Tag Archive for: defence budget

It’s (past) time to get serious about funding Australia’s defence and security

In the week of Australia’s 3 May election, ASPI will release Agenda for Change 2025: preparedness and resilience in an uncertain world, a report promoting public debate and understanding on issues of strategic importance to Australia. This is an article from the report.

The National Defence Strategy (NDS), released in April 2024, gave urgent warning that Australia’s strategic circumstances were rapidly deteriorating. It noted that the 2023 Defence Strategic Review (DSR) had warned that ‘Australia faced its most challenging strategic environment since the Second World War’, and that events had worsened since the DSR’s release only 12 months before.

In the 12 months since the NDS hit the streets, the geostrategic environment—and the strategic risks that Australia faces—have not just continued that trajectory, but have exponentially deteriorated, to the point that Australia now faces a global and regional security environment that bears little relationship to the foundational assumptions that the NDS is based on: a rules-based global order and an open, stable and prosperous Indo-Pacific.

China’s growing assertiveness, malicious cyber targeting of political and military systems and civilian ICT networks  and adversarial mercantilism  have ratcheted up to new levels, demonstrated most vividly by the recent circumnavigation of Australia by PLA Navy Task Group 107  and the no-notice live-fire drills conducted in the Tasman Sea. Beijing has warned that more such visits will occur,  and Australian naval experts argue that the Royal Australian Navy is ill-equipped for such an eventuality, with only ‘16 battle-force vessels—its smallest and oldest in decades’.

Russia’s war on Ukraine continues to eat away at the longstanding verities of the international security framework that has underpinned global stability and security in the post–World War II environment. Russia’s continued flouting of the Geneva Conventions,  attacking critical infrastructure targets in Ukraine,  including nuclear energy plants,  kidnapping and forcing of Russian citizenship upon Ukrainian citizens,  threats of nuclear war  and increasing use of paid or politically motivated agents to undertake sabotage attacks  throughout Europe have resulted in an increasing realisation that European security architecture and military capability spending are no longer appropriate and that a more general war in Europe, and potentially globally, is becoming more likely.  Prime Minister Albanese has recently ‘opened the door to sending Australian troops to Ukraine’, but military experts suggest that ‘the current operational capability of the defence forces is looking pretty thin.’

And perhaps most consequentially, the new Trump administration has flagged a more selective approach towards traditional alliance relationships, demanding of its allies that they align with US policy and intents and invest in much higher levels of defence spending  in order to justify continued US engagement and support. Absent such demonstrations, it’s becoming clear that a stultifying effect will encompass the relationship.  In speaking of Australia, Elbridge Colby, the President’s nominee for Under Secretary of Defense for Policy, declared that ‘The main concern the United States should press with Australia, consistent with the President’s approach, is higher defense spending. Australia is currently well below the 3% level advocated for NATO by NATO Secretary General Rutte, and Canberra faces a far more powerful challenge in China.’

And as Mike Burgess AM, Director-General of the Australian Security Intelligence Organisation, noted in his 2025 threat assessment:

Australia has entered a period of strategic surprise and security fragility. Over the next five years, a complex, challenging and changing security environment will become more dynamic, more diverse and more degraded. Many of the foundations that have underpinned Australia’s security, prosperity and democracy are being tested: social cohesion is eroding, trust in institutions is declining, intolerance is growing, even truth itself is being undermined by conspiracy, mis- and disinformation … Australia is facing multifaceted, merging, intersecting, concurrent and cascading threats. Major geopolitical, economic, social and security challenges of the 1930s, 70s and 90s have converged.

In the DSR, Sir Angus Houston AK AFC and Stephen Smith highlighted that ‘Defence planning is about managing strategic risk. Defence spending must be a reflection of the strategic circumstances our nation faces.’  They recommended that:

Defence funding should be increased to meet our strategic circumstances. Lower-priority projects and programs should be stopped or suspended to free essential resources which can be allocated to projects and programs that align with the priorities in the Review. Funding should be released through the rebuild and reprioritisation of the Integrated Investment Program (IIP) and reinvested into priority Defence projects, programs and activities consistent with the Review.

Against the complex,  interconnected  and existential  threat environment Australia now faces, the next government must seriously consider whether the funding commitments, set out in the NDS and the Defence Portfolio Budget Statements meet the threshold test of the DSR that spending reflect the strategic circumstances Australia now faces. And, noting that the NDS quite clearly states that Australia no longer enjoys the benefit of a 10-year window of strategic warning time for conflict, and that the ADF is not fully fit for purpose, whether we have the appropriate balance between investing in the future (with initial operating capabilities for many of the current IIP projects coming due in the 2030s through 2050s) or preparing for the present (investing in the readiness and sustainability of current units and platforms, and undertaking rapid acquisition of improvements to the force-in-being).

In ASPI’s The cost of Defence: ASPI defence budget brief 2024–2025, we suggested that the answer to those two fundamental questions was ‘No’. Justin Bassi, ASPI’s Executive Director, categorically stated that:

Australia needs to spend more on defence—and it needs to do so immediately. The strategic imperative has been firmly established in the government’s own major defence documents. The Albanese government and the Coalition opposition agree that we are in the gravest geopolitical period in generations, and this is only going to intensify … the rhetorical urgency is not being matched by action in the form of defence investment … This year’s budget priorities are not directed towards strengthening the Australian Defence Force’s ability to fight in the next decade.

In the 2024–25 Budget, the government noted that Defence funding as a proportion of GDP would reach 2.3% by 2033–34.  The majority of that funding is backloaded to the period beyond the forward estimates (out to 2027–28). In essence, Defence is receiving no additional funding for the next three years, which, as The cost of Defence noted, is a holding pattern that leaves us critically exposed to events in the near term and results in preparedness and readiness levels well below any real ability to hold an adversary at risk for a meaningful period.  The RAN has mothballed major and minor combatants to meet urgent personnel and funding challenges in other parts of the fleet, including the two Supply-class fleet replenishment oilers being out of service for an extended period (the need for a supply ship was clearly demonstrated by the PLA Navy’s recent circumnavigation, which couldn’t be followed continuously by the RAN). Meanwhile, the Australian Army is downsizing its armoured combat vehicle aspirations, and RAAF flying hours have contracted.

Raising Defence spending to at least 3% of GDP is a strategic necessity.  Doing so will help to assuage US concerns regarding our continued commitment to the alliance and help meet the Trump administration’s priorities, as the previous Chief of the Defence Force and DSR author, Sir Angus Houston AK AFC, stated, ‘[President Trump] might say increase our GDP defence spend to 3.0 per cent, but I don’t think that is a bad thing.’  More importantly, it is necessary for Australian security to deliver the necessary cash injection and funding certainty for Defence (and defence industry) to focus on the preparedness of the force-in-being, as the previous Secretary of Defence, Dennis Richardson AC, noted: ‘we must raise to 3 per cent [of GDP defence spending] to do this, because the only other way to do this is to cannibalise our other Australian Defence Force capabilities.’

