowed but not clear at this point? The update floats the idea of increasing the size of the ADF and of the public service in Defence, saying a detailed proposal will be considered in 2021. The logic here is compelling. An increasingly active ADF with greater firepower, involved in grey-zone contests in our region, will be bigger than the 2016 white paper envisaged. Operating and supporting this bigger, busier ADF will simply take more people.

The more lethal ADF is to be bought with the fixed funding line the government gave Defence in 2016—a clear signal that it doesn’t see Defence as a source of savings in the tight fiscal environment Australia faces in the next few years. Some things that were planned won’t happen, like the modernisation and replacement of the army’s G-Wagons; those are welcome savings but they don’t involve big numbers.

The commitments to further measures to implement the update’s ambitious and sobering new directions, like increasing in the size of the ADF and introducing the industrial and logistics measures needed to sustain the ADF in high-intensity combat, look destined to require increased defence funding, perhaps as early as the 2021–22 budget.

Overall, the update and force structure plan set a clear direction for Australia’s military that engages with the new world we are living in. It’s good work, and it positions Australia well to resist coercion and be part of deterring conflict. Now the hard work of implementation must begin.

As the Australian government’s finances come under increasing pressure from the effects of Covid-19, so too might the scope for some forms of Defence investment in new capital equipment. That could pose difficult challenges for the department, centring on the issues of cost–benefit analysis and industry protection.

More intense competition for many forms of public funding, new investment priorities for defence and rising equipment sustainment costs raise some vexing questions for defence industry policymakers. In future, what level of price premium should be paid for preferring domestic over foreign supply of traditional weapons platforms as well as a new generation of weapons systems? And how much assistance should be provided to ensure the domestic availability of strategically important industrial capabilities?

In recent years, answers to those questions have frequently been based on four arguments. First, Australian defence industry is already internationally competitive or can readily become so through a combination of exports and a continuous flow of orders from Defence. The industry’s main problem is being denied a reasonable opportunity to bid for Defence work.

Second, as Australia enters a period of profound strategic disruption, almost all the materiel we require must be manufactured here to safeguard our national security—in what amounts to a form of industrial autarchy.

Third, as a source of advanced manufacturing, the industry can help the Australian economy avoid an over-reliance on the mining, agricultural and service sectors.

And finally, Defence’s capital equipment projects are promising sources of technological innovation and labour skills. When they ‘spill over’ into other areas, those sources provide a net boost to the economy.

Those four arguments have vociferous advocates. They also have staunch critics, whose concerns have surfaced on numerous fronts (for example, here, here, here, here, here and here).

However, the level of scrutiny given to these arguments is well below what it should be.

As Australia enters a period in which the opportunity cost of investing in any form of defence capital equipment or defence industry assistance could be magnified—not only for Defence but for the rest of the country—a more rigorous approach to assessing the social costs and benefits is required. If all that sounds overdrawn, consider the following.

More than four years on from the release of the defence industry policy and after the delivery of more than 500 pages of associated policy documentation and a similar number of government press releases on all manner of defence industry issues, there is still no clear picture of what industrial capabilities are critical for Australia to hold in-country for military-strategic reasons. Nor is there a useful indication of where, when, why and to what extent Defence’s demand might exceed the industry’s capacity to supply any of the 10 industrial capabilities already assigned broader sovereign status.

Defence has released a discernible plan to collect the relevant demand and supply data—as distinct from the collection itself—for only one capability. And broader development strategies for relevant areas of the defence industry are being set before that data emerges. How industrial sovereignty can be achieved when the Australian content of many major equipment acquisitions is 60% or less—and most components are imported—has yet to be explained. None of those factors are mentioned in the public version of last year’s defence mobilisation review.

In recent years, government media releases covering the effects of major capital equipment acquisitions have emphasised ‘jobs and growth’—to the exclusion of relevant military-strategic issues. And those statements provide little or no insight into the factors that tend to determine economic impact: the price premium, the level of Australian industry content, and knowledge spillovers from domestic assembly that might help reduce the cost of equipment sustainment.

For higher profile projects, like the F-35 fighter jets and naval shipbuilding, the economic data proffered in public statements—and in much of the analysis that underpins it—is difficult to interpret from a cost–benefit perspective. Opaque job figures for the F-35 are still being used. The government has yet to release its economic cost–benefit data for assembling the $50 billion-plus future submarines and $26 billion future frigates.

