Tag Archive for: Australia

Australia is getting the long-range missiles needed for a contested Indo-Pacific

For the first time since the retirement of the F-111C bomber in 2010, the government looks set to restore a long-range deterrence and strike capability to the Australian Defence Force. This is a very sensible move.

The 2020 defence strategic update, and accompanying force structure plan, mark a decisive shift in approach from the 2016 defence white paper. The update recognises that Australia must respond to a more adverse strategic outlook, characterised by an assertive China, and highlights the risk that strategic competition between Beijing and Washington could escalate into a major conflict in our region.

The key message is that Australia must deter threats from major-power adversaries far away from our shores. The update announces ‘the procurement and integration of advanced longer-range strike weapon systems onto combat aircraft to allow the Air Force to operate at greater range and avoid increasingly sophisticated air defences’. A centrepoint will be the acquisition of the AGM-158C LRASM (long-range anti-ship missile) for the F/A-18F Super Hornets and, eventually, other platforms.

The LRASM is a vast improvement on the much older, less capable Harpoon anti-ship missile system, and the US has approved the sale of up to 200 of them with related equipment to Australia for $1.47 billion. The main benefits of the LRASM are its long range—at least 370 kilometres, compared with the Harpoon’s 124 kilometres—and its ability to attack in intelligent swarms and to autonomously determine the best path to strike a vessel.

The LRASM is also being designed to be carried on the P-8A Poseidon maritime patrol aircraft, and potentially could be integrated into the vertical launch systems on the navy’s Hobart-class air warfare destroyers and Hunter-class frigates. Replacing the Harpoon with the LRASM would dramatically boost Australia’s anti-ship capabilities and reduce the need for the launching platform to approach inside the range of an adversary’s weapons.

The LRASM acquisition is a good starting point for building a credible long-range strike and deterrence capability. And it’s long overdue, given the expanding lethal envelopes of Chinese anti-ship missiles, which could strike our naval forces outside the range of the defensive missiles they have now. But an even more capable strike potential will be needed, and the force structure plan outlines a number of potential capability acquisitions.

The plan makes clear that options for investing in hypersonic weapons will be explored under a development, test and evaluation program.

It suggests the ‘acquisition of remotely piloted and/or autonomous combat aircraft, including teaming air vehicles, to complement existing aircraft and increase the capacity of the air combat fleet’. That implies manned–unmanned teaming, and Boeing Australia is already developing an airpower teaming system centred on the ‘loyal wingman’ drone for precisely this role.

As the Australian Defence Force’s offensive capability grows, the update contemplates introducing a more effective defensive capability, noting that ‘survivability of our deployed forces will also be improved through new investments in an enhanced integrated air and missile defence system and very high-speed and ballistic missile defence capabilities for deployed forces’. This is likely to be the SM6 missile, which would also give a ballistic-missile defence capability within the atmosphere, and a potential land-attack capability for the navy’s Hobart-class and Hunter-class vessels.

So, the update is boosting both the offensive and defensive capabilities of our forces. That’s precisely what’s needed for the emerging threat environment we face as a rising China invests in offensive strike warfare capability. But is it enough? Not quite.

The ADF needs to have better situational awareness at greater distances from Australia. Chinese area-denial capabilities include medium- and intermediate-range anti-ship ballistic missiles. Its DF-26 anti-ship-capable IRBM has a 5,000-kilometre range. The ability to strike at such systems isn’t contemplated in the new force structure plan, so although our ability to strike at greater range is a welcome development, it’s still not sufficient to counter these threats. We are still vulnerable.

An essential feature of the US–Australian alliance is the joint facility at Pine Gap, which, among other duties, supports global missile early warning via the space-based infrared system. Any missile launched from China against the Australian mainland, or deployed forces, would be detected by that system, and a warning would be transmitted through Pine Gap, providing some time for defensive measures. For Australia, that capability is likely to come with a ship-based missile defence system as alluded to in the update.