The NDS states that the new strategy of denial at the heart of Australia’s national defence focuses on ‘deterring a potential adversary from taking actions that would be inimical to Australia’s interests and regional stability’.  In the current geostrategic environment, no potential adversary is going to be deterred by a paper ADF that won’t exist until well into the 2040s and 2050s. Moreover, no potential adversary will be deterred by a ‘business hours’ ADF that does not maintain credible capability for 24/7 defence of its own territory and exclusive economic zones, including in the Southern Ocean and Antarctica. A substantial investment in the preparedness—readiness and sustainability—of the ADF is mandatory if we intend to deter the actions of aggressive nations, which can rehearse their kinetic and non-kinetic offences in Australia’s own backyard and in our ICT networks. The immediate security of Australia and the safety of our citizens, including those travelling in civilian airliners across the Tasman or into Asia, necessitate that we can undertake real-time surveillance and reconnaissance and, if necessary, active, defensive and offensive counterattack measures.

Moreover, we must have not just the ability to ‘change a potential adversary’s risk assessment and therefore decision-making calculus’  by imposing cost on that adversary, but also the ability to absorb the costs of successful adversary actions aimed at Australia, whether they be economic, psychological, political or military. National preparedness—a strategic and systematic process to plan, coordinate and integrate resources and efforts across all sectors of government, the economy and society to ensure that the nation is ready to manage potential disasters, emergencies or national-security threats—does not yet exist in Australia. While the NDS makes a strong argument for the need for ‘a coordinated, whole-of-government and whole-of-nation approach [that] harnesses all arms of Australia’s national power to establish a holistic, integrated and focused approach to protect our security and advance our interests’,  the Budget doesn’t allocate any resources to make Australia’s national preparedness and resilience real.

It’s long been axiomatic in Defence rhetoric, but not in Defence’s reality, that Defence must ‘structure for war and adapt for peace’.  A decade ago, David Peever and his First Principles Review team flagged that Defence was not fit for purpose and proposed an ambitious agenda to reform Defence’s decision-making and processes to deliver on the outcomes required of it.  All of the 76 recommendations of the review were ticked off by Defence, and yet, a decade later, the DSR again found that Defence was not fit for purpose. The NDS devotes a chapter to the ‘reform agenda’,  and yet strategic and acquisition reform still eludes Defence. If Defence’s spending does rise to 3% of GDP, it will be essential that we have a Defence Department that’s able to spend that money efficiently and create substantially more combat power per dollar invested than the current organisation can deliver. Recent Senate Estimates testimony,  recruitment woes  and acquisition challenges  highlight that there’s much work still to be done to structure Defence for the uncertainties of our present, let alone the potential wars of our future.

We recommend to the next government that it undertakes four immediate actions following the next federal election.

—In the 2025–26 Budget, commit to increased funding of the defence budget to bring Australian defence funding to 3% of GDP by no later than 2026–27 and sustain that level over the next decade.

—Direct Defence to review the planned update to the NDS and the IIP, scheduled for release in 2026, with the aim of prioritising the readiness and sustainability of the current force-in-being, necessary for the 24/7 defence of the Australian theatre and our region.

—In the 2025–26 Budget, commit to funding national preparedness and national resilience measures across government, the economy and society that will ensure Australia is ready to manage potential national-security crises.

—Deliver, within three months of the election, with full implementation over the following 12 months, a public reform plan, as laid out in the DSR, to streamline procurement processes, enhance project management, reduce redundant spending and strengthen domestic defence manufacturing.

Awful optics: political fighting in Taiwan stalls part of defence budget rise

Political fighting in Taiwan is delaying some of an increase in defence spending and creating an appearance of lack of national resolve that can only damage the island’s relationship with the Trump administration.

The main opposition parties support the policy of President Lai Ching-te to lift spending from roughly 2.45 percent of GDP to more than 3 percent, but recently they’ve been unable to resist playing politics with the defence budget in the legislature.

Since Donald Trump has demanded that the United States’ European allies lift defence spending to 5 percent of GDP, and since Taiwan would be the frontline state in a war with China, the US is unlikely to find 3 percent at all sufficient.

Elbridge Colby, Trump’s nominee to become under secretary of defense for policy, said at his Senate confirmation hearing on 4 March that Taiwan should be spending 10 percent of its GDP ‘or at least something in that ballpark.’

The upper echelons of Taiwan’s ruling Democratic Progressive Party say they’ve understood the signal from Trump and are happy to spend cash on more weaponry. ‘We got that message and we’ll be more than happy to talk about strengthening our defence capability,’ former Taiwanese president Tsai Ing-wen told The Times.

The problem is that Taiwan’s legislature usually needs to approve major US weaponry purchases and government plans for indigenous defence capability development. But the legislature is dominated by parties that are soft on China.

Lai Ching-te was elected last year with around 40 percent of the vote, giving him control of the executive branch of government. But in concurrent legislative elections his independence-minded DPP narrowly lost its majority in the 113-seat parliament to the Kuomintang and its smaller ally, the Taiwan People’s Party.

The government and legislature have since been at loggerheads. Lai has done little to reach out and compromise, while the KMT and TPP have frequently been obstructive. Without providing evidence, the DPP says Beijing is behind their obstructions, while opposition lawmakers say Lai is too dictatorial.

There have been many brawls in the legislative chamber (real brawls, with punching, pushing and shoving) and protests in the streets. The executive branch has rejected bills passed by the legislature and sent them back to parliament for reconsideration. Taiwan’s constitutional court, an important democratic institution, had the sole power of legislative review and could act as an arbitrator. But because of one bill rammed through parliament by the opposition, the court has been temporarily paralysed.

The most worrying development came at the end of January when, hours after Trump’s inauguration. lawmakers voted to slash and freeze parts of Taiwan’s defence spending for 2025. Lawmakers cut 60 percent of the defence ministry’s publicity budget, crucial for recruitment. They also froze half the submarine program budget, 30 percent of military operations expenditure and funding for a drone industrial park.

Alexander Huang, director of the KMT’s International Affairs Department, says opposition lawmakers have cut about 1.3 percent of Lai’s proposed defence budget of NT$647 billion (AU$30.8 billion), which was originally 6.6 percent bigger than last year’s. After the cut, the rise is 5.2 percent, amid 2025 inflation expected to be about 2.0 percent. Huang notes that the frozen funds will be released once relevant government agencies give reports to the legislature, and parliamentarians are satisfied that defence projects are efficient and progressing.

Still, as far as optics go, the damage has been done. At Colby’s hearing, two US senators criticised the Taiwanese legislature’s efforts to cut defence spending. Republican senator Dan Sullivan accused the KMT of ‘playing a dangerous game’ while Colby himself found it profoundly disturbing.

For at least the past two decades, many US policymakers have pushed Taiwan to spend 3 percent of its GDP on defence, but it never reached this target. When Tsai Ing-wen took office in 2016, defence spending was just 1.82 percent of GDP, though she raised it to 2.17 percent in 2023. For many years, the budget was also not used as effectively as it could have been. For instance, until last year, conscription was only four months long, and the training was widely criticised for not being serious, looking more like a summer camp.