The economic perspective provided by official statements for military vehicles isn’t much better. Although poor public reporting of the economic impact of assembling the Hawkei light protected mobility vehicles has attracted much attention, there are other vehicle projects to consider.

For example, a headline figure of 1,450 new Australian jobs has been used for the recent acquisition of combat reconnaissance vehicles for nearly $5 billion. Not disclosed is that the 1,450 is a peak employment figure for only one year of a 34-year assembly and sustainment program. The corresponding annual average number of jobs created, made publicly available only through a freedom of information request, is 740.

That figure of 740 is dominated by jobs for vehicle sustainment, which appear to be double-counted. The number of jobs remaining is based on the implicit assumption of a price premium of zero for vehicle assembly—noting that the actual size of any premium hasn’t been disclosed publicly. No supporting evidence is provided relating to job creation or other benefits from spillovers or to the economic importance of the project at a regional level.

These gaps are difficult to reconcile with Department of Finance reporting guidelines for economic benefit. Nor do they appear consistent with two interim findings from the Covid-19 Manufacturing Taskforce: the importance of ‘core sovereign need’ to Defence, and an overarching policy requirement to drive national growth in advanced manufacturing through ‘rigorous implementation and measurement of impact’.

The looming strategic update to Australia’s 2016 defence white paper is an opportunity for creativity and practicality.

It’s too easy to imagine the update describing what’s happened in the last four years and moving on to say that the strategic, force structure and investment priorities in the 2016 plan are still ‘about right’—even with the marked changes in Australia’s strategic environment since then.

If that were to happen, it wouldn’t just be a bad case of reflexive bureaucratic self-protection; it would be a missed opportunity for the government to adapt Defence and defence investment to the world we live in.

Given we’re talking about how our nation spends $40 billion a year and how it employs 76,000 Australians directly and thousands more in defence industry, this is an issue of public importance. Beyond that, how Australia builds and uses its armed forces also matters to our security and to the security and prosperity of our region—particularly the South Pacific and Southeast Asia.

Back in 2016, there was US–China strategic competition, along with forecasts of changing military balances. The impacts of climate change were discussed. No one but an apologist, though, could claim that the judgements made then are unaffected by the pace, extent and nature of change since. Those developments have wildly outstripped assessments and assumptions made back in 2016.

Hypotheticals and potential paths from then have either happened or not happened, and these events or non-events have consequences. And new challenges—notably the Covid-19 pandemic—just weren’t in serious contemplation.

US–China technological and strategic competition has intensified during the pandemic, with rising nationalism and heightened mutual suspicion. This now clear path was only one of several potential directions for US–China relations back in 2016.

Aside from the dynamic between the world’s two biggest powers, another hypothetical from 2016 has now turned into a reality. A more coercive China is now a direct lived experience for Australia and one that’s only just begun.

Covid-19 has exposed the vulnerability of global supply chains, particularly for critical items in times of crisis. Medical emergencies and military conflicts are the most obvious areas in which this vulnerability must be addressed.

And there’s the now manifest need to take a ‘two-track’ approach to the Australia–US alliance.

On the first track is access to American technological and defence capabilities, along with contribution and access to the US and other Five Eyes intelligence that is becoming more critical to Australia’s national power.

That’s for two reasons: to project military power with regional partners in response to disasters and instability, and to have sufficient strength—along with close partners and allies—to deter those who would otherwise act against our interests. An increasingly assertive Chinese military in the hands of Beijing’s authoritarian rulers is a primary focus here.

On the second track of the alliance, though, is a need to acknowledge that an ‘America first’ US is acting in ways that serve some perceived national interests, but do not always serve Australian interests. An example is the disdain under President Donald Trump for multilateral action and institutions. The US, even more than many other nations right now, is also very internally focused given the civil unrest and looming election.

Australian strategy and policy have to manage the fact that American power, while still a primary deterrent of major war, is also now less predictable and less about orchestrating coalition action than at any time since the end of World War II.

The net result of this picture is that Australia must retain the benefits to our capability and security that flow from the alliance, while managing sporadic divergences between our interests and how the US uses its own power.

