. - a d

ISSN 1321-1579

Copyright Commonwealth of Australia 1994

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this pub~ication may be reproduced or transmitted in any form or by any means including information storage and retrieval system, without the prior written consent of the Department of the Parliamentary Library, other than by M-mbers of the Australian P ~ i i ~ e n t in the course of their official duties.

Published by the Department of the Parliamentary Library, 1994

I would like to thank Stephen Barber, of the Statistics Group, P e Social Policy Group who were responsible for extracting the statistics used in this paper on non-defence issues. Stephen prepared the graphics used to present this data in the paper.

This paper has been prepared for general distribution to Members of the Australian Parliament. Readers outside the Parliament are reminded that this is not an Australian Government document, but a paper prepared by the author and published by the Parliamentary Research Service to contribute to consideration of the issues by Senators and Members. The views expressed in this Paper are those of the author and do not necessarily reflect those of the Parliamentary Research Service and are not to be attributed to the D e p ~ e n t of the P a r l i a m e n ~ Library.

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Fina~cial ~ r ~ s s u r ~ ~ o i ~ t s on olicy . . . . 3 Before Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Policy in transition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

efence . the 1976 aper 5 . . . . . . . . . . . . . . . .

eality bursts in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 The Defence of Australia . The 1987 fence i f o r ~ a t i o n paper . 8 The Force Structure eview of 1991 . . . . . . . . . . . . . . . . . . . . . 9

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str - t . . . . . . . 20 Paying for it all . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

atterns of A u § t ~ ~ l i a

e Selected rtions out lays.

Afforda5le Self Reliarice 1

Despite its esoteric nature, the funding of Australia's defence has been an issue important to more than managers and accountants. In the years following the Vietnam War, Australian governments have been forced to address an uncomfortable reality. The evolution of Australia's strategic environment has tended to place on the nation increasing responsibility for its own security. Yet AustraIia remains a minor power in military terms with cyclical economy fluctuations and a self-declared direct military interest in an area equivalent to 10 per cent of the Earth's surface.

For over two decades the central issue of defence policy has been how to marry the evolving concept of defence self reliance with a defence strategy which the nation could afford to finance. Several white papers from the Department of Defence (hereafter, Defence) have attempted to address the issue. The continuing currency of public sector deficit reduction as central to national macroeconomic management, weaknesses in national economic performance and the social demands which arise as a consequence of those weaknesses, have demonstrated that defence self reliance is still perceived as an expensive goal. In an arena of competing demands buyers, (read "the electorate") tend to decide what constitutes the "affordable".

The last major policy paper to address this issue was The Defince of Australia I987 (DoA 87). However, over the seven years since the release of DoA 87 the global strategic situation has changed markedly. The collapse of the Eastern Bloc, the dissolution of the Soviet Union, the end of the Cold War and the termination of Superpower proxy wars around the world have produced a strategic climate entirely different to that to which DoA 87 was addressed. Although these strategic changes do not effect the whole structure of D5A 87 they have been sufficiently significant to require a extensive revision in the form of Defending Australia, the 1994 white paper.

The major development of Defence policy outlined by Defending Auspalia is the concept of "strategic engagement" with countries of the region. This stems from the awareness that the dynamic economic change in the Asia-Pacific area has become a major feature effecting Australia's strategic environment. Economic growth is contributing to the increased capability of regional armed forces and leading to changes in the relationships between nations in the region, and between them and those outside, which have potential to influerxe the development of Australia's strategic environment. "Australia's ability to help shape that environment will become more important to OUT security", the white paper notes.

Since 1969, when President Nixon enunciated the Guam Doctrine, the concept of ADF units operating as part of a foreign force in an overseas campaign has not been a tenable basis for policy. The concept of defence self reliance was developed in the 1976 white paper, AustraZian Defence, which focused on the need for the three Services to operate together with "substantial independence ii:

OUT own environment". The central issue for the implementation of such a

u Affordable Self Reliance

policy was the identification of the appropriate force structure, operational doctrine and level of preparedness for the ADF to hlfil its role.

However, Australian Dclfence did not define the criteria by which force structure could be evaluated for its relevance to defence self reliance. This was addressed in DoA 87. It endorsed the continued relevance of defence self reliance but deveioped a strategy of "defence in depth" to provide a framework against which to judge the relevance of force structure capabilities. The logic of this procedure was intended to allow a methodical movement toward developing relevant capabilities, by removing, reducing or delaying ADF programs and objectives less important to achieving self reliance.

Neither paper was satisfactorily implemented. Within a year of their announcement, both programs had suffered significant budgetary reductions because of government fiscal policy responses to a faltering economy. Funding of the equipment components of both programs fell behind objectives, but commitment to new procurement programs continued. Eventually, the "log jam" of equipment fiinding affected other areas of defence activity and, in the face of financial necessity, the policy had to be reviewed.

Thus, attempts to develop defence policy over the last two decades have had similar features. Expectation of funding has been consistently higher than the finance eventually supplied by government. Contractionary fiscal policies have led to reductions in Defence outlays which have effectively

e i ~ p l e ~ e n t a t i o n of Each reappraisal of policy a

ithin a year of its Iaunc

defined view of capabilities relevant to self reliance in defence.

Yet, in examining the structure of outlays on defence over the last 20 years it is difficult to argue that the portfolio has been particularly ill-treated. Although fluctuations in some years have had significant effects, in general, Defence outlays rose in real terms over the period of the mid- 1970s to the mid- 1 980s, and have declined only slightly (by about 1.25 per cent in real terms) over the last decade. Various budgetary measures and the recognition of a specific Defence deflator have assisted with the management of efence finance over the last decade.

However, social and economic change has placed new demands on government over the last twenty years and expenditure patterns have changed to reflect the newer concerns of the electorate. This trend is apparent in the declining percentage of GDP allocated to defence.

ather than the q u a ~ t ~ m of efence outlays being the source of the p o ~ o l i o ' s §ens i t i v i~ to ~ n a n c i a l pre§sures, it can b argued that the variation between the funding guidance up0 efence progra have been prepared, and the budgets actually appropriated, are the major

blern. The variation between the two has not u n c o m ~ o n l y er c e ~ t . In these circu~stances, over-co~mitment

of the e~u ipmen t vote is not sur

Affordable Self Reliaitce

Of recent years the variance between government future guidance and yearly budget allocation has reduced. On this basis, and significant changes to Defence management carried out in 199 1, Defending Australia expresses confidence that its comparatively modest program for developing ADF capabilities over the next few years can be fiunded with no real increas in Defence outlays. After that, providing a real increase in funding by sus ining Defence outlay at a rate equivalent to 2 per cent of GDP will, according to the white paper, prove %u%cient.

The likely problem with this approach is that it appears to ignore the remorseless inevitability of the business cycle and the constraints on government when setting fiscal policy. There is, simply, no ment by government to pass directly to any of its hc t ions the fbll fi benefits of growth in the economy. Doubts are M e r reinforced by the likely prospect that Defence &ding may well fall by another $400m, or thereabouts in real terns, before any such stabilising procedures are due to be introduced.