Lai this year plans to pass an additional special budget to push defence spending from 2.45 percent to more than 3 percent of GDP. The additional budget, which will likely be spent on US weaponry to demonstrate Taiwan’s resolve to Trump, will still need legislative approval. While mainstream KMT and TPP officials support increased defence spending, some in the opposition who are more pro-Beijing will probably object.

The blow-up between Trump and Ukrainian leader Volodymyr Zelenskyy is driving anti-Americanism in some quarters in Taiwan, especially with pro-China KMT politicians. Fu Kun-chi, the KMT’s legislative caucus whip, who has close ties with Beijing officials, pointed to the way Trump publicly scolded Zelenskyy and said Lai could be next in line.

‘Do we really have to spend 10 percent of Taiwan’s GDP or NT$2.86 trillion, on the military? Can the Taiwanese people shoulder this?” he said, according to the Chinese-language United Daily News.

Political scientists also predict it will be nearly impossible to push Taiwan’s defence budget to 8 percent or even 5 percent in the short term.

The KMT’s Huang, who is also a respected military analyst, noted that Taiwan’s overall government budget spending normally stands at about 12 percent to 13 percent of its GDP, meaning that 8 percent of GDP would amount to about two-thirds of Taiwan’s current government spending.

Huang added that it will be difficult for politicians across Taiwan’s political spectrum, including those in the DPP, to win votes if they propose higher spending and higher taxes.

Andrew Yang, a former KMT deputy defence minister, described a defence spending goal of 5 percent of GDP as ‘mission impossible.’

Well-connected Yang said some influential people in Washington were concerned about Taiwan’s political divisions. Yang said it was most important for Taiwan to convince Washington that the two sides had reached a consensus on defence so that the executive branch and legislative branch could focus on allocating resources. But while Taiwan mostly has the resolve to defend itself, all the squabbling will make this difficult.

Australia needs greater defence self-reliance, and extra funding

Two recent foreign challenges suggest that Australia needs urgently to increase its level of defence self-reliance and to ensure that the increased funding that this would require is available.

First, the circumnavigation of our continent by three Chinese warships in February and March puts in question our capacity to keep even one flotilla under persistent surveillance. To remedy this, we need to re-examine our intelligence and surveillance capabilities. We knew well enough where the Chinese warships were but not what they were doing.

Second, the aggressive behaviour towards Ukraine’s President Zelenskyy by President Donald Trump in the White House on 28 February raises the question of our need for a higher degree of defence self-reliance. This does not mean abandoning or jettisoning the alliance with the US. But it does mean we need better ability to manage military contingencies in our strategic approaches without depending on the United States.

This will demand greater capabilities in longer-range weapons and supporting capabilities for intelligence, surveillance and tracking. These contingencies raise the need for a significantly greater degree of defence self-reliance. The US under Trump will expect us to manage them by ourselves.

Further, the principle of extended deterrence in the Asia-Pacific—under which the US remains the strategic guarantor for its allies in the region, especially against nuclear attack—has not (yet) been challenged by Trump or his administration officials. That guarantee seems a curious exception to Trump’s transactional approach to other security commitments.

However, short of nuclear war, we need to ascertain whether our strongest ally has transformed overnight into our most immediate problem. Already we see that Russia’s long-standing ambition to divide NATO is several steps closer.

The assumption still reigns in Australia that military threats are something that happen to other people a long way away and will never come to our homeland. With that belief, we have indulged ourselves in the luxury of merely incremental increases in defence budgets, rather than the transformative investment that is now needed.

Such transformation is now needed to ensure, first, that the Australian Defence Force can surge to meet the demands of new, short-warning contingencies and sustain the associated higher rates of effort and, second, that the ADF can continue to be the basis for further military expansion in the event that our strategic circumstances deteriorate further.

Underlying these concerns is the need to understand that the US is undergoing radical change under Trump. As Sir Lawrence Freedman observes, ‘The US is shrinking before our eyes as a serious and competent power.’

Taken together, the observations set out above reinforce Australia’s need for a greater level of self-reliance. These new issues are demanding because of their severe and sudden impact on our strategic environment. They require Defence to revisit its allocation of resources.

Defence must review operational requirements for anti-ship missiles, drones and associated ammunition, sea mines, uncrewed submarines, air-to-air missiles and strike missiles. The review must result in a new allocation of resources to such systems.

In the past few years, it has become quite trendy for defence experts in Australia to assert we need to spend 3 to 4 percent of GDP on defence, compared with barely 2 percent now. That would mean finding an additional $28 billion to $55 billion a year and bringing the overall defence budget to between $83 billion and $110 billion a year, compared with $55 billion now.

On 7 March, the nominated US under secretary of defence, Elbridge Colby, bluntly called for Australia to spend 3 percent of GDP on defence.

Making such arbitrary claims for an additional $28 billion a year is not a responsible approach to defence planning. Instead, what is needed is a much finer-grained definition of the ADF’s needs for such materiel as mentioned above, particularly for long-range missile strike capabilities and their associated deterrence through denial. Australia’s Defence organisation now needs to get on with this as a matter of urgency.

Our focus now needs to be not so much on additional, hugely expensive major platforms, such as ships and crewed aircraft, but giving new priority to surveillance and targeting capabilities, missiles and ammunition and uncrewed systems. Such an approach would be much less expensive, and much more timely.

The fact remains that today’s ADF, together with supporting capabilities, has little ability to sustain operations beyond low-level contingencies. Moreover, assumptions about force expansion made over many previous decades are no longer appropriate, particularly with respect to major platforms. In contrast, a way forward is presented by the government’s 2024 Guided Weapons and Explosive Ordnance (GWEO) plan, which is aimed at establishing domestic supply of advanced munitions. It can significantly increase the ADF’s ability to sustain high-technology operations and credibly support powerful force expansion based on modern long-range precision strike and targeting. Again, this is much quicker and cheaper than buying yet more large and costly platforms.

Despite rising strike ranges, geography is not dead. As the 2024 GWEO plan says, ‘With vast maritime borders and critical northern approaches, Australia must be able to defend against any adversary who may project power close to our territory.’

At present, Defence is spending $28 billion to $35 billion to develop and enhance targeting and long-range strike capabilities out to 2034. These will give the ADF a greater capacity to hold at risk a potential adversary’s forces that could target Australia’s interests during a conflict. But this is just the beginning. There are more expensive investments to be made—for example, in integrated air and missile defence.

Merely asserting that a particular percentage of GDP is appropriate for the defence budget is not adequate. Arguments that say only ‘more is better’ will get us nowhere. Defence needs a story to tell—a conceptual framework, agreed and accepted by the government and by the machinery of government—as the basis for considering more specific issues and initiatives. It must be suitable for public presentation, not just to get public understanding of the need for increased funding but potentially to get acceptance of the need to handle what looks like an extremely worrying emerging strategic situation in the shorter term.