Denying the divergences would be as much of a strategic error as seeing them as a reason to disconnect from the benefits that American technology and intelligence bring to our national power.

The last big shift is in national expectations of what the Commonwealth, including Defence, can and should do to mitigate domestic and regional natural disasters, including bushfires, floods and pandemics. More of the same ad hoc application of people and machines not trained or equipped for the mission, as we saw with the national bushfire crisis last season, is helpful but insufficient given the emerging needs.

What flows from this is a much bigger rethink of plans made back in 2016 than anyone envisaged even as recently as September last year when Defence Minister Linda Reynolds announced the update.

If the major responses from Defence to our changed world amount to adjusted language and minor tweaks, though—or, worse still, simple implementation of 2016’s plans—they will not be enough.

Three examples from the capability investment area show what this might look like, and also sketch out more imaginative and potentially more successful alternatives.

If the update’s ‘new news’ is enhancing firepower by acquiring some advanced missiles and precision munitions, that won’t do the job. Buying a few hundred of Lockheed Martin’s long-range anti-ship missiles, or LRASMs, and a few new sea mines is window dressing. In any major conflict, 200 missiles would be just enough to get through the first days or, if you’re lucky, weeks of a crisis. Then everyone would need to pause politely while long lead orders were filled.

New purchases will work only if they’re accompanied by new production lines for Australian-built weapons. The US, Israel and Norway come to mind as partners whose weapons are in already in use in the Australian Defence Force and who may also benefit from having alternative centres of production in times of crisis—particularly if Australian government investment were to help create the new facilities.

This alternative approach wouldn’t just give the ADF a more powerful inventory, but would also ensure weapons were available in numbers during crises and address painfully exposed vulnerabilities.

If the update on the ADF’s undersea capability is about the Collins-class submarines being enhanced until the first Attack-class vessel arrives in 2035, that will also fall short of what’s required. Defence needs to give the government some significant capability injections much earlier than that in order to address rapid strategic and technological change, and to mitigate risk from a slow-to-arrive next generation of submarines.

Capabilities like Boeing’s Orca large unmanned underwater vehicle represent an alternative path. New platforms like the Orca could be in service early in the 2020s and complement the Collins boats through manned–unmanned teaming. With the collapse of airliner orders, Boeing is no doubt open to new business from reliable customers.

Additional variants of the navy’s offshore patrol vessels that include anti-submarine warfare capabilities would be another practical, near-term initiative worth pursuing.

Proceeding with implementation of the 2016 defence infrastructure plans with only minor changes, as we’ve seen with recent announcements in the Northern Territory, will prove inadequate. The Gordian knot on investment in essential fuel supply to Tindal airbase needs to be cut by investing in a fuel pipeline instead of trucks. That, together with forward-basing of naval vessels at Manus Island and starting a public conversation about a new eastern base for the growing fleet, would show the blend of imagination and practicality our environment demands.

I’m still hopeful about what the update will contain, not just because imagination is alive and well in Russell, but because we also have a more critical, demanding public that’s well aware of the growing strategic pressures Australia faces. Just as importantly, we have a demanding and empowered government that sees defence, defence capability and defence industry as key to Australia’s future.

For years Australian universities have exposed themselves to excessive dependence on revenue from international students, particularly from the People’s Republic of China. Unconstrained growth in this sector is changing everything from the design of Australia’s inner cities to the quality of the on-campus student experience.

Overdependence on anything is risky, and it’s clear that the Covid-19 crisis has turned this risk into an immediate threat to the viability of some universities. The tertiary chickens have come home to roost.

In late 2019, 212,264 people from China were on student visas at all levels of education in Australia. At the same time, only 104 students were here from Timor-Leste. That’s after 20 years of cooperation and development assistance, along with $2.44 billion in military stabilisation and peacekeeping operations.

Similarly, after many years of involvement in Afghanistan (during which 41 Australian soldiers were killed and 261 wounded and $8.47 billion was spent on military operations), a mere 29 Afghan students studied here last year. One can only conclude that despite the effort and expenditure, what we’re doing with those two countries is not translating into deep, enduring person-to-person connections.