In this context the eo~mitment to introd~ce a five-year budget for from 1996-97 is commence on the reduced base mentioned above.

eularly i ~ p o ~ a n t . It is likely that this budget wiII Nonetheless, if this

ceed on a predictable basis, i which has been lacking so

d policy f a ~ u r ~ . s a major cause of in^^

It is important that this problem be overcome during the period covered by Definding Australia. From about 2005, action will be required to overcome the ageing of equipment which supports some major capabilities of the ADF. If the financial projections of the white paper are not correct and its management reform is not achieved, Defence will again be left with s i g n i ~ ~ ~ t fimding commitments at a time when it will have to 60 emplate extremely expensive decisions, including whether or not to replace capabilities now provided by F/A- 18 and F 1 1 1 aircraft, and front line destroyers.

s possession of a techn the region. Should fi decade fail to place t whatever technologie defence policy will ag

is pQsture, the basis of

. . . lll

Affordable Self Reliance

The defence policy information paper The De/ence ofAustralia was released in 1987 and set the boundaries of the policy debate for the next seven years. The strategic concepts, policy directions and force development objectives enunciated in DoA 87 (as it became known) have continued to drive the activities of the Australian Defence Force (ADF) and the Department of Defence (referred to hereafter as Defence).

However, over the seven years since the release of DoA 87 the global strategic situation has changed markedly. The collapse of the Eastern Bloc, the dissolution of the Soviet Union, the end of the Cold War and the termination of Superpower proxy wars around the world have produced a strategic climate entirely different to that to which DoA 87 was addressed. Although these strategic changes do not effect the whole structure of DoA 87 they have been sufficiently significant to require a extensive re ision in the form of Defending Australia, the 1994 white paper.

A re-evaluation of DoA 87 has already taken place, for more immediate reasons. In 1991, before the significance of recent events was acknowledged in policy,

the Government announced a modification of the implementation of DoA 87, the Force Structure Review. The impetus for this was almost entirely financial. The funding projected to develop the capabilities outlined in DoA 87 had not eventuated and, depending on financial allocations over the remainder of the decade, only a half to two-thirds of the program would be completed inside the original target.

Such an occurrence is not the first instance of financial restraint on the development of the ADF. Since the end of the Vietnam engagement successive Defence policy approaches to the development of ADF capabilities have had to be reconsidered and revised for the lack of funds sufficient to achieve them. While in many cases these revisions involved delaying the procurement of equipment on which the provision or improvement of the ADF capability was to be based, in some cases (such as the fixed wing element of the Fleet Air Arm), financial pressures contributed to the total disappearance of the capability.

Defending Australia adopts a more restrained goal for fhding Defence in the period up to 201 0, estimating that the real growth which should be available to appropriations by funding Defence at the level o f 2 per cent of GDP should be sufficient. There are, however, some assumptions involved in this position which must be examined predicting the success o

1

This paper examines the history of financing defence over the last two decades. The Defence appropriation is examined in the context of trends in other Commonwealth outlays and trends within its own composition. The consequences of these trends upon programs to develop ADF capabilities are noted, as are changes to policy in response to the pressure of financial demands upon Defence. After drawing conclusions from the examination of the last t ,vo

2 ~ f o r ~ b l e Self Reliame

decades, some observations are offered on the likelihood of the o~jectives outlined in Defending ~ustraZia being financed more successhlly than in the past.

In a near perfect world, Australia's defenc licy would be developed from analysis of the military and other relevant se threats facing the country, and the options available to counter them. The results of such an approach would be the preferred force structure for the ADF, doctrine for its operational use and decisions on the state of preparedness of the various components of that force.1 The logic of such evaluation would direct program, financed through a succession of annual defence budgets, to provi the various types of equipment identified for the A.DF, the personnel structures needed to operate them to potential, and the training and exercising needed to develop the expertise required of the personnel. Adherence to this orderly approach would see the implementation of policy; deviation would risk its distortion or even failure.

The traditional examples of this approach tended to ignore economic and financial issues, preferring to derive the superior military policy and argue the government's responsibility to provide the necessary fimds. Where it was apparent that no feasible policy could be financed within the nation's means other approaches, most commonly an alliance with one or more partners, was the usual alternative. More recently, however, the importance of finances and, more widely, the ability of the nation's economy to sustain them, has come to be recognised as central to assessing the viability of any proposed strategy, including those involving alliance partners.

Israel, faced with threats to its national survival since inception, was able to devote successfully a large proportion of its national wealth to defence only because of a high level of economic and military aid from the USA. In contrast, the Soviet Union was unable ultimately to rnai n national security with large defence budgets drawn from an inefficient economy, especially because its East Bloc allies most often constituted a net drain on resources. Eventually, the burden of defence expenditures was a substantial component of the inadequacies

1. In this context, orce structure refers to the number and nature of operational units possessed

squadronsy tacticd trans ort squadrons, etc.; and so on for the Navy and Army). Operational doctrine identites the most productive way of employing the force's units (e. that submarines are better used near an enemy's bases than around the Australian coastf' Preparedness refers to the degree to which the various units in the force are ready to-conduct operations in a combat situation. It has two components; readiness and sustainability. The readiness of a unit may be effected by not having all required equipments available, by not having all required personnel on strength or by not having fully exercised and tramed for realistic operational conditions. Sustainability requires a unit to maintain operations for the time required to complete its task; this means the provision of the appropriate ran e of stores, maintenance and human services and the abili to deliver them where required. f t should be

experience of combat.

by a mili ff orce e.g. an air force with 3 air-to-air fighter squadrons, 2 ground attack

noted that most units are not thought to be fb ? ly combat prepared until having gained some

Affordable Sel f Reliance 3

which forced the Soviet Union out of the Cold War, and saw the loss of the Eastern bloc alliance and the eventual collapse of the USSR itself.

Of course, economic pressures upon defence policy do not have to be of the extreme that threatens national survival. A persistent failure to match the objectives of policy with the means of obtaining them can lead to varying degrees of failure in defence policy. In Australia, the last quarter of a century has seen several examples of persistently lower-than-programmed budgets, and other economic pressures., forcing the recasting of defence policy.

efore Vietnam

Throughout the 1950s and into the 1960s, Australia's defence policy continued to be that adopted during the Second World War, one of alliance to the USA but with continuing links to Great Britain, in the conviction that the country could not defend itself against perceived (although not necessarily real) military threats. These were thought to lie principally in the communist bloc, then seen as monolithic. The Royal Australian Navy (RAN) was largely structured to operate as an anti-submarine warfare component of the US Navy's 7th Fleet, in support of SEAT0 (Manila Treaty) obligations. The Australian Anny experimented for a time with a structure, the Pentropic Division, more closely aligned to that of the US Army,2 before abandoning it. Expenditures on defence, which reached 5 per cent of Gross Domestic Product (GDP) during the Korean War, settled back to half the rate (2.5 per cent) by the early 1960s.

