Monday, June 21, 2010

God give us better armed forces, but not yet

Kevin Rudd's chronic tendency to over-promise and under-deliver means the Australian Strategic Policy Institute's annual review of the defence budget is always an object lesson in how his long-suffering purse-string ministers manage to square the budget circle each year.

The fact that the Howard government was prepared to neglect many areas of spending that the Rudd government isn't - education and infrastructure, for openers - doesn't leave it hard to believe Rudd will be economising in areas John Howard favoured, with spending on defence the prime example.

Not, of course, that Rudd hasn't promised to spend a lot more on defence. In his defence white paper delivered a week or two before last year's budget, he matched Howard's commitment to 3 per cent real growth a year in defence spending until 2017-18, and 2.2 per cent thereafter until 2030.

To be fair to him, he also announced a "strategic reform program" in which $20.6 billion worth of the real growth would be covered by savings.

These brave plans took their first blow just two weeks later, when last year's budget cut $8.8 billion in funding from the following six years and deferred it to undisclosed years beyond.

Clearly, the goal of returning the budget to surplus (which includes limiting the real growth in overall budget spending to 2 per cent a year) was given priority over plans to strengthen our defence capability.

The author of the institute's review, Dr Mark Thomson, says that, on the face of it, defence was let off lightly in this year's budget. There were no further spending deferrals (not within the period of the forward estimates, anyway).

And defence was given a $1.6 billion "supplementation" to cover the cost of overseas deployments over the next four years, although it was required to absorb almost all of the $1.1 billion cost of enhanced protection for our forces in Afghanistan.

Defence spending is budgeted to increase by 3.6 per cent in real terms in the coming financial year, reaching almost $27 billion. What's wrong with that?

Just that the job done on defence spending in last year's budget was so thorough it didn't need further adjustment this year. For the following two years, spending is planned to fall in real terms, before recovering in 2013-14 (which just happens to be the year after we're now projected to have the budget back in wafer-thin surplus).

Thomson points out that the now-expected budget surplus of $1 billion in 2012-13 would not have been possible had last year's budget not deferred $3.4 billion of defence funding in that year.

The government now has a lot of credibility riding on the achievement of a surplus that year. If this looked in doubt, how reluctant do you reckon the purse-string ministers would be to push a bit more defence spending off into the future?

But Thomson notes that defence is already holding a lot of IOUs. Real spending is projected to recover the following year, 2013-14. After that, the catch-up needed to deliver the promised average 3 per cent real growth in spending should see defence funding increase by 29 per cent over five years.

Perhaps by then the resuming resources boom will be so well entrenched that Treasury's coffers will again be overflowing, so accommodating such huge real growth in defence spending will be no probs. Failing that, however, I don't find it hard to imagine the government welching on some of those IOUs.

The record spending budgeted for in the coming financial year sounds more comfortable than it is. Thomson says money available to initiate new equipment projects will have fallen by 55 per cent on the forward estimates in last year's budget, with further falls of 42 per cent and 36 per cent in the following two years. Only some of that could be explained by a higher Aussie dollar.

When Lindsay Tanner was shadow finance minister before the 2007 election he invited various worthies (including yours truly) to offer suggestions on ways the budget papers could be made more transparent and generally more informative to people on the outside of government.

These suggestions were developed into the Operation Sunlight policy Labor took to the election and has, we're assured, been implemented now it's in government. But Thomson complains of a lot of newly darkened corners in the defence budget.

He says the government ceased disclosing funding deferrals in its first budget. And this year, "in a marked departure from previous years, the budget papers do not list the projects planned for approval in the coming 12 months. Instead we get an omnibus listing of projects under development which will be approved in the next two to three years."

I have my own beef about lack of sunlight. There are two budget languages, "accrual" and "cash". The budget papers are written in accrual (which I think of as French), but Treasury and the government have encouraged us to continue the macro policy debate in cash (English). Trouble is, the government doesn't provide a full English translation. We get the key totals, but not much else, which means that as soon as you start trying to hold the government to account on some specific issue, you run into the language barrier.

When people tried to use the budget papers to establish how much the government saved by abandoning its emissions trading scheme, they were told their figures were quite wrong because they were in French, not English. Then, when people asked for an English translation of budget figures in another part of the debate, the government refused to supply it.

I guess all governments engage in this sort of budgetary obfuscation, but I confess I had hoped for better from that nice Mr Rudd.