After years of increasing revenues from skyrocketing international student enrolments, the vice-chancellors of Australia’s leading universities get paid obscenely high salaries, like the CEOs of large private corporations. Unlike the CEOs, whose shareholders expect them to manage risk and not just blindly pursue low-hanging opportunity, the vice-chancellors don’t appear to have had a viable strategy to manage the risks inherent in a business model that is excessively dependent on overseas students, especially from the PRC.

In 2019, before the Covid-19 crisis, nearly one-quarter of the higher education sector’s revenues and students came from overseas, and 37.3% of international enrolments were from the PRC. Some leading universities were drawing around 70% of their international student revenue from China. In December 2019, there were 164,730 Chinese student enrolments in the higher education sector. These enrolments were concentrated in coursework master’s degrees in management and commerce.

There have, of course, been warnings about this situation. Last year, for example, the Centre for Independent Studies’ Salvatore Babones argued that Australian universities had reached ‘China max’ and were massively exposed to risk. One risk was the perception of the declining quality of an Australian education. This resulted in an imbalance between the high cost of studying in Australia and the arguably low quality of teaching and learning making Australian universities less attractive.

Macroeconomic factors such as slowing Chinese growth, currency controls and exchange variations proved to be a greater risk. To this we can add a political risk of the Chinese Communist Party using student numbers as another source of economic vulnerability through which to demand Australian political acquiescence to CCP priorities.

Unlike American universities, whose finances are less exposed to the foreign student market, Australian universities failed to protect themselves in case of a catastrophic fall in overseas student enrolments.

In Babones’s assessment, the risk presented a moral hazard. That is, the universities’ pursuit of international student dollars presented them with substantial benefits, but if the business model failed it would be the Australian government and taxpayers who would have to bail the universities out.

One could argue that this is a microcosm of a broader unfettered Australian pursuit of Chinese money and the view that sees it only as upsides, with no impact on our sovereignty, resilience or freedom of action.

With the Covid-19 crisis, these risks have been realised. The university sector could lose up to $6 billion in revenue, and individual universities could lose up to half a billion dollars each. The Australian National University is reportedly expecting a $225 million financial hit this year, with similar cuts in revenue in coming years. No doubt the brunt will be borne by casualised staff. But the impact on education for Australian students and on research (which has benefited from the universities’ increased foreign revenue) is not clear. Will the Australian public have to bail universities out and suffer because of the moral hazard created by the universities themselves?

But even if things soon could return to the ‘normal’ of Australian universities’ highly abnormal dependence on revenue from PRC students, would we want them to?

There is an alternative.

The universities’ current embarrassment presents an opportunity for an ambitious plan that will wean the universities off their dependence on PRC income while developing our other neighbours and strengthening our relationship with them.

The shape of a plan to cut our university sector’s dependence on China could look like this: in return for the universities reducing their PRC student numbers by 100,000, the Australian government would fund 100,000 students from Southeast Asia and the Pacific—where we should be investing in deep, enduring interpersonal connections. We should bias the award of these ‘scholarships’ to countries that are democracies.

This would have some similarities with the government’s Australia Awards program, but there are fewer than 2,500 students in that program, and 90% of them are postgraduates. Moreover, the Australia Awards provide living allowances, driving up the cost per student. The proposed larger scheme would not provide such allowances to all its students; there are no doubt many enterprising young people who would be motivated by the waiver of tuition alone.

The new scheme would offer a mix of undergraduate and postgraduate courses, as well as secondary or bridging courses for those who need help to be ready for the start of tertiary education. In place of the current preponderance of business and management studies, the Australian government, in consultation with the governments of the beneficiary countries, could offer a more rounded mix of degrees driven by student requirements, not by the need to repay student loans. This would benefit medicine and nursing, education, engineering, IT, and even arts and social science degrees.

By using its buying power, the Australian government could require the universities to charge no more than the current average cost of a degree for an Australian student, which is around $20,000. It should be a take-it-or-leave-it proposition. To stop the universities from saying, ‘Thanks for the extra cash, we’ll take it, but we’ll also keep pursuing as many fee-paying overseas students as we possibly can’, as part of this deal the government would impose a cap on total overseas student visas, with subsidiary caps on individual countries and institutions.

To attract students from countries such Afghanistan and Timor-Leste, a proportion of scholarships would need to provide living allowances. But if the universities do in fact deliver a great product, a fee waiver should be enough inducement for many prospective students.