With that in mind, enhancing Australia’s ability to monitor an adversary’s mobile missile systems and be prepared for a possible launch would go a long way towards improving our preparedness to deal with such threats.

Although it’s not suggested that a long-range strike capability for the ADF necessarily implies attacking targets deep inside mainland China, an ability to strike at such systems if they were forward-deployed, perhaps to bases in the South China Sea, would help counter the threat these systems pose. A DF-26 fired from Hainan Island could just reach Darwin Harbour. A DF-17 missile carrying a hypersonic glide vehicle deployed into the Spratly Islands could reach Darwin and also RAAF Base Tindal. The force structure plan notes that geospatial information and intelligence are part of the defence enterprise, and satellites that can detect, track and monitor ballistic-missile activity would directly support both defensive and offensive strike options.

The force structure plan and the strategic update indicate that we will look to acquire hypersonic weapons as a deterrent—if we can see forward-deployed ballistic missiles, we can strike them. Having the ability to detect and strike at an adversary’s long-range missile systems with ground-based long-range missiles should be the next step beyond LRASM if we’re serious about long-range strike. The US has already begun developing such a capability. Australia needs to consider acquiring a weapon like this and working with the US to develop it into something more potent with longer-range.

One option might be to adapt a weapon designed for conventional prompt land strike as an anti-ship-capable weapon to attack an adversary’s naval forces at sea. That would in turn open up a requirement for satellite-based ocean reconnaissance, a capability Australia could easily help develop. It would dramatically expand our deterrence and strike capability well beyond that implied by a weapon like the LRASM.

Defence strategic update promises real change but more is needed 

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.

Australia needs to ensure it has the advanced missiles it needs

The pandemic has many lessons for how Australia’s future economy must operate, with opportunities to build new wealth around the global supply chains that originate with us—in natural resources, energy, food, research and education, for example. But these opportunities are accompanied by some nasty risks that the pandemic has revealed with how Australia manages crises—medical and health crises, but also military ones.

And in military crises, a glaring gap we must close is in our ability to supply the Australian Defence Force with precision munitions—notably missiles. Advanced missiles give militaries the edge in combat. In small, discretionary conflicts like Australia’s deployments to Afghanistan, Iraq and Syria, precision missiles fired from Australian and coalition aircraft were crucial to protecting the lives of ADF personnel, supporting ground operations and killing terrorist leaders and fighters. Without such weapons Islamic State might still control major chunks of territory in Iraq and Syria.

In an actual war, not just difficult counterterror and counterinsurgency operations, advanced missiles are essential to defeat modern military adversaries. Without them, the most capable ships and aircraft are not just defenceless, they are ‘offenceless’ as well—unable to inflict casualties on opposing forces without turning to mass attrition approaches or perhaps nuclear weapons.

But advanced missiles are in short supply, and they’ve run short even in the limited conflicts the ADF has been involved in over the past couple of decades. The ADF gets its missiles from US, European and Israeli manufacturers, at the end of long global supply chains. And, when the home nations of these manufacturers need missiles urgently themselves, their needs can get in the way of meeting ours.

That’s bad, but the situation is actually even worse. Missiles are slow to produce under current industrial structures, so orders have long lead times between placement and filling—think years, not weeks. Manufacturers can surge production for limited periods, but it’s hard for them to sustain a high tempo of production. And missiles require servicing and updating if stored, meaning they might need to be returned to the manufacturers far away.

This was all known before the pandemic, and the Australian military’s approach makes sense in peacetime, and even with missions like Syria and Iraq. But the deteriorating strategic environment in our region, combined with the heightened understanding of how vulnerable extended global supply chains are, means the current situation has become unacceptable. Military conflict beyond the scale of recent deployments is unfortunately quite credible.

Missiles are like a combination of a medical ventilator and the masks health workers need during a pandemic. They’re complex electro-mechanical devices like medical ventilators, so they can’t be made by just anyone (they’re also more complex than ventilators, with bespoke components that aren’t easily replaced by other items you have to hand).