Yet, when the logic of being in an alliance structure eventually called for an Australian military involvement, first in Malaysia and then in Vietnam, the ADF was largely unprepared. The Army had to be greatly expanded by use of conscription, was lacking the logistics support required to sustain combat operations and had little of the helicopter-borne mobility required to operate with American forces.

Over the length of the commitment to Vietnam, Defence expenditure rose to comprise 4.2 per cent of GDP by 1967-68,

Policy in Transition

The Vietnam period marks a transition in Australian defence policy, although one taking several years to develop and not fully recognised or enunciated at the time. The catalyst was not of Australia's choosin~., but the result of US disenchantment with the Vietnam conflict, and of the decline of Great Britain as an economic power. By the end of the 1960s it had been announced that the latter would withdraw its forces fiom South East Asia by 1971. President Richard Nixon's Guam Doctrine of 1969, henceforth effectively limited the USA

2. T.B. Millar, Australia's Defence, Melbourne University Press, 1965: 129.

4 Affordable Self Reliaitce

to providing military support to allies only after they had been shown in~apable of defending themselves fiom attack.

The implications of these developments did not prompt an immediate Australian policy response. Nevertheless, attitudes to defence under a number of governments evolved over the next seven years in an attempt to match the changed strategic environment with feasible pro

In 1969 Australian combat forces remained on deployment in Vietnam, but the end of that conflict was perceived as "approac ing" and a recently completed strategic appreciation had concluded that Australia faced no early threat to its security? As Australia disengaged m e r from Vietnam, and Great Britain withdrew its forces from positions east of Suez, John Gorton, as Defence Minister in the McMahon government, propose a policy of lessening focus on alliance commitments and considering more seriously the requirements of defending Australian territory, remembered now mostly for its media caption of "Fortress Australia".

In 1973 the newly-elected Labor government set about emphasising the trend the Coalition government had made apparent by withdrawing all combat forces from Vietnam. It withdrew the remaining ground forces from overseas (mostly from Singapore, as all that remained to be withdrawn from Vietnam was a training contingent) and sought to develop a policy structure around the concept of "Continental Defence".

Force of circumstances, especially restricted budgets, prevented much substance accruing to the various policy stances. Declaring Australian armed "forces ... now better equipped than they have ever been in peacetime ( s ~ c ) " ~ and given the favourable strategic outlook, the Government reduced the 1 969-70 Defence budget by 5 per cent in absolute terms, from the $1 164.7m allocated in 1968-69 to $1 104m.5

An attempt to resume the process of ADF force structure development in 1970, by then Defence Minister Malcolm FraseIc, was eakened less than a year later when, as an element of fiscal policy intended to restrain an inflation rate then "soaring" to 3 per cent per annum, the Defence budget was reduced by $36m, some 5 per cent. The Coalition's first effort to redress this situation did not

3. Sir Allan Fairhall, Minister for Defence, "Budge Debate", Haward, House of Representatives, 26 Aug. 1969: 665.

4. Sir Allan Fairhall, "Budget Debate": 665

5. Sir Allan Fairhall, "Budget Debate": 664.

6. This move was prompted, at least in part, by the loss of Government seats at the 1969 general election, thought amongst the government to indicate that some attention needed to be iven to those of i t s supporters who perceived a weakening of the previously accepted defence policy stance.

Affordable Self Reliance

appear until 1972, centering mainly on justification of a project to buiId Australian designed destroyers, the DDL project?

This project was cancelled by the incoming Labor government. Concerned that force development should concentrate on capabilities relevant to the defence of Australia, this and other projects were re-examined for their relevance to policy, and few initiatives were ready for approval in the 1973-74 budget. It was now five years since major projects to develop ADF force structure had been approved; consequentially, expenditure on equi ment in 1973-74 dropped to less than half the proportion of the Defence Budget it had been at two years before3 The Whitlam government had a vigorous social agenda and levels of government spending increased markedly in 1973-74 and 1974-75, with particularly rapid increases in health and education funding?

The competition for Commonwealth funding thus introduced was compounded by the development of "stagflation" (simultaneous incidence of currency inflation with depressed levels of economic growth) from 1974, and the deflationary fiscal policies adopted to fight it. Army strength was reduced from more than 4 1 000 in 1972 to some 3 1 500 in 1975 by Labor's prompt curtailment of conscript service but little advantage was achieved. Wage and salary inflation throughout the period, and the Government's desire to enhance the attractiveness of volunteer service, prevented the achievement of significant savings. Newly initiated equipment programs rarely require major funding in their initial years and so, despite announcing major equipment programs in 1974 and 1975, the Defence budget by 1975-76 allocated comparatively little to future force structure development. Proportionately more was spent on personnel costs than in 197 1-72, when conscription was operating. (See Fig.6, p. 18)

efence - the 1976

As leader of the Opposition, Malcolm Fraser had emphasised defence as an electoral issue and when in government he moved quickly to review defence policy. The result of this work, Australian Defence, was presented in November 1976. The document continued the evolution of the policy stance, stating that policy's primary objective was to increase "self reliance" and noting that force development could no longer be based on elements of the ADF fighting abroad as part of another nation's force.10 Operational considerations were more likely to focus on the three Services operating together as the ADF "in our own neighbourhood". 11

5

7 . Royal Australian Navy, A Survey of Fume Needs, 17 Aug. 1972.

8. See Figure 6, p. 19

9. See Figure 1 p.14

10. Department of Defence, Airsfrafian Defence, AGPS, Nov. 1976: 10.

1 1 . Aiisrralian Defence: 1 0.

6 4 f o r d a b k Self Reliance

It was by now considered important that the ADF should be able to operate wi "substantial independence in our own environment" and capabilities not relevant to this objective should not be pursued. l2 Develop~ent of " force-in-being" against these criteria was to be sufficient to ailow it to perform likely operational requirements ("current and foreseeable tasks"), and to provide an effective basis for expansion if strategic circumstances required. l 3

The 1976 white paper was notable for speci ing with precision the level of expenditure that was considered necessary to ovide these capabilities, all the more remarkable since both unemployment and inflation remained high, prolonging economic conditions that Australian Defence acknowledged as a constraint on government programs. For the FYDP14 1976-77 to 1980-8 1, the Government approved a fmancial ceiling of $12 billion (at January 1976 prices).15 This implied an increase in real terms across the duration of the FYDP of 5 per cent per annum. The financial objectives of the program were provided in detail - a primary aim to almost triple the roportion of total expenditure allocated to equipment to 23 per cent; after initially providing some additional Service personnel, to decrease the proportion allocated to this item fiom 57.6 per cent to 45 per cent; and to hold steady the proportional expenditures on operations and training. 16

Real increase in defence outlays for 1976-77 was 5.2 per cent. However, "stagflation" had not yet been conquered and, as part of a consequential adjustment of fiscal policy the following year, the Government allowed no growth at all in the Defence budget. (See Fig. 3, P. 15). Continued tight fiscal policy in 1978-79 caused significant cuts in operating expenditure (with, amongst other actions, around 20 per cent of Army's armoured capability mothballed only two years after the Government had decided to increase the number of tanks by about the same percentage). Growth in total Defence outlay that year registered only 1 per cent. Equip ent programs announced in Australian Defince had already slipped back in time.17

12. Australian Defence: 12.

13. Australian Defence: 13.

14. Five Year Defence Program, (FYDP), a frnancial programmin procedure with an outlook of five financial years, in which a new year is added at the end opthe sequence as the initial year in the program is completed. Introduced in 1969, the FYDP allows Defence to plan for hture expenditure commitments in a context where m large procurement contracts and other commitments are running simultaneously, but to rent schedules, and ex enditures actually achieved in any one ear com ared with those planned may vary sudien t ly to require significant recasting of Lture outrays.