How much would it cost? A program with 100,000 students at $20,000 for tuition each would be $2 billion per year. If we assume another $2 billion for a sliding scale of living allowances depending on need, plus $500 million for bridging courses for students needing English and other preparatory training, along with program administration and overheads, that’s $4.5 billion per year.

That’s a lot of money for the government to find in this Covid-19 era. But, in the short term, it can in part be regarded as stimulus spending for the tertiary sector. Whatever one may think of the universities’ commercial strategies over the past decade, their staff include many of our most talented people. We want them to stay here and keep teaching and researching.

In the longer term, as well-educated students start returning to their home countries, demonstrating the benefit of an Australian education, new markets could open up, allowing a reassessment of the balance between paying and scholarship students.

Another way to regard the funding is as a long overdue turnaround for our declining aid budget, which is now down to $4 billion per year or only 0.21% of GDP, a figure well below international benchmarks.

This program would be a major investment in the people of the broader region, one that will develop deep, human connections that will endure well after many Belt and Road Initiative projects have crumbled.

An Australian investment to build the human capital of Southeast Asia and the Pacific could become the centrepiece of an effort to lift our national engagement with the region, based on a foundation of people-to-people links. It is an infinitely more valuable approach than simply forever scaling up average-quality degrees for PRC students.

As we saw with the Colombo Plan, the long-term return on investment to Australia for building high-quality people-to-people relationships with our neighbours has been of enormous economic, social and strategic value.

This approach also gives our universities a one-time opportunity to rethink their currently failing business model, which is built on greed, scale and a less-than-optimal commitment to offering a high-quality educational and life experience.

Many academics who find themselves teaching in Australian degree factories would agree on the need to rethink the sector. In the post-Covid world, any business model built on a slavish over-reliance on a relationship with the PRC is irretrievably gone. Universities that rethink their approaches have a chance to design a solid future. Those that cannot make the break from dependence on money from the PRC will remain hostage to the fickleness of the CCP in ways that cannot be sustained.

Tuesday 12 May was to have been budget night, until Covid-19 intervened and the government moved the 2020–21 budget release to 6 October. This gives Prime Minister Scott Morrison and his team time to focus on the crisis and to gauge its impact on the economy and the government’s own financial position. We don’t have clarity on that yet.

ASPI normally releases its annual The cost of defence budget brief a fortnight after budget night. Since there’s no budget to analyse, we’ve delayed this year’s publication to October. But since there’s naturally speculation about the future of the defence budget, it’s worth recapping what we know (this post) and outlining some possible futures (stay tuned next week).

Back in that distant era BCV, readers may recall that, despite the media and political attention paid to the government’s commitment to return defence spending to 2% of GDP by 2020–21, the 2016 defence white paper noted that tying the defence budget to GDP created planning uncertainty because defence funding would go up and down as GDP predictions changed. Consequently, the white paper presented a fixed funding line out to 2025–26 (page 180). Since the white paper, the government has delivered that funding and the 2019–20 budget looked like being no different.

Because forecast GDP growth has slowed since the white paper was released, that fixed funding line has gone up faster than GDP, and it looked like it would reach 2.2% in the next few years. So, what takes precedence? The fixed funding line or 2%? In Senate estimates hearings on 29 November 2020, Labor asked that question. The defence minister responded that the government was ‘absolutely committed’ to the white paper funding line, even if it grew past 2% of GDP. That was, of course, BCV.

In February, the government published the portfolio additional estimates statements for 2019–20 updating the May budget. In the update, the defence budget had grown by $587 million since the budget was published, due mainly to almost half a billion dollars in compensation for loss of buying power from the falling Australian dollar, plus $88 million in supplementary funding for Operation Bushfire Assist (see table 1).

Table 1: Change in defence portfolio funding from budget to additional estimates, 2019–20 ($m)

	Department of Defence	Australian Signals Directorate	Total
Budget 2019–20 (May 2019)	37,825	917	38,742
Additional estimates 2019–20 (February 2020)	38,388	941	39,329
Change	+563	+24	+587

Source: Portfolio additional estimates statements 2019–20: Defence portfolio.