The issues to be confronted include the level of strategic risk that the government is prepared to accept. What options in this respect does it want to consider? How much further down the path of self-reliance and sovereignty does it want to go in this new strategic environment? What would be the right level of reliance on the Trump government for intelligence, operational and combat support and logistics support? What range of options (and at what cost) should Australia now develop for contributing to US-led operations in the Indo-Pacific? This consideration will need to address a wider choice than in the Cold War, when Australia’s need to support the US in the Western Pacific, and US expectations of support, were much lower.

Further, Australia needs to consider its options for working more closely with other countries in the region, such as Japan, especially in the event that the US reduces its commitment to the area.

In many ways, the key point is how best to position Australia’s national defence effort (not just the ADF) to be able to surge in response to short-warning contingencies involving China as a potential adversary and, in a different way, the US, presumably as an ally.

The short-warning contingencies of today’s strategic circumstances will be potentially much more demanding than those of earlier years.

The legacy of five decades of assuming extended warning time is, in effect, an ADF with little capacity today for sustained operations, especially at an intense level. So, positioning Defence to have this surge capacity requires close attention.

It is good that governments have, progressively, recognised most of these issues. But implementation has been slow. The end of the era of extended warning was made clear in the 2016 Defence White Paper, drafted in 2015. This was 10 years ago, the length of time during which previous defence policies assumed we would respond to strategic deterioration and expand the ADF. But in terms of more potent defence capabilities, we have very little to show for it.

Even so, Defence’s adoption of net assessments (modelling likely enemy capabilities against ours, including both sides’ logistics support) is a powerful tool contributing to decisions about the force structure, preparedness, and strategic risk. Decisions on communications, surveillance and targeting capabilities reflect the importance of Australian sovereignty in these vital areas.

Defence is grasping the opportunities presented by the new technologies of remotely operated uncrewed platforms (combat aircraft, small submarines and surface ships). Such platforms offer a more expeditious and less expensive mode of force expansion than the acquisition of major crewed platforms, just as local manufacturing of modern long-range precision strike missiles does.

The matters set out above would contribute to the basis for estimating the costs of defence policies, including the costs of different policy options such as different levels of self-reliance and strategic risk, more or fewer options for contributing to US-led Indo-Pacific operations, greater or lesser reliance on the US for sustainability stocks of spare parts and munitions during contingencies.

Other factors include the need to address workforce issues, including the difficulties that the ADF has in attracting and retaining its personnel. If the latter difficulties persist, there may well be a need to consider radically different approaches to the ADF workforce, including some form of national service, an increased focus on the Reserves, or both.

Arguments for increased funding based on the above analysis would be much more likely to carry the day than mere assertions that a particular arbitrary fraction of GDP should be the target for the Defence budget.

Finally, the authors of this article are of the view that Defence’s decision-making abilities are not adequate, even for peacetime governance. It is, therefore, but a short step to be concerned that the arrangements for decision-making in the event of the more serious contingencies that have now to be part of the defence planning basis would be even less adequate. This also needs attention.

It’s been done before: pay for more defence spending with debt

Australia, Britain and European countries should loosen budget rules to allow borrowing to fund higher defence spending, a new study by the Kiel Institute suggests.

Currently, budget debt rules are forcing governments to finance increases in defence spending with savings elsewhere or with taxes. But the study, examining military build-ups across 22 countries over the past 150 years, shows that defence spending increases have almost never been funded by spending cuts and that tax increases generally come later.

The larger the military build-up, the more governments rely on deficit and debt financing. These findings are consistent with economic theory, which suggests a mix of deficit and tax financing, with deficit financing playing a dominant role in large, short-term build-ups.

Australia has been under pressure to increase defence spending ever since 2010–11, when cuts reduced the defence share of GDP to just 1.6 percent, the lowest since 1938.

Earlier Kiel Institute research shows defence spending across the G7 advanced nations has been at a record low. The Trump administration has pushed allies to raise defence spending above 3 percent of GDP and has challenged their assumption that the US military would always be there as a backstop to their national security.

Last week, Germany’s incoming chancellor, Friedrich Merz of the Christian Democratic Union, won agreement from the Social Democrats and the Greens to exempt defence spending from the country’s strict limit on debt, enabling a defence build-up.

The European Union has also proposed bending its fiscal rules to allow member states to lift defence spending by up to 1.5 percent of GDP over a four-year period.

In contrast, Britain’s Keir Starmer is sticking to rules demanding a return to a balanced budget by 2029. The Labour prime minister said reaching a defence target of 3 percent of GDP would have to be funded by tax increases and spending cuts, starting with a cut to foreign aid from 0.5 percent of GDP to 0.3 percent.

In Australia, the fiscal strategy of the Labor government of Prime Minister Anthony Albanese requires that spending growth be limited until government debt is ‘on a downward trajectory’ and that most of any improvement in tax revenue should be used to lower debt.

The rule is not ironclad and allows for exceptions. But in practice, the increased defence outlays recommended in the Defence Strategic Review have been funded largely by cuts to existing defence programs until 2027–28, when Treasury predicts gross debt will start falling.

The Kiel Institute says Britain showed the folly of putting budget rules ahead of national security in the 1930s.

Despite massive external threats, it maintained a balanced budget and reduced its debt to GDP ratio until the late 1930s. It thus places concerns of debt sustainability and currency stability above the growing concerns of war.

Britain’s Treasury regularly rejected requests for increased defence spending during the 1930s and, the Kiel Institute argues, contributed to the British policy of appeasement. Britain’s defence spending was below 3 percent of GDP until 1937. In contrast, German military outlays had been more than 10 percent of GDP since 1935. While the British budget was balanced, Germany ran large deficits, funding its military with debt.

The defence spending increase being envisaged across the advanced world is much smaller than would be needed to prepare for war. During World War II, combatants devoted between 40 and 70 percent of their resources to the war effort. In Australia, spending rose to 40 percent of GDP in the early 1940s.

The Kiel Institute research, which excluded both world wars, identified 113 examples of military build-ups where spending rose rapidly over at least two years.

On average, military build-up raised defence spending by about 1.5 percent of GDP and occurred over a five-year period.

The central finding was that health and education spending grew at similar rates during periods of military build-up and when defence spending was level or declining. Total non-military spending rose more rapidly (about 0.75 percent of GDP a year) during periods of military build-up than when military outlays were level or falling.

During military build-ups, budget deficits grew by an annual average of almost 0.5 percent of GDP but declined on average in normal times. This shows the dependence on debt. Tax revenues rose by about 0.75 percent of GDP a year during military build-ups, compared with about 0.5 percent in normal times.

The paper said governments should rely on borrowing to fund increased defence, at least in the short term.

To manage the resulting debt burden in the medium term, governments could raise taxes, reduce tax avoidance and exemptions, and temporarily freeze the growth of consumptive government spending, such as social transfers and subsidies.

The next Australian government needs a bolder plan for the navy

The past year brought a renewed focus on Australia’s deteriorating security situation and maritime capability. Despite the maritime emphasis in Australia’s 2024 defence announcements, the country remains far from being adequately positioned to defend its extensive sea lines of communication, subsea cables and broader national interests at sea.