15. Department of Defence, Australia's Defence: 15.

16. Australian Defence: 58-60.

17. Derek Woolner, Fundin Australia's Defence, Working Paper No. 77, Strategic and Defence Studies Centre, ANU, I f 8 3 : 5 lff .

Affordable Self Reliance

A similar process was repeated shortly afterwards, following the USSR's intervention in Afghanistan in December 1979. Influenced by a perception of a deteriorating international order, and foreboding about the strategic balance between the superpowers, Prime Minister Fraser announced another concerted effort to raise defence preparedness, this time planned within a FYDP based on 7 per cent real growth per annum.18

The initial response to this policy shift raised real growth in the 1980-81 Defence budget to 5.6 per cent, the highest rate of growth over the last quarter of a century. But the following year a balance of payments crisis persuaded the Government to again reduce spending: $101m was taken from the equipment vote in January 1982 and the real value of total Defence outlays in 1981-82 declined by 1.7 per cent? (See Fig. 3, P. 16).

Reductions in projected outlays due to ning Commonwealth fiscal management was not the only way in h the reality of economic circumstances destroyed the assumptions of Defence financial planning. Inflation and high nominal wages growth were recurrent problems during the period of the Fraser government and their effects flowed into the Defence budget. To regain income equivalence for the ADF, the salaries of Service personnel were increased by an average of 30 per cent in early 1982, with the costs to be absorbed with the Defence budget as already appropriated. The cost of this increase in 1981-82 alone was $230m, more than a quarter of the previously projected level of expenditure on equipment, the budget element which bore the major impact of the financial reallocation.

Such developments undermined one of the principal policy objectives of the 1976 white paper - to divert outlays from personnel costs to allow expansion of the equipment vote and hence develop the capabilities of the ADF. Over the period from 1976 to 1983 the increase in total outlays only slightly exceeded the growth of personnel costs.20 By 1982 unplanned reductions in the equipment vote had led to a situation where the Government had approved commitments for almost ten times the amount it had been able o spend in 1981-82.21 In 1983 the incoming Labor Defence Minister discovered that 90 per cent of the projected h d s for equipment had been committed for the next five years,22 most of it for the F/A-l8 fighter.

I 8. Malcolm Fraser, "Afghanistan: Australia's Assessment Hansard, House of Representatives, 19 Feb. 1980: 25.

d Response", Ministerial Statement,

19. Derek Woolner, Fundin Australia's Defence, Working Paper KO. 77, Strategic Defence Studies Centre, ANU 19th: 3 1.

7

20. Derek Woolner: 70.

2 1 . Derek Woolner: 46.

22. Derek Woolner: 50.

8 Affordable Self Reliaiule

ti0 er

The logic of this financial situation drove the Defence portfolio for the early years of the Hawke Government. The goal of greater defence self reliance, however, was not apparently closer and the cost of maintaining existing equipment programs was forcing restrictions in other areas, such as operating costs. Increasingly, policy was criticised as losing the very capability it was attempting to develop through the equipmen program by an inability to maintain the expertise of the personnel required to operate them.

The most notable omission from the 1976 white paper had been a definition of the criteria by which force structure could be evaluated for its relevance to self reliance (and which could be used to exclude capabilities that were not relevant). To many observers it appeared that ADF capabilities were simply a perpetuation of those which existed before 1969, a phenomena generally referred to as the "replacement syndrome". These issues were e mined in Paul Dibb's 1986 Review of Australia's Defence Capabilities and its extensive analysis of defence capabilities used to identify the principle factors setting the ADF's priorities in selecting areas of operations, force structure and states of readiness. These issues largely determined the policy judgements outlined in The Defence of Australia, 1987.

DoA 87 endorsed the policy of self reliance, acknowledging that the concept had been pertinently identified in the 1976 white paper, and that the latter's observations remained valid. The crux of the problem facing defence policy, DoA 87 continued, was that a decade after 1976 no "clear definition of Australia's defence needs in an era of self reliance" had emerged? DoA 87 used the logic of the h e w o r k provided by the review of capabilities to overcome this difficulty, developing an ordered strategy for Australia's defence (dubbed "defence in depth"), and utilising this to direct the allocation of funds within the Defence budget. In fact, the Minister considered the strategy provided by DoA 87 should shift attention fiom questions about the adequacy of total Defence outlays to issues about the efficiency of the use of efence funding. 24

Unlike its predecessor, DoA 87 provided no detai rojections of expenditure. It noted that waste and inefficiency was "inevita en unrealistic guidance is given as a planning basis for defence spending"25 but stated that the Defence budget would need to retain "a share of GDP similar to that devoted to defence in recent years",26 if the levels of capability identified in DoA 8 7 w x e to be

23 . Department of Defence, The Defence of Australia 1987, GPS, Canberra 1987: 2.

24. Kim Beazley, Minister for Defence, Afier the White Paper - the challenge of management, National Press Club, 25 Mar. 1987: 6.

25. DoA 87: 103. "Guidance" is a figure, approved by g o v e F e n t , which indicates by what proportion hture Defence budgets will be permitted to v per cent"); it is usually provided over the period of the F 8 P to allow forward p annmg of defence activities.

"YO" by in real terms ( e g ,

26. DoA 87: 99.

Nfordable Self Reliance 9

achieved. Outlay on Defence had run at 2.8 per cent of GDP for the previous four years. In general, however, the tone of the DoA 8 7 discussion of resources was restrained. For instance, it noted that pursuing a central priority of sustaining the re-equipment program for the ADF would require continuing constraints on personnel levels and only limited expansion of training.27

The Minister was confident the proposals could be fbnded, claiming that, after the Defence budgetary growth of the precedi g years "Defence spending has now reached a level at which further growth is not required to sustain a credible defence policy".28 Furthermore, he noted that, in the current climatezg, no one would believe promises to sustain increases in Defence expenditure. Citing the case of the reorganisation of the Defence industrial facilities, which was to allow a saving of some $120m in 1987-88, the Minister suggested that improved efficiency throughout the portfolio could divert h d s to sustain more important elements of the Defence program. And, he observed, if cuts in the program did become necessary, they could be made with a minimum of disruption because the policy embedded a process of determining priorities; "it is simply a matter of management ".30

e Force S t ~ c ~ r e Review of 1991

Two months after the release of DoA 87, the Treasurer announced that the guidance for the 1987-88 Defence budget was reduced fiom a real increase of 3 per cent to a reduction of 1 per cent. As a result of the reordering of expenditures that this move required, outlay on equipment during 1987-88 was reduced to $1.73 billion, some $322m less than had been spent the previous year. (See Fig 6 , P.22). Yet one of the policy objectives of DoA 87 had been to shift expenditures withm the Defence budget towards capital investment. Certainly, there was no lagging behind in the planning for such investment, and during the year contracts were let which increased the obligation to fbture expenditures (mostly for equipment) to $10.4 billion. By the end of the financial year that obligation had been reduced by only some $500m.31