In war, missiles are more like masks in a pandemic than like ventilators, though. You need many thousands of them and they can’t be reused. Ordering or holding a few hundred just doesn’t cut any mustard outside peacetime training routines. So, production is key.

We know with the pandemic that normal supply chains can get disrupted. The level of disruption we’ve seen so far from Covid-19 is nowhere near the level of disruption we’ll see during war.

We also know that even with the limited demands our military has made on existing missile production and ordering systems, we struggle to meet those needs.

The current approach is simply unfit if Australia gets involved in any significant military conflict.

With precision munitions production and sustainment, we must assess what our needs during conflict are likely to be and plan to meet them—instead of planning for peacetime levels of use and supply and hoping things will be all right during war.

Knowledge that our current approach is not fit for purpose requires action. Here, fortunately, things are possible that will greatly reduce our military’s vulnerability to running out of the means to fight.

Australia is fortunate in having close relationships with the countries whose companies manufacture our missiles, and in having subsidiaries of these companies operating in Australia—companies like Raytheon, Rafael, Lockheed Martin and Kongsberg. We also have a workforce that can do advanced manufacturing, with some high-profile examples on display during the pandemic as firms like Gekko systems shifted from mining tech to making medical ventilators.

We haven’t used these companies and government-to-government relationships in a creative way that would close our missile supply gap, though, and we need to do so now.

Now is the right time politically, strategically and economically.

The Australian economy is in the middle of a redesign, with the government starting to focus not just on supporting current employment, but on what will drive future employment and prosperity in the changed world of Covid-19.

The government’s future stimulus program can and should include the defence industry sector—not by spending more on the huge ship, submarine and land vehicle projects, but by investing in the focused area of missile production and sustainment facilities in Australia. This type of manufacture is the iconic high-tech, niche manufacturing area that Australians can excel at and that is feasible given our demographics and capacities.

Incentives, and even co-investment in facilities by the Commonwealth, can help create centres of missile production here which the ADF can rely upon during a conflict. This is about co-production of missiles that are already in or are entering the ADF’s inventory, done in partnership with the companies we buy them from now.

Strategically, it makes sense for other nations—notably allies and partners almost certain to be fighting with us against any common adversary—to be able to be resupplied from Australian missile production centres to supplement their own supply sources, and to add different elements to supply chains that make disruption during times of crisis harder.

Strategically and politically, getting this to happen will involve the highest levels of our political leadership engaging with their counterparts. It’s at least an issue that must be on the agenda of the next annual meeting between our defence and foreign affairs ministers, Linda Reynolds and Marise Payne, and their US counterparts, secretaries Mark Esper and Mike Pompeo.

Getting agreement to and support for high-end US missiles, like the long-range anti-ship missile made by Lockheed Martin, to be manufactured in Australia as well as the continental US through co-production will only happen if the senior leadership of our nations drive it.

Along with our military leadership, they are the ones who can see the strategic value in diversified sources of supply during conflict. We’ll need to put aside hardwired industrial protection mindsets and probably change some longstanding policies on technology release.

But to ensure our men and women who may be fighting future wars in our region have the weaponry to win, in the numbers they need when and where they need it, there’s no alternative to growing Australia’s and its allies’ missile production capabilities. Having these capabilities is also the best way to deter others from engaging in military conflict.

Defence requirements must be clear as Covid-19 puts budgets under pressure

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’.

Australia’s defence budget in the age of Covid-19: Unsustainable sustainment?

I noted in the previous post in this series that planned increases to the Defence Department budget are concentrated in its capital investment program, which rises to nearly 40% of the total budget. Since the capital program traditionally is the area that gets hit when Defence has to take a budget cut, that area could be a tempting target should the government need to find funds.

But there’s another potential threat to the capital program, and that’s an internal one. Since the 2016 defence white paper, the capital budget has underspent by around $4.8 billion. Meanwhile, the sustainment program has overspent by a very similar amount. There’s a lot going on behind those numbers (exchange rate adjustments, changes to accounting methods, and so on), but overall it looks like sustainment costs have increased more than expected and Defence has had to dip into capital funding to cover it.