With a federal election due by May, the next Australian government must spend on the navy, address the capability gaps and make timely decisions on future capability.

In the past 12 months, the oceans on which we depend for our protection and prosperity have experi­enced a dramatic deteriora­tion in security terms, unseen in recent decades. Globally, from the Black Sea to the Red Sea, maritime trade is under pressure. Europe has experienced further attacks on critical maritime infrastructure, including subsea cables – the backbone of internet connectivity.

Closer to home, we’ve witnessed escalating aggression from China’s coastguard, which regularly has attacked Philippine vessels in the West Philippine Sea.

Australian sailors have been placed at risk, most recently when a Chinese fighter pilot inexplicably deployed flares in front of an Australian helicopter operating in international airspace. This is not simply a canary in the coalmine; it means the breakdown of global norms.

If a conflict arises in the Indo-Pacific, it will be inherently maritime in nature and we will be compelled to fight with the capabilities we have at the time.

In February 2024, the government announced a historic expansion of the surface combatant fleet—the destroyers and frigates of the Royal Australian Navy equipped with offensive and defensive weapons including missiles and torpedoes. But this expansion is not expected to materialise until the 2030s.

During the past 12 months there has been an integration of new missile capabilities in the navy’s small fleet. Announcements have included the acceleration of building ships for the army and key achievements in training, treaties and export controls to support Australia’s acquisition of nuclear-powered submarines. In fact, 38 percent of Defence’s spending plan, the Integrated Investment Program, across the next decade will be directed towards maritime capabilities.

These developments are positive, but they have not shifted the needle in the near term to address Australia’s vulnerabilities in the maritime domain.

Australia’s surface combatant fleet has been reduced from 11 to 10 with the decommissioning of HMAS Anzac because of its age. The mine-hunting fleet also has been diminished, leaving only two vessels remaining after a mid-year decision to cancel their replacements. Australia’s two tankers, critical for replenishing fuel, food and ammunition for naval ships, have been laid up for most of 2024 because of defects. Additionally, much of Australia’s hydrographic capability, vital for surveying beneath the surface of the water, has been decommissioned, leaving only one ship in operation.

The list goes on. These issues are the product of decades of delayed and indecisive decision-making compounded by a lack of investment. The increasing frequency of attacks in the maritime domain, coupled with the absence of strategic warning time for a potential regional conflict, highlights the urgent need to address Australia’s waning maritime power. This is not simply a nice-to-have but an essential requirement for an island nation when global security norms are being redefined.

In 2025 a timely decision on Australia’s future frigate design will be critical to achieving the planned 2029 delivery of the first of 11 ships. This decision must prioritise the option that minimises delivery risks, ensures operational capability by 2029 (or sooner), maximises commonality with existing Australian systems and offers the design flexibility to accommodate future upgrades.

We must be even bolder than this. While the thought of another review may make us groan, the next government must conduct a thorough assessment of our broader naval and maritime capabilities. If we acknowledge that we’re not currently equipped to protect our trade routes or subsea cables, we must critically examine the composition of the wider fleet—not just the surface combatants but also our mine warfare, hydrographic, amphibious, replenishment and clearance diving capabilities.

Finally, we must confront the difficult conversation about spending to deliver these capabilities at speed. While the current government has made the first substantial increase to the defence budget in nearly a decade—projecting defence spending to rise from the current 2 per cent of GDP to 2.4 per cent by the end of the next decade—this will not be enough to revitalise our defence, particularly our naval capabilities.

During the Cold War, Australia consistently spent an average of 2.7 percent of GDP on defence, with spending exceeding that level during major naval construction efforts. If Australia is truly facing its most complex and challenging strategic environment since World War II, as outlined in the 2024 National Defence Strategy, we cannot afford to continue underspending.

Budget: 10-year defence spending up 11 percent from 2022 plan

The Australian federal budget shows defence will receive a significant increase in funding over the next decade under the new National Defence Strategy and Integrated Investment Plan.

The budget papers, issued on 14 May, include a chart comparing the proposed funding with the spending profile projected ahead of the 2022 election, when the AUKUS deal had been struck but no additional resources arranged.

It shows that defence is now due to receive a total of $718 billion over the 10 years to 2032–33, up 11 percent from the $647 billion envisaged in the 2022 Pre-Election Fiscal Outlook, a politically independent document prepared by the Treasury.

The increase in funding starts slowly but gets larger over the decade, so that by 2032–33, defence is projected to have $96.5 billion to spend, which is a massive 17.1 percent more than was provided for the same year in 2022.

Last year’s budget, which was handed down shortly after the Defence Strategic Review called for a sweeping overhaul of Australia’s military capabilities, was criticised for providing no additional funding over the four-year budget period, other than compensation for a fall in the value of the Australian dollar. With no compensation for inflation, which was then running at 6 percent, defence was falling behind.

The only increase last year came beyond the four-year budget period, with a provision for an additional $30 billion from 2027–28 and beyond. With the passage of 12 months, the first of that spending is now within the budget horizon. The budget provides $67.4 billion for defence in 2027-28, a 10.6 percent jump from 2026–27.

The budget also incorporates an additional $1.7 billion for shipbuilding over the four-year budget period, which is part of the government’s $11.1 billion response to a review of the navy’s surface fleet, announced in February.

The cost of implementing the National Defence Strategy and its associated spending plan, the Integrated Investment Program, over the budget period is an additional $5.7 billion, rising to $50.3 billion over the decade.

Over the next 10 years, defence spending will average an annual increase of 6.6 percent, delivering a real increase ahead of inflation. Treasury predicts consumer-price inflation will fall to 2.75 per cent this year and next, and then average 2.5 percent beyond that.

The government faces a series of other spending pressures, with the cost of the National Disability Insurance Scheme forecast to keep rising at an average 9.2 percent a year over the decade and absorbing more than defence. Interest costs are predicted to rise by an annual average of 9.9 percent over the decade, while aged care, hospitals and Medicare all face costs rising at average rates of between 5.7 and 6.5 percent.

Over the next four years, the defence share of the federal budget will rise only marginally from 6.1 to 6.2 percent. However, other arms of government are receiving smaller shares. Education’s share of the budget will fall from 7.1 per cent to 6.8 per cent, while the health share drops from 15.5 percent to 14.8 percent.

As indicated with the release of the National Defence Strategy and Integrated Investment Plan last month, the increase in government funding goes only part of the way to covering the cost of the major planned investments.

The $50.3 billion in additional budget funding over the decade hardly covers the cost of the submarines, which the investment plan said would be greater than $50 billion over the decade.

The budget funding will have to be supplemented by a further $73 billion in cuts to existing programs to fund the $330 billion total investment in new equipment over the decade.

Cuts include the reduction in the number of infantry fighting vehicles and cancelling the purchases of a fourth squadron of F-35A fighters and two joint support ships, however a full list has not been published. The cuts are likely to include many minor deferrals and reductions in the scope of purchases, however $73 billion is a lot to take out of the existing investment program.