Over most of the following years the Defence budget was not increased in real terms and it took four years before outlays on equi ment reached those of 1986- 87 in nominal terms. By 1989-90 it was noted that the forward commitment to equipment, dominated by the "very large" submarine and ANZAC ship projects,

27. DoA 87: 105.

28. Kim Beazley, Minister for Defence, After the White Paper - the challenge of management, National Press Club, 25 Mar. 1987: 7.

29. The country was heading for an election where the extent of government spending was an issue in the light of Treasurer Keating's "banana republic" statement.

30. Kim Beazley, Minister for Defence, After rhe White Paper - the challenge of management, National Press Club, 25 Mar. 1987: 10.

3 1 . Budget Paper No. I , 1987-88: 86.

10 Affordable Self Reliuiice

meant that some 90 per cent of equipment h d s were already earmarked for several years ahead? Previously the figure had been around 65 per cent.

The effect of the high forward commitment in the equipment vote was that some 80 per cent of total Defence spending was already earmarked before each year's budget planning began. By 1991 it was noted that the commitment to hture equipment expenditure was at its highest level ever. Even so, at the level of funding provided the Defence budget since DoA 87, only three-quarters of the DoA 87 program could be completed before the Val of the next millennium.33 The impact df finance on the development of ADF capabilities was by now

again at the stage it had been in 1983, with defence outlays unable to fund the equipment program and the problems in the equipment vote effecting the balance of the remainder of the budget.

Thus the driving force behind the Force Structure Review 1991 (FSR) was almost entirely financial. The Appropriations allocated to Defence in the four years after DoA 8 7 had averaged zero real growth, compared with the average guidance figure of 1 per cent real growth. (See Fig. 5 , P. 18). The problem which would arise if the development of ADF capabilities outlined in DoA 87 was not substantially achieved by 2000 AD was that other central capabilities (such as the RAAF's fighter force) would need updating soon afterwards and the likely financial pressure would lead to the collapse of the logical structure behind the DoA 87 strategy.

The FSR announced changes to Defence management as significant as those of DoA 87 had been to the development of ADF capabilities. In the aftermath of a number of fundamental studies of ADF support practices, the Comerc ia l Support Program (CSP) was initiated. This opened a range of supply, maintenance and service operations to commercial tender and allowed the redeployment of the Service personnel involved to combat units. The provision of training and other support functions was to be rationalised, allowing establishments to be merged and surplus facilities to be sold. Greater use was to be made of Reserve Forces and a new concept, the Ready Reserve, was introduced, while regular personnel numbers were reduced. Those personnel reductions proposed by the Review were expected to total almost 10 500 Service and 3800 civilian positions, and to save some 2 billion by the end of'the decade. 34

Within this fiamework of on-going reforms, it was expected that the Defence program then in place could be achieved with no real increases in Defence outlays. If additional funding was provided, priori in its use would be given to rectifying those elements of the equipment program which had to be delayed or reduced, such as helicopters for the ANZAC frigates, or the oft-deferred airborne

32. Budget Paper No. I , 1989-90: 3.49.

33. Department of Defence, Force Structure Review 1991, May 199 1 : 3.

34. FSR: 44.

Affordable Self Reliance 11

ng and control aircraft. However, the Review c o ~ s e l l e d that a sustained reduction of 1 per cent in Defence h d i n g would threaten the viability of the DoA 8 7 defence ~trategy.~S

The clear impression from the foregoing is that successive governments have indicated excessive guidance as the basis on which programs for developing defence capabilities would be fhded over future years. The annual budget for Defence has seldom matched these earlier ections. However, in an area where contractual commitments worth billi f dollars and taking 10 to 15 years to complete are involved, such c create serious management difficulties, waste human and financial resources and impact on other areas of the Armed Services' activities.

On at least three occasions in the last two decades the funding pressures developed by this process have contributed to either the loss of an Australian Defence Force (ADF) capability or to signi cant restructure of underlying defence policy. In this sense, the planning of Australian security has been dysbctional and fmance has often appeared to be the principle policy determinant.

m ris

For over two decades the central issue of defenc licy has been how to marry the evolving concept of defence self reliance defence strategy which the nation could afford to fmance. Kim Beazley, as Minister, thought DoA 87 provided an approach which was affordable within existing allocations. The continuing currency of public sector deficit reduction as central to national macroeconomic management, weaknesses in national economic performance and the social demands which arise as a consequence of those weaknesses, have demonstrated that defence self reliance is still pe ed as an expensive goal. In an arena of competing demands buyers, (read electorate") tend to decide what constitutes the "affordable". In almost a quarter of a century the Defence bu as grown from $1 157m to $9 746m at the current monetary values, a mor seven fold increase. Over the same period total Commonwealth outlays h reased almost thirteen fold in current terms, from $9 047m to $1 14 5 14m. intervening period has been one of high infiation, economic change, social evolution and political expectat ions.

In the early 1970s Defence spending remained a major component of ~ o ~ o n w e ~ t h budget outlays. Today, the ~ o ~ o n w e a l ~ s range of financial responsibilities has expanded considerably and the growth in the relative importance of social security (ie., the social wage) has meant that the position of

35. FSR: 6.

12 Affordable Self Reliaiice

Defence in the hierarchy of ~ o ~ o n w e a l t h financial responsibilities has declined. Defence now receives a smaller proportion of outlays than health or education funding. At the height of the recent recession the proportion of outlays devoted to unemployment benefits approached that allocated to defence.

Although the peak of expenditure on the Vietnam involvement was over in 1972-73, conscription was still to be completely phased out and equipment ordered during the height of that conflict remained to be payed off. As Figure 1 illustrates, at 12 per cent of Cornonwealth bu get outlays, Defence consumed almost half as much as the finance paid directly to the state governments. With the election of the W t l a m government a new social agenda began to be developed and a rapid increase in expenditures on health and education occurred in the early 1970s. So did the need to increase the number of unemployment benefit payments, as the advent of a period of turbulent economic change began the era of persisting unemployment.

With the exception of a period in the early 1980s, mostly related to changes in health insurance provisions, health has become entrenched as a major financial responsibility of the Commonwealth. So to have general Social Security payments, rising towards the end of the period as the development of government income transfer schemes has cushioned the effects of growing inequalities in market based incomes.36 The effectiveness of such programs for overcoming some of the primary impacts of wage inequality should ensure that expenditure in this area will remain a strong political priority, aided by the expected aging of the population.