The pressure on the capital budget could get worse as sustainment costs increase. Let’s look at Defence’s four megaprojects. (For the purposes of this exercise, I’ve normalised all costs to real 2019–20 dollars to compare apples with apples.)

The first is the Attack-class submarine. Sustaining the six Collins-class submarines over the past seven years has cost on average $615 million. There will be twice as many Attack-class boats, and they’ll be around 50% bigger. They’ll be more complex, with more subsystems and more software, and will operate more unmanned and autonomous systems. So, it’s reasonable to assume the sustainment cost for the Attack class will be at least three times more than Collins, or $2 billion. Granted, that spending’s a long way off; the first boat won’t be handed over to the navy until 2032, and the twelfth 22 years later.

The second is the Hunter-class frigate. Sustaining the eight Anzac-class frigates has cost on average $361 million over the past seven years. The nine Hunter-class frigates will be more than twice as big (around 8,000 tonnes compared to 3,600 tonnes). They’ll have more capability, like 32 vertical launch missile cells compared to the Anzacs’ eight. Doubling the Anzacs’ sustainment cost would be $700–750 million, and that’s probably understating it. Again, those costs are a fair way off, with the first Hunter expected to be operational around 2030 and the ninth somewhere in the mid-2040s.

The third megaproject is the F-35, but we’ll look more broadly at the air combat fleet. In contrast to the previous two programs, these costs are increasing right now. The air force is in the middle of a long transition from an air combat force consisting of the F/A-18A/B ‘classic’ Hornet and the F-111 to one consisting of the F-35, the F/A-18F Super Hornet and the EA-18G Growler. The total for the air combat fleet in 2007–08 was $335 million. Because the force is in transition, there isn’t a steady state to compare it to, but the cost last year was $691 million and Defence predicts $832 million this year. If we project out to the end of the transition when the classic Hornets have retired and all F-35s are in service, the number could reach $946 million, if the F-35’s hourly flying costs don’t come down. So, overall, the cost of the air combat fleet is at least doubling and coming close to tripling.

The fourth is the army’s armoured vehicle program, LAND 400. Here there’s some worrying new news. Phase 2 acquires 211 Boxer combat reconnaissance vehicles to replace the ASLAV fleet. An economic impact study commissioned by Defence was recently released in response to a freedom of information request. The study was completed in March 2018, the same month the government announced it had selected the Boxer, so we can assume it was based on tendered cost data. The study presents a $9.6 billion out-turned whole-of-life sustainment cost for the Boxer. If we convert that to a constant, or real, number, it’s around $225 million per year (or $1 million per vehicle). According to data provided by Defence to ASPI, the average sustainment cost of the ASLAV fleet over the past seven years is $43 million. So that’s a five-fold increase.

The really worrying bit is when we project that onto phase 3, which will acquire up to 450 infantry fighting vehicles to replace the army’s obsolete M-113 fleet. These tracked vehicles are likely to be even bigger than the Boxer. That suggests they’ll cost at least as much as the Boxer to operate. So, the cost for the fleet will be at least $450 million. The average annual operating cost for the M-113 over the past seven years is only $17 million.

In short, the annual sustainment cost of the armoured vehicle fleet is going from around $60 million to potentially $700 million. Granted, Defence likely hasn’t been using the M-113 much; it’s not a deployable capability so it’s probably being allowed to gracefully degrade. So $60 million might not be a complete picture. But $700 million is more than the Collins, currently Defence’s most expensive capability.

It’s not just the megaprojects and things being delivered far in the future that are showing big increases. The offshore patrol vessels will be around $200 million per year, based on information Defence provided to the Senate, compared to the Armidale-class patrol boats at around $100 million (and a doubling seems underdone to me in light of the disparity in size and capability). The army is now completely dependent on software-driven systems (for example, communications, battle management, and fire control systems) all of which will need frequent updates. And there’s new capabilities in Defence’s force structure plan that aren’t replacing any existing capabilities, so they’re entirely new costs.