Total defence spending is now expected to rise to 2.3 percent of GDP by 2033–34, up from 2.1 percent this year. The government had flagged that spending would reach 2.4 percent, however an upgrade in Treasury’s forecast for nominal GDP means that the percentage will now be slightly less.

There has been little change in the Australian dollar’s exchange rate since the mid-year budget update last December so the budget does not include any of the compensation that inflated last year’s defence resourcing. The Australian dollar did fall over the latter half of 2023, which meant there was an additional $2.5 billion provided by the Finance Department to offset the additional cost of equipment purchased abroad, however this was included in the 2023–24 additional estimate statement.

National Defence Strategy: too slow on air-and-missile defence

Australia’s failure to prioritise acquisition of surface-to-air systems for missile defence is alarming.

We need such equipment as part of our measures for facing one of our most demanding threats—China’s large inventory of conventional and nuclear long-range strike missiles.

Those Chinese weapons could hit airfields, other bases, ships and civilian infrastructure, debilitating our ability to fight.

Three main means of countering long-range strike weapons are available: passive measures such as hardening or dispersing their targets; intercepting the incoming missiles with surface-to-air or air-to-air systems; and knocking them out before launch. Australia is so far relying on the first and third of those and not moving fast enough on the middle one.

Last month’s National Defence Strategy and its associated acquisition plan, the Integrated Investment Program, appear to have cut funding for the surface-to-air systems, the engagement component of integrated air and missile defence (IAMD). While a joint air battle management system will be bought under the previously announced AIR 6500 Phase 1 program, the updated acquisition plan says addition of other active missile defence systems await future consideration ‘as technology matures’.

When, then, will Australia field systems for knocking down incoming strike missiles? That just isn’t clear.

Australia’s geography provides some protection, due to the range that strike missiles and possibly their launching aircraft or ships must cover. But Chinese CJ-20 air-launched cruise missiles can fly 1500-2000km after they’re dropped by H-6K bombers that themselves have a combat radius of 3200km. The bombers could fly from China’s Hainan island, which is 4100 km from Darwin.

Meanwhile, Chinese ballistic missiles carrying conventional warheads continue to improve and are approaching ranges threatening to Australia’s north from China, such as the DF-26 with its 4000km range.

As for countering long-range strike missiles, passive measures reduce the likelihood and impact of attacks without engaging the weapons or their launchers. Such measures typically include concealment, deception, dispersion and hardening of infrastructure and facilities. They can help the ADF to operate under attack more effectively and would reduce losses.

It’s also possible to attack launchers or missile inventories before launch to reduce or defeat the threat—using strike forces against strike forces. The National Defence Strategy and acquisition plan put high priority on improving the ADF’s capability to perform ‘impactful projection’, executing precision strike over long distances. This prioritisation, along with a deferral of IAMD investment, means that such offensive operations will need to serve as the ADF’s primary tool to defend against long-range strike missiles.

But finding and destroying mobile missile launchers has been incredibly challenging. Hunting for Scud ballistic missiles and their launchers was a high priority mission in the 1991 Gulf War, yet ‘mobile missiles proved particularly difficult to detect and were never fully suppressed,’ according to the US Air Force.

Things haven’t improved much since then. US officials said in January that two days of attacks against Houthi targets had left the militant group with about ‘three-quarters of its ability to fire missiles and drones at ships transiting the Red Sea.’

Both operations were conducted against adversaries with minimal or compromised air defences. But China has dense and powerful defences against air and missile attack—just the sort of IAMD system that Australia doesn’t possses. Degrading China’s strike missile force using Australian strike capabilities would be extraordinarily difficult.

There are other pitfalls in overreliance on offensive operations. One is that they can result in strategic instability: each side has the incentive to use its strike forces first to knock out the other side’s. That would apply particularly to Australia, since it seems not to be spending enough on defending its strike forces.

Another challenge is that the ranges of cruise missiles and conventional ballistic missiles keep rising. Their possible launch positions therefore become more numerous and more distant. If Australia intends to rely on offensive measures, its strategy implies having a capability and willingness to strike inside China. That would be highly escalatory.

That leaves us with the priority to acquire active defences, ground or air systems for shooting down incoming strike missiles with interceptors. After its performance in the Gulf War, the then current version of the US Patriot system was labelled ‘a nearly total failure’ against Scuds, but such systems have improved dramatically in recent years. Evidence is in the successful interception of more than 300 munitions from Iran by Israel and its allies and Ukraine’s use of ‘highly effective’ modern air defences to successfully defeat countless missile and drone attacks.

A strong strike-missile attack by a major power would severely challenge such surface-to-air systems, and it would be unreasonable to expect them to provide total protection. But what a layered defence could provide is an ability to blunt attacks that come with little or no warning time, including those that might be expected on the first day of a war. They would also buy time, giving offensive operations more opportunity to succeed.

In Ukraine, a lack of air defence missiles caused Kyiv’s largest power plant to be destroyed by Russian missiles. Without sufficient air and missile defences, Australia’s bases and critical infrastructure remain susceptible to missile strikes. Prioritising a more balanced spending plan, including active defences, would be a wise move in today’s missile age. They would help reduce the nation’s vulnerabilities, making coercion more challenging for any adversary.

National Defence Strategy: preparing slowly to strike far

The 2024 National Defence Strategy (NDS) reiterates the importance of a strategy of deterrence by denial suggested in the 2023 Defence Strategic Review. It also reiterates air, sea and land capability decisions already made to support a more hemispheric role for the ADF, in particular to counter the risk of coercion from afar in the next decade.  

But it hardly reinforces deterrence by denial in the shorter term—this decade. 

The current emphasis on deterrence by denial actually extends and deepens a theme in defence policy that goes as far back as the 1987 Defence of Australia white paper; the idea was then called Defence in Depth. The 1987 document said the ADF had to be able to find and deal with an enemy in the sea and air gap to the north of the continent and to defeat forces that managed to land in remote locations. 

The 2024 NDS, supported by the 2024 update of the Integrated Investment Program (IIP), aspires to extend the ADF’s reach to a wider ‘area of primary military interest.’ This was defined in the 2023 Defence Strategic Review (DSR) as ‘encompassing the north-eastern Indian Ocean through the maritime Southeast Asia into the Pacific, including our northern approaches.’ Within this broader hemispheric region, the 2023 document set five key tasks for the ADF: 

to defend Australia and our immediate region … deter through denial any potential adversary’s attempt to project power against Australia through our northern approaches [the sea-air gap] … protect Australia’s economic connection to our region and the world … contribute with our partners to the collective security of the Indo-Pacific; and … contribute with our partners to the maintenance of the global-rules based order. 

The 2024 NDS correctly emphasizes that Defence must now function within a multi-domain operational space, encompassing not only the traditional domains of sea, air and land but also space and cyberspace, and that it must be able to fight in the electromagnetic spectrum. New layers of challenge are added by having to face long-range conventional precision strike by advanced ballistic and cruise missiles, cyber attack and ever-more sophisticated counterspace systems. 