When it was issued, the 2019–20 budget for defence equalled 1.93% of the government’s GDP prediction. If we compare the revised defence budget with the government’s GDP prediction in its mid-year economic and fiscal outlook, the defence budget reaches 1.96% of GDP. But the outlook was released on 16 December—before the worst of the bushfire crisis—so its revised GDP prediction doesn’t reflect the economic impact of that emergency, let alone the Covid-19 crisis.

Before Covid-19, the force structure in the 2016 white paper was looking increasingly unaffordable, even with a defence budget that reached 2% of GDP. The former secretary of defence who presented that white paper to the government recently admitted as much. The evidence can be seen in many places; for example, the sustainment costs for some major incoming and future systems (like the F-35s and land combat vehicles) are expected to be several times higher than corresponding costs for the systems they’re replacing.

As always, funding pressures manifest themselves in delays to the capital acquisition program. Defence informed the Senate in late January that:

To accommodate changing priorities within Defence’s budget, investment proposals can be reprioritised, funding re-profiled, re-scoped, deferred or divested. Since the release of the 2016 IIP [integrated investment program], 106 IIP capability projects have been affected through reprioritisations to accommodate Government and Departmental priorities.

Since there’s been no public update to the white paper’s investment plan in the four years since it was released, there’s no way of knowing what those 106 projects are or what the capability impact is. But it seems clear that projects have been delayed due to funding pressure.

Then the virus arrived, with the associated hit to the economy and consequently to government revenue. Nobody knows how big a hit it will be, or how long it will last for, or what its impact on the defence budget will be. Nevertheless, in early April the finance minister implied that the government was sticking to the white paper’s funding line regardless of changes to GDP:

The Government agreed back in the 2016 Defence White Paper that there would be no further adjustments to funding as a result of changes in Australia’s GDP growth estimates.

This was to provide funding certainty in the context of a massive investment program and to avoid the need to have to regularly adjust Defence’s force structure plans.

As part of the annual Budget processes, a 10-year Defence funding profile is agreed by Government which is designed to provide planning certainty to Defence.

If the government continues to deliver that funding line while the economy suffers prolonged doldrums, the defence budget will continue to grow as a percentage of GDP, potentially even to 2.4%. That relative growth is likely occurring already. If we assume that there will be no GDP growth at all in 2019–20 due to Covid-19, the defence budget presented in the mid-year budget outlook has already hit 2% of GDP, a year early. If GDP goes backwards this year, the defence budget could now be at 2.1% of GDP.

But, of course, it only counts if Defence spends it, and spending that money could be difficult. Defence has reduced its activity to manage the impact of Covid-19—for example, by suspending training missions in Iraq and Afghanistan and cancelling exercises here. The annual rotation of US marines through Darwin has been postponed. That reduced activity will reduce the spend.

Similarly, spending on acquisitions will likely slow. The US Department of Defense is predicting a three-month delay across most of its major projects. Here things seem to be mixed. Some projects appear to be tracking well. Work is starting on the first of the offshore patrol vessels in Western Australia. HMAS Waller’s full-cycle docking, the first to install sonar upgrades on a Collins-class submarine, should be finished on schedule mid-year. But there may be delays to other projects, such as the Tindal airbase upgrade.

Small to medium enterprises with less ability to absorb disruptions to cash flow are especially vulnerable to a slowdown—and if they go broke it can have disproportionately large impacts on the major projects they feed components into. Defence is trying to support them by keeping the cash flowing, telling ASPI that ‘$4.5 billion [has been] paid earlier than the contracted payment terms’. Still, it’s hard to see all projects delivering as planned with local and global supply chains disrupted by the virus. That’s likely to continue into next financial year.

So, it could be hard for Defence to spend all its money this year. Traditionally, when the department has big underspends, it tries to make quick acquisitions, like additional C-17As. If the government wanted Defence to spend, it could try to get more F-35As sooner than planned. F-35 production has been hit by Covid-19, but some European partners might offer us their slots to save cash.

Nevertheless, when it’s all done and dusted, Defence probably won’t spend its budget this year and hit 2% of GDP a year early. But should the government still honour its commitment to get to 2% next year? There have been suggestions that defence should take a budget cut as its share of the country’s economic pain. Next week, I’ll look at the potential impact on Defence of a cut.