Defence is making big bets on the affordability of its future force, but is it bound to lose those wagers? Not necessarily. Overall, the economy grows in real terms. Over the past two decades, GDP has grown by around 80% in real terms, with the defence budget growing by 95%. So, even if Defence’s budget stays at around 2% of GDP, its government funding too will grow in real terms.

The problem is that the cost of military equipment also grows in real terms, but generally much faster than inflation. That’s why virtually every Western military is shrinking. While Australia’s defence budget has nearly doubled over 20 years, the Australian Defence Force hasn’t come close to doubling. The number of uniformed personnel has grown by only 14%, and platform numbers have remained fairly stable (albeit with some entirely new capabilities added, like the Wedgetail early warning and control aircraft).

Therefore, the scale and duration of the impact of Covid-19 on the economy will be crucial. A short, sharp recession that’s a temporary blip on the trajectory of Australia’s GDP will make it easier for the government to honour its commitment to increased defence spending. But the affordability of the future force will still be under pressure from the spiraling cost of systems. A prolonged, grinding recession or even depression will affect both GDP and the defence budget, making it very unlikely that Defence will be able to both buy and operate the planned force, even with 2% of GDP.

White paper update must not be about defending the 2016 status quo

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.

Australia’s defence budget in the age of Covid-19: Room for a cut?

In the first post in this series, I noted that, so far, the government remains committed to the 10-year defence funding line it presented in the 2016 defence white paper. That funding line is likely to grow past 2% of GDP. In this post, I’ll look at what effect a budget cut could have if that commitment wavers.

Let’s first look at the planned trajectory of the defence budget. Over the remaining six years of the white paper decade, the funding line continues the healthy growth it has shown over the past six years.

Figure 1: The defence budget, 2011–12 to 2025–26 (A$ million)


Source: Department of Defence portfolio budget statements. Real baseline is 2019–20.

But that growth is not spread evenly across the three big subcategories of the defence budget: personnel; operating and sustainment; and capital investment and acquisitions. As the government’s repeated references to its $200 billion investment in defence capability would suggest, the capital budget is by far the biggest beneficiary of the growth. Even in real terms, the acquisition budget grows substantially.

Figure 2: Defence’s capital investment budget, 2011–12 to 2025–26 (A$ million)

Sources: Department of Defence portfolio budget statements and additional estimates statements. Real baseline is 2019–20.

That sustained growth changes the balance of the department’s budget. While there’s no perfect ratio between the big three, in most defence organisations capital is generally the smallest of the three and Australia’s is usually no different. The capital budget bottomed out in 2012–13 but has grown dramatically since then. If it achieves the trajectory laid out in the white paper it will come close to 40% of the total defence budget.

Figure 3: The balance of the big three, 2011–12 to 2025–26

Sources: Department of Defence portfolio budget statements and additional estimates statements; 2016 defence white paper.

I’ve suggested previously that that distribution could be hard to achieve. In short, as you spend more on equipment you need to spend more on people and operating budgets. If we look at the path of the big three, the proportion of capital seems to have stayed fairly constant over the past five years at around 30% of the budget. There may well be a natural balance or equilibrium that is hard to break.

With the department’s funding increasing, the suggestion that it should take a budget cut as a share of the Covid-19 financial pain might appear reasonable. I’m on the record as saying now is not the time to be reducing the defence budget—the government should actually be increasing it significantly—so what follows may appear as special pleading. But it’s helpful to understand the impact of a cut before one advocates for or against it.

The defence budget is emerging from a long period in which Australia enjoyed a post–Cold War peace dividend. Defence spending went from between 2% and 3% (and in some years even more) of GDP during the Cold War to less than 2% for 25 years, under governments of both sides of politics.