To all that, add the emerging technologies of swarming autonomous systems; the implications of quantum technologies and artificial intelligence for advanced sensors, communications and battlespace management; and the acceleration of the pace of war through hypersonics and directed energy weapons. So, the ADF has a much more complex task than simply defending the sea-air gap. 

Furthermore, our critical infrastructure can be threatened with not only direct attacks but also indirect coercion. This can occur through disruption of sea transportation of vital supplies and other trade and even through the severing of submarine cables that maintain national connectivity with the global internet. 

In this regard, the NDS and IIP get the fundamentals broadly correct. They recognise that Australia is an island nation, so it is only sensible for Defence to prioritise a buildup of naval power at the centre of future ADF ability to carry out five key tasks noted above. 

The basics of this remain acquisition of nuclear powered but conventionally armed submarines (SSNs) and expansion of the Royal Australian Navy surface fleet under the recently released Fleet Review. These are accompanied by re-announcements of long-range strike capabilities that have been progressively approved since 2020. Certainly, the ADF’s long-range strike capabilities will be enhanced and better able to contribute to achieving the five tasks at greater range.  

The boost to naval capabilities, particularly SSN acquisition, will enhance our ability to project power farther from our northern coast. The SSNs will have the flexibility and endurance to remain on station for much longer than the current Collins-class diesel-electric submarines. Defence Minister Richard Marles goes so far as to state that ‘…more than any other capability, this platform will give an adversary pause for thought and hold their assets at risk further from our shores. Our future submarines define projection.’ 

Finally, the army’s ability to undertake littoral warfare will be enhanced, as will its ability to support long-range strike missions through acquisition of highly mobile land-based strike capabilities including HIMARS launcher vehicles and PRsM missiles. 

These are all good steps towards achieving an ability for deterrence by denial. The challenge, though, may be around timing. In launching the NDS and IIP, Marles states that ‘…the strategic problem we are trying to meet, that we are trying to solve, is making sure that in a much less certain world in the future we are able to resist coercion and maintain Australia’s way of life.’  

Yet at the same time, the NDS correctly recognises the rapid worsening of Australia’s strategic outlook, even stating that ‘Australia’s strategic environment has continued to deteriorate since the release of the Defence Strategic Review ….’ With the ending of an assumption of 10 years of strategic warning back in 2020, the challenge now is how to balance investment in new capabilities to meet long-term threats identified in the NDS versus ensuring the ADF is equipped to respond to short-term and immediate risks. So, it was worrying that in responding to media questions, the minister derided concerns about potential ‘worst contingencies that may or may not occur in the next few years’, suggesting that such concerns ‘lack wit’. This is not a helpful observation at a time of increasing strategic peril. 

Like the 2023 DSR, the 2024 NDS and IIP update seem to have a disconnect between their perception of a rapidly rising danger and their approach to meeting it. While preparing for threats in the 2030s and beyond, Australia must also get ready for protracted military operations in worst contingencies this decade. 

That would require the government to be more ambitious in increasing defence spending sooner than suggested in the IIP. The IIP correctly talks about ‘minimum viable capability’ approaches, but timelines stretch out even as threats rapidly approach. So, in addition to extra funding sooner than suggested in the IIP, there would also need to be greater determination to streamline capability acquisition processes and make some radical change in this regard. There are risks ahead that cannot be dismissed, and we must be ready for them. 

Making Japan’s defence spending sustainable

One of the highlights in Japan’s three national security documents released on 16 December 2022—the national security strategy, the national defence strategy and the defence build-up plan—is the commitment to increase defence spending.

The defence build-up plan revealed that the Japanese government will spend approximately 43 trillion yen (US$310 billion) from 2023 to 2027 on defence capability. Japan’s Ministry of Defence budget will increase annually to reach 8.9 trillion yen (US$64.1 billion) in 2027. The 2023 defence budget demonstrates Tokyo’s determination to follow through on its five-year spending commitments under the defence build-up plan. The total budget of more than 6.6 trillion yen (US$47.5 billion) is a 27.5% increase from 2022 and the biggest defence budget in Japan’s post-war history.

But the ‘roughly 2% of GDP’ goal that Prime Minister Fumio Kishida discussed in his press conference following the release of these three documents is slightly misleading. The 2% includes not only the defence budget but also other national-security-related spending such as the Japan Coast Guard budget and national infrastructure investments.

Still, the 2023–2027 budget plan is 60% higher than the 2018–2022 spending plan. As a country that historically spent roughly 1% of its GDP on defence and resisted calls to spend more, Japan has marked a departure from the past in committing to such a considerable increase.

Highlights from the three documents—such as Japan’s acquisition of counterstrike capabilities—have grabbed news headlines. But funding remains a thorny issue. The Liberal Democratic Party–Komeito ruling coalition has been working on fiscal measures that will enable Tokyo to follow through on its defence spending commitments.

In December, based on the LDP–Komeito approved outline, the Ministry of Finance included ‘tax measures to secure financial resources for strengthening defence capabilities’ in its seven-point 2023 tax reform proposal.

The coalition introduced the Defence Fiscal Resource Bill to the National Diet in February. The bill provides the fiscal framework through which the Japanese government will fund the defence spending increase—which is essentially a mixed package of the establishment of the defence enhancement fund and the incremental phased increase of corporate, personal income and tobacco taxes. The bill passed the House of Representatives on 23 May and, following approval by the House of Councillors on 16 June, became law.

The opposition parties, including the Constitutional Democratic Party, vowed to block the bill. But the large majority that the LDP–Komeito ruling coalition enjoys in both houses of the Diet, along with support from the conservative Japan Innovation Party, cleared the way for the bill’s passage.

Even though Kishida won the legislative battle, whether the public will support it remains highly questionable.

In fairness, the majority of the Japanese public supported a defence spending increase. Polls taken by media outlets across the ideological spectrum throughout 2022 consistently showed that the public mostly supported a defence spending increase. Three separate media polls taken in April, October and December 2022 show that over half of the respondents supported a defence spending increase. Even a May 2022 poll by the Mainichi Shimbun, known for its criticism of expansive defence policy, shows 76% public support for such an increase.

But the public resisted funding this defence spending increase through higher taxes. Public resistance to tax increases began showing in late 2022. Two polls in November and December showed that more than 60% of the public disapproved of such a tax hike. This public pushback continues in 2023. Polls in January and February showed that 71% and 64% of respondents were against increasing taxes to fund a defence budget increase.

A 7 May public opinion poll revealed that nearly 90% of the respondents are concerned about a military crisis in Taiwan and more than 60% support Japan acquiring counterstrike capabilities. But 80% are opposed to financing defence spending through tax increases.

Plus, Kishida might have missed the chance to gain public support for the defence tax hike by bringing the case to the public. Two separate polls conducted in January indicated that 78% and 63% of respondents thought that Kishida should dissolve the lower house and call an election before implementing the defence tax hike. But with his approval rating just recovering to 45% following a successful G7 summit in Hiroshima, Kishida decided not to dissolve the lower house at least in the near future.