Given the strength of political support for many programs funded by Commonwealth expenditures, it is perhaps surprising that Defence has retained as much prominence as it has. In fact, a continued commitment by the Commonwealth to sustained expenditure in many areas has been made possible only by the significant reduction in Commonwealth transfers to the state governments, falling from 25.9 per cent of outlays in 1972-73 to 12.6 per cent in 1994-95.

36. Ross Gittins, “You need to be a Gini to explain wage inequality“, Sydney Morning Herald, 12 Nov. 1994.

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

.

+Soc Sec - other -++-Health - I

I r I I I I 1 I I I I I I I I t I I I I I

1972-73 1974-75 1976-77 1978-79 1980-81 1982-83 1984-85 1 986-87 1 988-89 1990-91 1992-93 1994-95

financial year

14 Affordable Self Reliurule

Within the C o ~ o n w e a l ~ sphere Defence outlay has been comparatively well supported, having been fimded at higher levels than education for almost 15 years. Fig.2 demonstrates that, afirer a period of sustained real growth fiom the mid-1970s to the mid-l980s, the real value of Defence outlays has receded only slightly over the last ten years, by some 1.25 per cent compared with the level reached in 1983-84.

I

financial years

Fig.2 gives the real value of Defence outlays since 1975-76, calculated by using both the Defence deflator and the Gross Non F m Product (GNFP) deflator. The budget papers describe the Defence deflator as a better guide to the real value of defence activities purchased by the budget. Its variance &om the more generally used measure of inflation reflects the higher capital component of Defence outlays, its exposure to overseas purchasing and a generally higher rate of inflation affecting some aspect of defence activity.

In general, therefore, it is not accurate to claim, as have more colow-ful critics, that the defence budget has been squeezed, c , slashed or in other wise deformed by forces unaware of its hdamental value to the nation. Being a h c t i o n fimded through public sector outlays, Defence finance has to be seen in the context of total Commonwealth outlays. Within this context, the preparation of the Defence budget has received some assistance. The use of the Defence deflator provides a more relevant financial basis for the preparation of the Defence budget, whilst in recent years there has been a policy of providing supplementation of the budget for "one-off" task performed at the request of government. In addition, the comercialisati of a number of Defence functions (the former Defence factories, the Defence Housing Authority, for instance) has removed the funding requirements of these organisations from the Defence budget.

As can be seen in Figure 3, the rate of change of the value of Defence outlays has tended to parallel that of total Commonwealth outlays, and has shown higher rates of growth than total outlay on occasion. The two periods where the rate of

Affordable Self ReliarLee 15

growth of total outlays has greatly exceeded that of Defence were the economic recessions of the early 1980s and 1990s. At these times public spending is aimed at areas where effects can be achieved quickly; few of the components of Defence outlay are relevant to this objective.

I i UT

10.0 -

8.0

6.0

4.0

2.0

0.0

-2.0

-4.0 58883

financial year

It is notable that, as fiscal policy was reversed following economic recovery, the rate of decrease in the real value of Defence outlay was not greater than that of total outlays. The one significant exception, in 1981-82, was in response to a currency related economic problem and reflected the greater exposure of Defence to overseas sources of supply at that time.

The same general relationship exists between the proportions of GDP allocated to total Commonwealth and to Defence outlays. It is often alleged that governments have failed in their duty by not sustaining spending on defence at a certain level of GDP. In fact, total Cornonwealth outlays have oscillated around 27 per cent of GDP in response to macroeconomic requirements of deficit management, and Defence outlays, being omponent of that total, have tended to follow suit, although not in a direct r ionship. It should be noted that both outlays are on a declining path at ent, with obvious political pressure to reduce the proportion of GDP taken Commonwealth outlays.

16 Affordable Self Reliame

I

1

UT

32 0 3.5

30.0

- 28.0 s n [=I 26.0

f 24.0

22.0

v

$!

3.0 - E e a

2.5 $ L 0 e

23 2.0

As fknding for defence has been provided generally as would be expected in the context of wider developments in public sector finance, the cause of the problems experienced with Defence financial management lie elsewhere. As Fig 5 illustrates, over almost all of the last two decades the problem has been the irrelevance of government guidance for fiiture defence expenditure. With few exceptions, guidance to Defence, which provides the basis for long term planning of force structure development, has varied from the outlay governments have been prepared to actually provide. Variations between the planning basis for Defence and actual outlays as great as 40 per cent are not uncommon. This is not an original conclusion. To quote DuA 87

.... considerable waste and inefficiency in defence planning is inevitable when unrealistic guidance is given as a planning basis for defence spending?

37. Defence of Austra/ia I987, 103.

Affordable Self Reliance

0 0)

m c

6.0 , 2

5 0

4 0

30

g) 2.0

1 0

0 0

-1 0

-2 0 81677 81983 w-33 86586 ma?

financial year

It should be noted that the guidance figures shown here are "near term", (Le., the last guidance given before deciding actual appropriations in the context of formulating the Budget). Longer range guidance figures, usually given in the context of the major policy papers, were usually much higher. Guidance in Australian Defence was for 5 per cent real growth for the period 1976-77 to 1 980-8 1 ; that in the succeeding post-Afghanistan statement 7 per cent per annum for the FYDP. In the period following DoA 87, longer range guidance was published annually, but it was consistently reduced by 50 per cent or more in the year leading up to the next budget.

Given the significance of these projections for planning force structure developments, in the context of starting equipment programs costing billions of dollars and extending over ten or more years, it can be argued that planning for the development of ADF capabilities has been ineffective by any realistic measure. It is particularly ironic that the major departures in the real value of outlays fkom the guidance figures, those occuning in 1977-78, 1981-82, and 1986-87 and 1987-88, should have occurred sho ly after Cabinet had approved defence policy predicated on high, sustained levels of Defence outlay.

The dislocation of Defence management which h resulted fi-om this sequence of events affects most areas of Defence activity. This is illustrated in Fig.6. Particularly noticeable are the contractions of outlays on equipment in 198 1-82 (and the subsequent equipment "log jam'') and in 1987-88. It is noticeaLle that following the latter instance the proportion of sp ing allocated to equipment has not been brought back to the levels'seen in th

17

100.0

90.0

80.0

70.0

Affordable Self Reliance 19

The long-term trend in personnel outlays is also noticeable. The two instances of policy reversal mentioned earlier in this paper (1973-74 and 1981-82) are easily seen. The long term trend is worth noting as an example of the interaction of Defence with wider national developments. The persistence of expenditure above 50% of the budget until 1983-84, despite a decade of policy to reduce it below that proportion, reflects the persistent wages inflation of the period. The reduction in the comparative level of personnel funding corresponds with, firstly, the wages pause of the last year of the Fraser government and, more persistently, the low wages growth under the active incomes policy of successive Labor governments.

Acknowledging the problems caused by unrealistic guidance is not to argue that governments should have been obligated to provide the finance indicated in the Defence policies they approved. Figure 7 pro~ides an estimate of the Defence outlays that would have been achieved if the guidance had been used to allocate each budget over the past two decades.