That level of funding resulted in the phenomenon described as ‘Defence’s broken backbone’: decaying facilities, equipment lacking spares, insufficient funding to train, lack of war stocks of munitions, and so on. The result was that readiness fell, impacting the Australian Defence Force’s operational capability.

That became clear in 2010 when the ADF didn’t have a single amphibious ship available in cyclone season. One of the most beneficial outcomes of increased defence spending is that the department has remediated much of the broken backbone. Nevertheless, a drive around any defence base will show there are still people working in facilities dating back to the middle of last century.

It’s useful to bear in the mind the maxim that strategy is the alignment of ends, ways and means. A coherent strategy is one in which we know what we want to achieve, know how we will achieve it, and have properly resourced it. If you reduce the resources, then you must adjust your goals; otherwise, strategic incoherence results.

So where could you cut? Reducing people is difficult. Getting rid of uniformed people is bad PR. Moreover, the future force is going to need substantially more people than the ADF currently has. Unmanned and autonomous systems will likely help in the long term, but not overnight. Short-term cuts to personnel are false economies when it can take years to train them at a cost of millions of dollars. Some ranks in some trades are already critically rare commodities.

It’s hard to see Defence further reducing its civilian numbers. They’re already at the lowest level in 20 years. The cost of public servants is only a small part of the defence budget, so cuts wouldn’t help much. Plus, getting rid of public servants often shifts work to the private sector as consultants and contractors are called in.

It’s always tempting to find savings in operating budgets, and despite many years of Defence finding savings through ‘shared services’, there’s no doubt that more can be done. But there’s not too much to be found in taking the scalpel to the budget for photocopying.

The vast bulk of the operating budget is in the sustainment of Defence’s systems (around $12 billion this year). Sustainment costs are trending upwards. That’s because new systems always cost more than the ones they are replacing. Always. It’s certainly possible to reduce sustainment budgets, but if it continues for any length of time it inevitably leads to the broken backbone. And there’s already pressure on the sustainment budget, as I’ll discuss in the next part of this series.

So that leaves the capital budget, which may look a tempting target. When governments need money, they often turn to Defence’s capital budget. But Defence’s investment program always plans on spending every single dollar, so if the capital budget is reduced, Defence will have to change the plan. The usual way it does that is to delay projects. Repeatedly delaying projects creates a ‘bow wave’ effect of deferred investment. That means existing capabilities stay in service longer, and new capabilities that are needed to meeting emerging threats aren’t delivered. Eventually that results in zombie capabilities that can’t be deployed because they are effectively obsolete and present unacceptable capability risk.

So, the government could cut the defence budget, but it will affect capability. The longer the cuts last, the more enduring the effect and the harder the recovery. The government would have to restore coherence to its strategy by realigning ends, ways and means.

That doesn’t mean the current plan is perfect and can’t be improved. Indeed, Defence Minister Linda Reynolds has directed the department to review it. In a future post, I’ll look at ways Defence could deliver better value for money and get more bang for its buck, particularly considering what we’ve learned from the Covid-19 crisis.

Australian universities must rethink their broken business model or risk failure

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.

Australia needs volunteers to be ready for a cyber conflagration

Australia’s ‘black summer’ of bushfires and the Covid-19 pandemic caught authorities and citizens off guard, but they shouldn’t have. Experts were warning about catastrophic fires from mid-2019, while national security agencies have worried about a global pandemic for decades. In each case, the sheer scale of the crisis appears to have made it difficult to imagine and plan for ahead of time.

Scanning the horizon, what other large-scale risks does Australia face? An obvious one is a major, destructive cyberattack.

Last year, the defence force’s head of information warfare revealed that although Australia has strong cyber defences, ‘when it comes to scale, I’m a bit worried’. The bushfire and coronavirus crises have reinforced how difficult it is to manage whole-of-nation emergencies. Coordination problems between state and federal governments impede responses, our national supply chains lack resilience, physical infrastructure can be brittle, and there are subterranean fault lines in our social cohesion. A major cyberattack would expose all of these weaknesses.

