Is 2 percent of GDP enough for defence?

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HMAS Parramatta pictured returning to Sydney. Significant investments have been made to increase Australia’s naval capacity. Picture: Department of Defence

It’s very likely that the government will deliver on its promise to return the Defence Department’s funding to two per cent of GDP in the 2020-21 budget. That will be a number in excess of $41 billion. But is it enough, Marcus Hellyer* writes in The Canberra Times.

Two per cent seems to have become the unofficial benchmark for what countries that take national security seriously spend on defence, he writes. The original article is here.

But there is nothing carved in stone that says two per cent will guarantee your security. Countries that face clear threats spend more, sometimes much more. 

There are several reasons to think two per cent isn’t enough for Australia right now. The first is that the long-term funding model presented in the 2016 Defence white paper is already based on getting to more than two per cent of GDP.

The white paper recognised that longer-term defence planning requires funding certainty. It’s difficult to provide this certainty if defence’s funding is tied directly to GDP because its budget will fluctuate as GDP predictions go up or down.

So the white paper provided Defence with a fixed funding line out to 2025-26 that is ‘decoupled’ from two per cent of GDP. It just so happens that they coincide in 2020-21. 

Beyond that year, the fixed funding line actually grows beyond two per cent of GDP; just how far beyond depends on your prediction of GDP growth.

But it’s that fixed funding line that Defence’s planning is based upon, not two per cent of GDP. With low GDP growth, the discrepancy between the two numbers gets very big very fast.

If this, or any future government, moves away from the fixed funding line back down to a number based on two per cent, then Defence will take a big budget hit, likely forcing it to give up capability.

The second reason is that even if Defence gets the white paper funding line, it’s debatable whether it’s enough to afford the future force set out in the white paper.

There are two main cost drivers in the acquisition and sustainment of military equipment-size and complexity. The systems set out in the white paper are both bigger and substantially more complex that what they’re replacing.

The Navy, for example, is doubling in tonnage. And every system is getting more complex with more sensors, more computers, more software, and so on.

Much of the growing Defence budget is being used to acquire these systems, but it’s highly likely that more funding will also be required to crew and operate them.

For example, the Navy recently revealed that its workforce analysis suggests it needs to go from around 15,000 to 20,000 people; that’s a 33 per cent increase that is not covered in the white paper’s funding model.

Air Force is replacing a third generation fighter with a fifth generation fighter which could cost twice as much to operate.

Australia, like most western countries, harvested a peace dividend after the fall of the Berlin Wall and the Soviet Union.

The third reason is that the force laid out in the 2016 white paper was based on a set of strategic assumptions such as the enduring primacy of the United States’ military power.

However, there is now consensus, from the Minister for Defence through to academics and policy analysts, that these assumptions no longer hold.

While few assess that our defence alliance with the US is now meaningless, Australia may need to develop greater defence self-reliance. That will cost more.

Normally if your strategic environment changes, you’d adjust the force structure to meet those new circumstances. But that brings us the fourth reason; much of Defence’s spending is already locked into large local construction programs (ships, submarines and armoured vehicles) that are politically untouchable.

As a result, Defence has very limited flexibility to adjust its acquisition plans to respond to the changing strategic environment.

That’s fine if we think the world will wait until future submarines start coming online in the mid-2030s.

But if the government wants to acquire new and different capabilities sooner, it’s probably going to have to provide additional funding.

In short, these reasons taken together suggest that two per cent is probably not enough to afford a force that already is not the right one to provide us with security in uncertain times.

 Rising tensions with China and changing demands on our defence force could see costs rise significantly. Picture: Supplied

And that brings us to the final reason to think two per cent isn’t enough. In times of strategic uncertainty, Australia has historically spent more, sometimes quite a lot more.

Throughout the Cold War Australia averaged about 2.8 per cent.

The reason the government has had to ‘return’ the defence budget to two per cent is that Australia, like most western countries, harvested a peace dividend after the fall of the Berlin Wall and the Soviet Union. 

The fundamental question for the government is, what kind of security environment do we find ourselves in?

One like the brief window of US unipolar hegemony in the 1990s and 2000s? Or one more akin to the strategic uncertainty of the Cold War?

The answer is that it’s probably even worse than the latter because the rise of China is going to shake up our region far more than the Soviet Union ever did.

  • Dr Marcus Hellyer is Australian Strategic Policy Institute’s senior analyst for defence economics and capability.

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