NWEALTH DEFENC CURRENT PRICES

O i , , , , 87576 87879 855&! 85685 83185 PaNl €EmM

financial years

By 1993-94 outlay on defence would have reac $12 422m compared to the $9746 actually spent. The difference represe an extra $2.68 billion that would have been available to Defence in that ye lone, an increase of 27.5 per cent. But it also represents an increase of 19.6 per cent to the Commonwealth budget deficit registered in that year. Given the p~litical pressure placed on governments throughout these decades to implement budget reduction strategies, such a level of defence spending must be seen as fiscally untenable. One can only conclude that, had any government succeeded in matching achieved Defence outlays to hture guidance for any length of time, it would have been forced, when next economic policy required fiscal. action, to reduce Defence outlay by a degree more disruptive than any that was in fact experience throughout this period, or to take unpopular revenue measures.

The realism of financial guidance must, therefore, be a major issue in evaluating the 1994 white paper.

20 &fordable Self ReliaiLce

The major development of Defence policy outlined by Defending Australia is the concept of "strategic engagement" with countries of the region. This stems from the awareness that the dynamic economic change in the Asia-Pacific area has become a major feature effecting Australia's strategic environment. Economic growth is contributing to the incre capability of regional armed forces and leading to changes in the relations etween nations in the region, and between them and those outside, which have potential to influence the development of Australia's strategic environment. "Australia's ability to help shape that environment will become more important to our security", the white paper notes?

In other areas of policy, however, the 1994 white paper endorses, with some refinement, policy developed by its predecessors. The basis of Australia's defence policy remains self reliance, now more tightly defined as maintaining "the military capabilities to defend our country without depending on help fiom other countries' combat forces1'.39 Although in effect reflecting earlier statements, this definition, by implying the role of alliance and other partner nations in providing support to any Australian military effort, implies a more modest and affordable approach to defence self-reliance.

The criteria for developing the ADF force structure needed to implement defence self reliance have not changed significantly fiom their first expression in DoA 87. The basic strategy of defence in depth remains, with the sarne logic for determining relevant military capabilities that was developed by the Review of Australia's Defence Capabilities, in place.40

However, the developing capability of regional defence forces has changed the criteria against which that logic is exercised and it is assessed that the level of sophistication which might be encountered in conflict, and that the ADF should be structure to combat, will probably have to increase over the next 15 years. It is interesting that in this light, however, the objectives for developing ADF capabilities are comparatively modest. Most, though not all, of the specific equipment proposals mentioned in Defending AustraZia (AEW&C aircraft and helicopters for the ANZAC class frigates for ex e) were the focus of concern in the FSR. It seems unlikely that the capabili ogram outlined in the white paper would exceed that of DoA 8 7 which was estimated at $25 billion.41

38. Department of Defence, Defending Australia, Defence White Paper 1994, AGPS: 1 1.

3 9. Defending Australia: 1 3.

40. Defending Australia: 28ff.

4 1 . Beasley, Afrer the White Paper . . . , 9.

Affordable Self ReliarLce 21

The management reforms introduced by the Force Structure Review are also continued by the white paper. The program to reorient personnel usage initiated in the former document is well advanced and has already brought reductions of 15 per cent of ADF personnel and 16 per cent in the numbers of civilians employed by Defence, representing some 10 200 and 4000 positions, re~pectively.~2 In addition, the CSP has re1 ed 2200 ADF and 980 civilians fiom support areas, allowing the poten relocation of reallocation to operational areas.43

Inter alia, the white paper confirms that the m ~ a g e m ~ n t initiatives of 1991 are proving successhl and providing a base on which the defence program can be h d e d "for the next few years".44 The CSP has already achieved recurrent annual savings of almost $loom45 and personnel reductions will yield a M e r $440m in recurrent savings by 1997-98.46 Together, these two amounts represent 5.8 per cent of total outlays for 1991-92, the year in which these programs were introduced.

However, Defending Australia acknowledges that the real value of Defence outlay will have to increase in the medium term future, if the effectiveness of the ADF is to be maintained in the changing strategic environment. A rate of growth in Defence outlay equivalent to that of the economy as a whole, allocated &om later in the decade, is considered sufficient. Under these arrangements, the white paper states, Defence outlays would constitute 2 per cent of GDP.47

Nonetheless, the presentation in Defending Australia implies that Defence outlays will be further reduced in real terms over the next few years. Defence outlay is currently estimated to approximate 2.1 per cent of GDP in 1994-95.48 A proposition to stabilise spending on defence at 2 per cent of GDP implies a M e r reduction in Defence outlay to the level of GDP proposed. This deduction is supported by comments of Professor Paul Dibb who, in noting that Defence outlay had fallen by 1.25 per cent over last ten years, observed that it still had another 1.25 per cent to go before st lising.49 As a proportion of

42. Department of Defence, Defending Australia, Defence White Paper 1994, AGPS: 60.

43. Defending Australia: 1 19.

44. Defending Australia: 145.

45. Defending Australia: I 19.

46. Defending Australia: 149.

47. Defending Australia: 146.

48. Budget Paper No.1, 1994-95: 3.30. Given the recent strengthening in growth of GDP, it is reasonable to assume that Defence outlay will finish the year at a level lower than 2 per cent of GDP.

49. Professor Paul Dibb, Head, Strategic and Defence Studies Centre, ANU, "AM" ABC Radio, 1 Dec. 1994, DPL transcript,

22 Affordable Self ReliarLce

1993-94 GDP such a move,would represent a reduction of some $43Om. The indication that further real reductions in Defence outlays may well be an option for Government fiscal policy (in the light of white paper confirmation that the defence program can be funded within existing appropriations) is that this amount corresponds with savings expected within the Defence portfolio.50

In the long term, however, the greatest difficul facing Defence finance is the assumption that sufficient of the growth in the economy will be retained to f%nd a real increase in Defence outlays. This approach faces two problems. Firstly, the normal functioning of the business cycle has not yet been able to sustain increasing economic activity over any length of time, and certainly not the 15 year time frame of the white paper. The usual cycle will probably ensure a downturn in economic growth in the earlier segment of the white paperk 15 year time frame. Secondly, the strategy appears to assume that economic growth can be transferred to any particular government sector without reference to fiscal policy.

In general, government fiscal strategies do not mirror the path of economic growth, but tend to become contractionary before growth rates peak. Where government counter-c yclical expenditure is required (Le., increased expenditure

,to kick start the economy), its focus is usually on short term expenditures and, as Figure 4 demonstrates, Defence spending does not increase at a rate comparable to total Commonwealth outlays at such times. In this context economic growth is not simply "passed on" to any public functions. Thrs feature is demonstrated in Figure 8 where the proportion of CDP going to Commonwealth total and Defence outlays is seen to contract as the budget balance passes into surplus (budget balance change moves to the positive side of the scale).