A deliberate state-sponsored cyberattack would also differ in important ways. Fires and viruses don’t have geopolitical agendas or make coercive political demands. They don’t intend to hit us where we are most vulnerable, and they don’t adapt their strategy to outfox first responders. Indeed, just as Australian national security analysts will use recent crises as learning opportunities, foreign adversaries are likely also observing our strengths and weaknesses with interest.

So what can be done?

One good policy idea is to organise and train ‘cyber resilience’ volunteers. It’s not a new idea: calls for some form of cyber civil defence have been mooted in Canberra for years, including most recently by the shadow cybersecurity minister writing for this site.

Importantly, this model is nothing like the state-sponsored hackers used by other countries or groups of ‘cyber vigilantes’. Offensive cyber should be left to Australia’s capable and appropriately authorised federal agencies. Volunteers would support whole-of-nation cyber risk reduction and, if needed, response and recovery efforts.

Recent experiences with bushfires and Covid-19 help illuminate four reasons why this idea deserves serious consideration.

First, Australia doesn’t have state or local authorities with significant cyber defence capabilities. In the event of a crisis, the roles and responsibilities of the states, and how private sector talent and infrastructure could lawfully be used, remain unclear.

A volunteer organisation could help bridge that gap. Significantly, volunteers would not only be technical experts—just as not all volunteer firefighters work on the front line. Skills in business, planning, communications, trades and engineering would be essential.

Second, and most important, recent experience has shown us that crisis response and recovery need federal coordination and resourcing, but must also be responsive to local needs. Effective crisis management has a yin and yang: clear top-down direction, plus robust bottom-up capacity.

For bushfires, Australia’s decentralised approach allows communities to be active in risk reduction, and state and volunteer emergency services are experienced with the conditions in their areas. However, as climate change increases the fire season’s severity and duration, state-based services alone are no longer sufficient—a shift evidenced by the government’s unprecedented deployment of more than 6,500 defence personnel this summer.

While the gap in our 2019–20 bushfire response was a lack of early federal involvement, in a cyber emergency the weak link would be the absence of decentralised response and recovery capabilities.

Our top-down approach to cyber defence hinges on federal agencies like the Australian Signals Directorate and the Australian Cyber Security Centre. However, the systems and networks which states, local governments and businesses rely on are as varied and distinctive as conditions in different regions in a bushfire season.

Cyber volunteers could add vital on-the-ground knowledge to response efforts. Their contribution could also help authorities better prioritise federal resources. For example, Defence’s contribution to bushfire recovery assistance allowed state authorities to focus on fighting fires in critically affected areas. In the event of a destructive cyberattack, the inverse could happen: volunteers could help communities and small businesses patch systems or temporarily restore local infrastructure, while federal authorities engaged in the broader cyber fight.

Third, Covid-19 has emphasised the importance of ensuring that government advice and expert information cut through a sea of global misinformation. In fire season, volunteer services play a key role in informing the public via town hall meetings, door-knocking local residents and social media updates.

In a cyber crisis, volunteers could support federal messages by supplying trusted, relevant information to their communities. They could also be a significant conduit for information at all times. Like local fire services do with fire awareness, local cyber volunteers could build cyber literacy within communities and schools, and amplify the government’s cyber safety campaigns.

Fourth, Australians share in a proud volunteer tradition. More than 500,000 of us regularly contribute to non-government emergency organisations. A failure to embrace this volunteer spirit would be a wasted opportunity. Indeed, in a disaster, it’s likely that spontaneous volunteers would look for ways to pitch in. Now is the best time to determine how to harness this goodwill; resolve issues of command and control, quality assurance and training; and draw legal boundaries.

Establishing a cyber volunteer capability would send a powerful signal to all Australians about the need to understand the cyber risks we face and prepare for their consequences so we’re not caught off guard by another foreseeable crisis.

Australia’s defence budget in the age of Covid-19: Where are we now?

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.