The Japanese public seem already to be reacting negatively to Kishida’s choice. The 17–18 June poll conducted by Kyodo News shows that Kishida’s approval rating has dropped by more than 6 points to 40.8%. While the defence-related tax hike wasn’t the only reason for the decline in his approval rating, it indicates that Kishida’s tactics of steamrolling widespread public resistance with the power of majority might work in the short term, but may undermine the sustainability of Japan’s increased defence spending over time.

Defence budget set to take a big inflationary hit

The size of the cuts that Australia’s Defence Department must make to existing programs to create room for the recommendations of the defence strategic review will be dictated in part by the persistence of inflation.

The breakout of inflation was barely recognised at the time of the March 2022 budget. The Reserve Bank’s cash rate still stood at a rock-bottom 0.1% and both the bank and Treasury believed a rise in international prices reflected short-term factors that would soon pass.

These included disruptions to supply chains caused by the pandemic, interruptions to energy supplies caused by Russia’s invasion of the Ukraine and the disruption to food supplies caused by extensive flooding in late 2021.

Treasury expected that the consumer price index would reach a peak of 4.25% in the three months to June 2022 and then drop back to 3% by the current June quarter. The RBA was even more confident, tipping ahead of last year’s budget that inflation wouldn’t surpass 3.75% and would be back to 2.75% by now.

Instead, inflation accelerated to 6.1% by June 2022 and touched 7.8% by March this year, the latest complete CPI survey. Last month’s budget stayed with optimism: Treasury predicted that inflation would be back to 6% by the current quarter and would be down to 3.25% by June next year.

Inflation hits the budgets of every government department (and every business and household), but Defence is unusually exposed because of its large capital acquisition program, which involves multi-year commitments that are often exposed to cost increases. Defence has capital purchases this year of $15.1 billion, much higher than the next-ranked Department of Social Security’s capital purchases of $866 million.

Defence inflation is difficult to untangle. There is intergenerational cost inflation, with each successive generation of defence equipment involving greater complexity, capability and expense than the one before. The development costs of equipment involving new technology are inherently uncertain, while new technology frequently involves rare or hard to fabricate materials, with high costs.

Major acquisition programs are subject to cost blowouts, only part of which are due to ‘inflation’; changes in specifications, delays and poor planning contribute to the rest. Then there’s the lack of competition in defence procurement, which, in the US, is behind the stories of US$1,400 toilet seat lids, US$1,260 coffee cups and US$436 hammers.

Defence equipment is typically manufactured without the economies of scale that would be required in the private sector. One US study found that over a 70-year period, defence costs rose 30% faster than prices across the economy.

While Defence deals with inflationary pressures across the full spread of its operations, simple construction materials have contributed to the difficulty of its budget management. The price of concrete has risen by 18% over the past two years, and steel is up 40%.

Treasury’s updated forecasts for inflation in the 2023–24 budget translate to a reduction in Defence’s purchasing power of between 5% and 6% a year, relative to the forecasts made in the budget delivered in March 2022.

The latest forecasts assume that inflation returns to ‘normal’ levels rapidly; however, the loss of purchasing power, incurred as prices rose 6% over the last year and a similar amount the year before, is permanent.

There have been some encouraging signs—for example, excluding ‘volatile’ prices like energy and food, the CPI had come back from a peak of 7.5% in October to 5.5% by April. Oil and shipping prices have fallen sharply and are back to pre-pandemic levels.

On the other hand, the cost of market services has risen by 6.7%, while electricity prices are up 15.2% and housing 8.9%. The trend of continued inflation in services is evident in other advanced nations, and reflects the continued ‘overheating’ of economies after years of ultra-low interest rates and excessive government stimulus.

The share of the population with a job is close to a record high, the number unemployed is close to a record low, and there are almost as many unfilled job vacancies as there are people without a job and looking for one. Business is operating with less spare capacity than at any time in the last 40 years. It would be surprising to see inflation fall far while these factors prevail.

It appears likely, therefore, that inflation will take longer to bring under control than either the RBA or Treasury is predicting. If inflation is still at 5.5% by the middle of next year, and still at 4.75% by June 2025, the erosion in the value of the defence dollar would rise to almost 11% over 2024–25. The impact of inflation is cumulative—the lost value of a deflated currency is never regained.

As ASPI’s 2023 defence budget brief demonstrated, the core provision of defence funding is lower in this year’s budget than in the budget of March 2022, once compensation for adverse foreign exchange movements is taken into account. Excluding that compensation, defence funding totals $152.5 billion between 2023–24 and 2025–26, down from $154 billion over the same period in the March 2022 budget.

Defence has to squeeze between $7.3 billion and $7.8 billion of new and otherwise unfunded spending into that reduced budget allowance, covering items recommended in the defence review, such as the hardening of northern bases, the nuclear-powered submarines and a long-range strike capability.

Before looking at inflation, this suggests Defence is having to make new purchases equivalent to around 4% of its total budget with total resources that are about 1% less, implying that savings equivalent to 5% of its budget will have to be found.

The breakout of inflation means that, on the current forecasts from Treasury, the defence dollar buys 5% less than it expected in March last year. This would require savings equivalent to roughly 10% of the defence budget to be found to finance the new priorities under the defence review.

If inflation lingers at around 5%, the savings required would rise to roughly 15%. There is doubtless fat in the defence budget, as there is in all departmental budgets, but trying to achieve a massive reorientation in defence priorities consistent with the recommendations of the review while at the same time seeking huge savings is unlikely to generate an outcome satisfactory to anyone.

Tag Archive for: defence budget

Stop the World: Defence innovation and investment with Heather Richman and Linda Lourie

This week on Stop the World, we bring you a special episode from the sidelines of the ASPI Defence Conference ‘JoiningFORCES’. In this first episode of a short series, ASPI’s Director of Defence Strategy and National Security, Bec Shrimpton, speaks to defence innovation and investment experts Heather Richman and Linda Lourie.

They discuss defence innovation and opportunities for the government to work with the private sector to achieve national security outcomes. They also consider how the investment landscape has changed in the United States, including increased willingness from entrepreneurs to invest in national security.

About the guests:

Heather Richman is founder of the Defense Investor Network in the US, and has held a wide array of roles at the intersection of national security, technology, and investment—including at Stanford University and on Capitol Hill.

Linda Lourie is a Principal with WestExec Advisors. She is also a Principal with the Washington Circle Advisory Group, LLC, and a Member of the U.S. Export-Import Bank’s Advisory Subcommittee on Strategic Competition with the People’s Republic of China. Linda has previously held senior roles in the White House Office of Science and Technology Policy and in the Defense Innovation Unit.

Bec is Director Defence Strategy and National Security at the Australian Strategic Policy Institute. Bec has over 20 years experience in policy, operational and corporate roles in the Australian Department of Defence and DFAT. She has served as senior adviser Major Powers to Australia’s Foreign Minister, and led trade and investment in the defence and space sectors in Austrade.