Australian Government Unveils 2015-2016 Defense Budget Amidst Economic Uncertainty

by Dan Darling, International Military Markets Analyst, Forecast International.

The center-right Australian government of Prime Minister Tony Abbott unveiled its latest budget on May 12. The budget, delivered by Treasurer Joe Hockey, nixes the austerity approach undertaken by the government in its first budget (2014-15) in favor of tax cuts for small businesses and higher spending on child care and infrastructure as the government seeks to ease passage of its latest budget through the upper chamber of Australia’s bicameral parliament, the Senate.

In short, this is a growth-oriented budget instead of a deficit-cutting one, the likes of which earned the government widespread opprobrium last year from politicians and the public alike. It illustrates recognition by the government that optics are vital if it hopes to emerge successfully in the next general election, likely to be called sometime next year.

The government’s delicate balancing act – deficit reduction versus greater spending – is playing out against a backdrop of collapsing commodity prices (crucial to Australia’s economic well-being) and an increasingly unstable global security environment. Thus meeting the government’s commitment to boosting Australian defense funding to 2 percent of GDP – an Abbott campaign pledge heading into the September 2013 election – requires a degree of choice on the part of the ruling Liberal/National coalition. Do they increase the defense budget as promised in order to undertake security missions abroad and modernize the armed forces at home? Or is the priority on keeping the fiscal house intact and preserving Australia’s gold-standard triple-A credit rating?

Per the budget, the answer appears to weigh a bit heavier in favor of defense. Under the 2015-16 government budget, the allocation for defense will be AUD31.9 billion ($25.2 billion), up by AUD2.6 billion ($2.05 billion) from the Defence Department’s FY14-15 outlay. This amounts to an 8.1 percent year-on-year nominal increase – a little over 4 percent in real terms, and brings the defense budget upward to about 1.93 percent of GDP.

In addition, the four-year Forward Estimates (2015-2016 through 2018-2019) for defense spending under the latest budget have increased by AUD9.9 billion ($7.82 billion) over those put forth under the 2014-2015 version, thus bringing the total spend over that span up to AUD132.6 billion ($105 billion), or roughly AUD33.15 billion ($26.2 billion) per year.

The Abbott government’s 2014-15 fiscal outlay for defense jump-started its stated goal of meeting the 2-percent-of-GDP spending standard within a 10-year window. The latest military earmark brings that standard well within reach, although it should be noted that under current projections, the defense budget as a share of GDP is expected to slide to around 1.8 percent in 2016-17.

With the remaining three fiscal years within the Forward Estimates allowing for defense budgets of AUD33.57 billion per annum, further details on how the government intends to meet its 2-percent-of-GDP benchmark will have to be spelled out in the looming Defense White Paper, expected later in the year.

Ongoing projects and equipment requirements – including C-17 strategic airlifters, EA-18G Growler electronic warfare aircraft, P-8 Poseidon multimission maritime aircraft, MH-60R “Romeo” naval combat helicopters, and AEGIS-equipped Hobart-class air warfare destroyers (AWDs) – are all funded under the 2015-16 defense budget as part of a larger AUD6.782 billion ($5.36 billion) capital investment earmark.

The operations element within the larger defense budget will amount to AUD910.7 million ($720 million). That figure takes into account ongoing missions in Iraq (Operation Okra), Afghanistan (Operations Highroad and Slipper, the latter involving repairs to equipment returned to Australia from the now-defunct mission), and the Middle East/Gulf region (Operation ACCORDION), among others.

While the latest defense budget appears to be very good news for Australian defense, a couple of factors bear mentioning.

First, in order to compensate for the depreciation in purchasing power of the Australian dollar on the global market, the government is providing around AUD730 million within the overall budget. This funding is tantamount to running in place – the fiscal legs are churning, but the distance traveled is bounded.

Second, the rise in the share of the defense budget per GDP under this year’s budget is largely the result of a slowing economy.

This brings up the matter of broader government finances.

While Australia’s financial situation is hardly perilous – current debt-to-GDP projections by the Treasury foresee debt peaking at 27 percent in 2016-2017 – and the government insists that deficits will continue to shrink successively each year until a surplus is reached in fiscal 2020, the end of a decade-long mining investment boom and declining demand from China have hindered the Australian economy. These factors also erode government revenue estimates and result in larger year-end imbalances than anticipated.

Though the government may be using this year’s budget to soothe lingering voter discontent over last year’s version, the longer-term defense trajectory may be put into doubt should Australia’s deficit widen over the coming few years rather than narrow as Tony Abbott, Joe Hockey, and the Liberal/National coalition expect – or hope.

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