ALTH DEFENCE OUTLAYS, TOTAL OUTLAYS I

AND

PROPORTION OF GDP CHANGE IN BUDGET €3

32.0

30.0

28.0

26.0

24.0

22.0 -_______- I

3.0

2.0

1 .o 0.0

-I .o -2.0

-3.0

4 .0

20.0 1 ! -5.0

50. Defending Australia, 149.

Affordable Self Reliarace

At this point can be observed a coinciding slight drop in the proportion of CDP going to Defence - not necessarily because of any decision of government, but simply because GDP is growing at a faster rate than the transfer of funds into public sector activity, in this case, defence. That is, in order to sustain Defence outlays at a predetermined level (in this case as a proportion of GDP) a decision has to be made to appropriate the necessary fimds. Whether government will make such a decision has been, and remains, the issue.

In this context the commitment to introduce a five-year budget for Defence fiom 1996-97 is particularly important. It is likely tha this budget will commence on the reduced base mentioned above. Nonetheless, if this funding arrangement does proceed on a predictable basis, it may well provide the planning stability which has been lacking so far in the implemen~tion of defence policy and remove what is argued by this paper as a major cause of inefficiency and policy failure.

On an examination of recent history, it cannot be assumed that government will take the annual budgetary decisions necessary to divert a portion of national economic growth to Defence. Whether such decisions as are taken will provide the level of increase in defence outlay required to fund the Defence program envisaged over the next 15 years remains to be see. The "equipment bulge" Defending Australia foreshadows as arriving in about 2010 may well be again a time at which a fimdamental reconsideration of Australia's defence strategy will be forced by the lack of sufficient finance.

Yet it is more important than usual that th~s problem be overcome during the period covered by Defending Australia. If the financial projections of the white paper are not met and its management reform is not continued, Defence could again be left with significant funding commitments deferred till after the end of the 20th Century. The "equipment buldge" which would occur shortly afterwards, refers to the need, from about 2005, to take action to overcome the ageing of equipment which supports some major capabilities of the ADF. At this time Defence will have to contemplate extremely expensive decisions, including whether or not to replace capabilities ow provided by F/A-18 and Fl 1 1 aircraft, and front line destroyers.

Such a situation would again threaten defence policy. To date, the issue of the combat eeectiveness of the ADF in achieving defence self reliance has been based on its possession of a technological lead over the armed forces of the region. Should financial management of the port lio over the next decade fail to place the ADF in a position to h l l y exploit the benefits of whatever technologies are relevant to maintaining this pos , the basis of defence policy will again have to be reconsidered.

23

(See next page for notes and sources)

Financial Year Defence: current (% Govt Real growth Guidance (a) (FYI $m (%GDP) spend in g )

1971-72

1972-73

1973-74

1974-75

1975-76

1976-77

1977-78

1978-79

1979-80

1980-8 1

1981-82

1982-83

1983-84

1984-85

1985-86

1986-87

1987-88

1988-89

1989-90

1990-9 1

199 1-92

1992-93

1993-94

1994-95 (est)

1995-96 (est)

1996-97 (est)

1157

1222

1326

1628

1853

2149

2340

2568

2965

349 1

4055

470 1

5299

5938

6674

72'08

7422

7780

8476

9067

9362

9703

9786

98 10

9960

10278

3.2

2.9

2.6

2.7

2.6

2.5

2.5

2.4

2.4

2.5

2.6

2.8

2.8

2.8

2.8

2.8

2.5

2.3

2.3

2.4

2.4

2.4

2.3

na

na

na

12.8

12.0

10.8

9.1

8.5

8.9

.8

8.8

9.3

9.6

9.8

9.5

9.3

9.2

9.5

9.5

9.4

9.5

9.7

9.1

9.

8.

8.5

na

na

n

na

na

na

na

na

5.2

0.0

1 .o

3 .O

5.6

-1.7

4.6

4. I

2.8

2.9

-0.4

-1.1

0.5

0.0

0.0

0.0

0.0

-0.75

na

na

na

na

na

na

na

7.2

5.2

3 .O

2.6

5.5

5.3

4.3

(b)

4.5

4.5

3.8

3 .O

1 .o 1 .o 2.0

1 .o 0.0

-0.5

-0.5

-0.5

-0.5

0.0

Aiiachment I notes and sources:

(a) Forward guidance by Government of real growth for following Financial Year (eg, in 1975-76 Government gave gui ance of 7.2 per cent real growth for 1976-77,5.2 per cent was the actual outcome).

(b) No guidance this year due to change of Government March 1983.

The data on outlays, percent GDP and percent Government spending (except 1992-3 onwards, all figures for which are from the 1993-94 oficial Budget Papers), are from Allan Shephard, Australian Defence Statistics 1972-1992, Commonwealth Parliamentary Research Service Issues BriefNo.20 1992, p.3. These figures were verified for Mr Shephard by the Defence Department. The last two columns (again except for 1992-93 onwards) we taken from Hansard (Senate), 28 April 1992, p.1736, Answer to Question No.1752, and are an official Departmental response to that question.

With the exception of data for 1971-72 to 1973-74, this table has been taken from Australia's Security: Issues for the New Century, by Gary Brown, Australian Defence Studies Centre, Australian Defence Force Academy, 1 994.

e .

SEL CTI ET

(per cent)

Social security assistance Transfers

to other Unemploy govern

Defence -ment Other Total Health Education -rnents

1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-8 1 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-9 1 199 1-92 1992-93 1993-94 1994-95

12.0 10.8 9.1 8.5 8.9 8.8 8.8 9.3 9.6 9.8 9.5 9.3 9.2 9.5 9.5 9.4 9.5 9.7 9.1 9.1 8.8 8.5 8.0

1.6 19.6 2.3 3.1 2.7 3.1 3.2 3 .O 2.8 3 .O 4.6 5.2 4.6 4.4 4.5 4.2 3.8 3.5 4.7 6.6 6.8 6.8 5.9

19.1 20.4 18.6 20.0 23.8 24.7 24.7 24.9 24.7 24.8 24.2 23.9 23.2 22.9 22.7 24.4 25.2 26.5 27.1 27.9 28.3 29.9 30.1

20.7 7.

20.9 23.1 26.5 27.8 27.9 27.9 27.5 27.8 28.8 29.0 27.8 27.3 27.2 28.6 28.9 30.0 31.8 34.4 35.1 36.6 36.0

7.8 7.0 7.2

13.6 10.6 10.1 10.0 10.1 10.1 7.1 7.0 7.8

11.6 11.8 12.0 12.7 13.0 13.5 13.5 13.5 13.6 14.2 14.3

4.4 22.7

9.3 8.5 9.0 8.8 8.6 8.1 8.0 7.9 7.6 7.2 7.0 6.9 6.8 7.1 7.3 7.5 7.8 8.1 8.3 8.5 8.3

25.9

20.8 20.4 21.3 22.2 22.7 22.6 22.1 24.1 22.5 21.7 17.8 17.4 17.0 16.6 16.5 16.2 14.5 12.8 12.9 13.5 12.6

Source: Budget Staternents,various (Budget Paper No. 1 ).