A (fiscal) reality of our own creation
28 Mar 2013|

As part of the Alliance 21 project, I was asked to give an Australian perspective on defence spending and the Australia–US alliance. Or, in other words, it was my job to explain why Australian defence spending has been slashed. A simple enough task you’d think, given the apparent agreement—at the political level at least—that we each face a so-called ‘new fiscal reality’. If only it were so.

While US officials say they understand and accept the imperative for Australia to curtail its defence spending, it’s increasingly clear that’s not the case. Certainly those in the US defence establishment not constrained by diplomatic niceties haven’t been fooled. Have a look at what my US colleagues on the Alliance 21 project Michael O’Hanlon and Patrick Cronin [coming soon] have to say.

After all, why would anyone conclude that our countries face similar situations? Australia and the United States are in very different economic and fiscal situations. The table below (click to enlarge) shows the most recent data for comparable periods for each country.

Australia has lower unemployment, higher workforce participation and stronger economic growth than the United States. More importantly, from a fiscal perspective, Australia’s debt and deficit are insignificant compared with that of the United States, and our government expenditure as a share of GDP is 10% smaller. At the same time, the United States is spending more than twice as much as Australia on defence as a share of GDP.

The US fiscal consolidation is being driven by the realisation that they can’t continue to pile up debt at the rate they are today forever—especially given the long-term trends in social security and health costs. There’s no denying that the machinations over the US budget are ugly; sequestration is the bluntest of blunt instruments. But who are we to point the finger about dysfunctional politics?

The point is that the US needs to get its fiscal house in order one way or another. The argument that the US can continue to borrow indefinitely because they have the exorbitant privilege of being the world’s reserve currency is flawed. They’ll only be accorded that privilege so long as expectations of inflation and default are held in check—and that demands getting debt under control. No such imperative exists for Australia.

That the United States has decided to cut defence spending as part of its effort to balance the books is hardly surprising—at 4.1% they spend a greater share of GDP on defence than any advanced economies apart from Singapore and Israel. Once again, the difference with Australia is stark; they are cutting defence from a high base, we are doing so from a relatively low one.

So what was I to say to a US audience about Australia’s dramatic about-turn on the spending promises touted in the 2009 White Paper? I offered two viewpoints.

First, I explained that history had given Australian politicians an irrational fetish for surpluses at any cost. I said that because an Australian Labor government hasn’t delivered a surplus since 1989; it represents a political Holy Grail that blinds politicians to anything else. They didn’t swallow that argument. For some reason, unbeknown to me, Australia’s policy acumen is held in very high regard in America. Perhaps we’re still living on the reputation of the Hawke-Keating era. Whatever the reason, they assume that we are thoughtful and deliberate in our decisions. It was put to me twice that Australia only fully abandoned its 2009 defence plans after it became clear that the US pivot to Asia was going to happen—hardly a healthy suspicion for our ally to be holding.

The second explanation I gave was that Australia is simply behaving like any junior partner in an alliance and free-riding because it would be illogical to do otherwise. They understand this argument, having borne the brunt of free-riding allies in Europe and Asia since WWII, but they don’t like to hear it. If nothing else, it offends them to think that a friend such as Australia would deliberately take advantage of them.

Having failed to adequately explain why Australia has reduced its defence effort concurrent with an increased US focus on the region, I turned to explain how we might nonetheless work together to build security in this part of the world. My ideas are set out in my Alliance 21 paper. It’s the usual package of enhancing regional cooperation, greater use of Australian bases and materiel cooperation. They took this for what it was worth—better than nothing.

I’m on the record as arguing that Australia can and should set its defence aspirations below that contained in the 2009 Defence White Paper. I stand by my arguments. But I can’t pretend, and nor should anyone else concerned with the health of the ANZUS alliance, that the recent precipitous cut to Australian defence spending hasn’t had a negative impact on the Canberra—Washington relationship.

Mark Thomson is senior analyst for defence economics at ASPI.