Two—the magic number
26 Aug 2013|

At last, defence is being paid some serious attention in the election campaign. In his campaign launch on Sunday, Mr Abbott said:

Within a decade, the budget surplus will be 1 per cent of GDP, defence spending will be 2 per cent of GDP, the private health insurance rebate will be fully restored, and each year, government will be a smaller percentage of our economy.

In contrast, the government’s stated position—as set out in its 2013 Defence White Paper—is less definitive and comes with an important caveat:

…as well, the Government is committed to increasing Defence funding towards a target of 2 per cent of GDP. This is a long-term objective that will be implemented in an economically responsible manner as and when fiscal circumstances allow.

Nonetheless, it’s possible to compare the commitments of the two sides in some detail based on some minimal assumptions.

Let’s start with the government. In the 2013 budget, the government laid out the next four years of defence funding and provided an aggregate figure for the six subsequent years ($220 billion). Assuming that the funding for the latter period is used to generate linear growth, it’s possible to calculate a figure for defence spending for each year until 2022. Using the GDP figures provided in the budget for GDP over next four years and the estimated real GDP growth rates from the 2010 Intergenerational Report (PDF), it’s possible to estimate the resulting GDP share over the next decade. The result’s that defence spending as a share of GDP rises to just under 1.67% over the next few years and then falls to around 1.64% by 2022. Put simply, medium-term real growth in the defence budget of around 2.5% p.a. is overwhelmed by slightly higher real growth in GDP over the period.

Now for the opposition. Although the opposition is unequivocal about the share of GDP to be spent on defence in a decade’s time, we’re left to guess at how defence spending will grow to that level. A reasonable assumption, consistent with that made above, is that the growth will be linear between now and then. While it’s possible to envisage defence spending being kept low over most of the forthcoming decade and then surging up to 2% of GDP at the end, that’s not practical. Past experience shows that Defence can only grow at a steady and moderate rate—hardly surprising for a complex organisation—so a realistic strategy to reach 2% in a decade (from around 1.6% today) would be linear growth. To do so, requires average real growth in defence spending of around 5.3% p.a., and around $35.5 billion more than the government has promised.

The two charts below depict my best estimate, consistent with the assumptions detailed above, of (1) nominal defence spending and, (2) defence spending as a share of GDP for the two parties.

It remains to be seen whether Mr Rudd will match Mr Abbott’s commitment to devote 2% of GDP to defence within a decade. No doubt, journalists are lining up to ask the question at this very moment. And well they should, especially given the significance that such a commitment holds for fiscal policy in the years ahead. But from a defence policy perspective, it will be a pity if the debate begins and ends with a bidding war over GDP share.

Don’t get me wrong. Existing plans for the ADF are underfunded and boosting spending to 2% of GDP will more than likely close the gap. In that sense, Mr Abbott’s commitment is a welcome development. But that begs the question of whether current plans for the ADF are appropriate in terms of the scale and type of capabilities being acquired. For the moment, that question is in the too hard basket for our politicians.

Unfortunately, defence planning is an inherently difficult exercise in mitigating strategic risks of dimly perceived likelihood and consequences. What’s more, defence capability is a highly specialised area of expertise. As a result, successive governments have largely acted on the advice they’ve gotten from senior military leaders as to the shape of the ADF. Ministers intervene (thankfully) on specific capabilities from time to time. But make no mistake; the overall agenda is set by the aspirations of the brass on Russell Hill. And so it is that our defence debate has come to revolve around a single number.

Mark Thomson is senior analyst for defence economics at ASPI.