Defence

Cover story

Defence Budget 2006–07

The Defence Budget for the next financial year consists of a total departmental funding of $19.6 billion along with administered appropriation of a further $2.6 billion.

This funding represents:

• maintenance of defence spending by government at approximately 1.9 per cent of Australia's Gross Domestic Product (GDP);
• an increase of $1.9 billion (or 11 per cent) from the projected result for 2005–06;
• an increase of $1.4 billion (or 8 per cent) compared with the Forward Estimate published in the 2005–06 Additional Estimates; and
• 9 per cent of total Commonwealth spending.

New measures

The most significant new Budget measures include:

• the acquisition of an enhanced Heavy-Airlift capability;
• the Hardened and Networked Army initiative;
• funding for operational commitments;
• the establishment of the High-Readiness Reserve and an enhanced conditions-of-service package for all Reservists; and
• the work to modernise Defence facilities at Mulwala.

Other features

Other Budget measures include:

• enhancement of Australia's coastal surveillance and detection capabilities for illegal foreign fishing in Australia's economic exclusion zone;
• funding to ensure that the Defence Housing Authority meets competitive neutrality requirements;
• Naval Aviation logistics funding for 2006–07;
• funding for improved intelligence connectivity;
• deployment of two Chinook helicopters and personnel to Afghanistan; and
• adjustments to Defence's funding for the Headquarters Joint Operations Command project.

Defence workforce strength

Measures to strengthen the Defence workforce include:

• plan to increase the total Defence workforce to approximately 98 800 by 2015–16; and
• increase of $3.1 billion in funding for workforce over the next 10 years.

Working to a plan

The Australian Government's long-term funding commitment for Defence was one of the headline items of the Treasurer's announcement on 9 May and has captured a great deal of attention since Budget night. Described by the Minister for Defence as providing 'substantially more firepower', the Budget announcements on additional defence spending provide for a range of operational commitments, new capabilities and people initiatives. Compiled by Harry Baxter.

The responsibility for compiling and managing Defence's annual budget submission rests with the First Assistant Secretary Budgets and Financial Planning (FASBFP), George Veitch.

According to Mr Veitch, Defence's funding in 2006–07 and beyond continues to be based primarily on the allocations approved by the Government in the context of the White Paper, Defence 2000: Our Future Defence Force.

The Government's ten-year funding commitment in the White Paper totals $28.5 billion. The funds continue to be allocated for the purposes originally intended, including the Defence Capability Plan, through-life support costs, growth in personnel costs from 2004–05 onwards and other baseline cost pressures.

To date the Government has allocated $6.3 billion of the $28.5 billion, and a further $3 billion is provided in the 2006–07 Budget.

'The big money phases in from this Budget. To put it another way, in the second five years of the ten-year commitment there is still $22.2 million to be spent, or an average of $4.4 billion per year,' Mr Veitch said in his post-Budget briefing.

Excluding the administered appropriation of $2.6 billion (covering costs associated with military superannuation and military housing), the Defence Budget totals $19.6 billion in 2006–07.

In this Budget the Government has decided to continue to increase Defence spending in real terms by 3 per cent per year until 2015–16. Between now and 2015–16 the Budget will grow from $19.6 billion to $26.8 billion, and this will mean a 15-year commitment to 3 per cent real growth in Defence funding. This allocation will fund major projects such as the Joint Strike Fighter and Air Warfare Destroyer, along with other priorities set out in the revised Defence Capability Plan 2006–16, which is to be released in June. It will also provide extra funding for personnel and operating costs.

As well as maintaining a strong focus on investment and personnel, Mr Veitch emphasises that the funding provided in this year's Budget includes sizeable amounts for net personnel and operating costs (NPOC), logistics, estate upkeep and other operating costs.

'This ensures we get an appropriate balance between investment, personnel and operating costs,' he said. 'Having long-term planning certainty and getting the right balance in the Defence budget are the two most important ingredients for effective long-term financial planning in Defence.'

The 2006–07 Budget includes funding for a range of new measures to be implemented by Defence. In addition, new savings measures totalling $665.2 million over 10 years are to be implemented.

Heavy-Airlift capability ($1.9 billion)

The 2006–07 Budget provides an additional $1.9 billion for the acquisition of the Boeing C-17 Globemaster III at a project cost of $2.2 billion. Defence has provided $335 million in offsets by reducing the scope of the project to acquire or refurbish C-130H aircraft.

The first C-17 aircraft is expected to arrive in Australia in December 2006, with final delivery of all aircraft expected by mid 2008. The Government has agreed that Defence will be supplemented for the operating costs of the C-17s and we will take a proposal back to the Government in the 2007–08 Budget once costs have been assessed.

Hardened and Networked Army (HNA) initiative ($1.5 billion)

The 2006–07 Budget has provided an additional $1.5 billion over the decade to 2015–16 for the HNA initiative, including funds to:

• restructure the Army, based on combined arms battle-groups with increased protection and firepower;
• increase the size of the Army by 1485 servicemen and women to improve the sustainability of deployed forces;
• re-role a parachute infantry battalion to a mechanised battle-group and relocate it from Sydney to Adelaide; and
• re-role, retrain and re-task the Army Reserve to provide direct support to Army's operational units.

Funding for operational commitments ($623 million)

The Government has provided $6 billion in additional funding since 1999 to meet the cost of operations. The 2006–07 Budget provides an additional $623 million for operations in Iraq and Afghanistan, and for surveillance of Australia's northern approaches.

New initiatives for Reserves ($560 million)

The 2006–07 Budget includes funding over ten years to raise a High-Readiness Reserve and to enhance the pay and conditions of our Reserve personnel. The creation of a High-Readiness Reserve of 2800 in Army and 1400 in the Air Force will significantly strengthen the Australian Defence Force (ADF), with members trained to the same skill levels as the Permanent Force. The High-Readiness Reserve will be available for deployment within timeframes of 28 days or less notice.

The enhanced pay and conditions package is designed to stabilise and grow the Active Reserve, and provide incentives for Active Reservists to move to the High-Readiness Reserve. The package includes pay increases linked to work value for all ex–Permanent Force Reserves, a Reserve Allowance of up to $10 per day, and an annual health support allowance for all Active Reservists.

Incentives for Active Reservists to move into the High-Readiness Reserves include an annual health support allowance to assist in maintaining readiness status for deployment and a completion bonus to be paid to members upon completion of their agreed High-Readiness service.

Modernisation of Mulwala facility ($131 million)

The 2006–07 Budget will provide approximately $300 million to modernise the propellant manufacturing capability at the Mulwala facility. The Government will contribute $131 million in additional funds, with Defence meeting the remaining costs. The redevelopment project is essential in meeting safety standards and compliance with environmental regulations.

Efficiency gains

In addition to the savings measures agreed in recent budgets, including the introduction of an efficiency dividend in 2005–06, the Government has required us to return $665 million to the Budget over the 10-year period through the following savings measures:

• the rationalisation of the ADF command-and-control structure which will involve, following a transition to the new Headquarters Joint Operations Command building at Bungendore, a permanent reduction of 241 military positions in the command-and-control structure;
• the broadening of target areas for administrative savings—which were only applied in the last Budget to civilian and administrative areas of Defence—to now apply to 30 per cent of the Defence Science and Technology Organisation's budget, garrison support, estate upkeep, and the sale and leaseback program; and
• a contribution by Defence to a wider government initiative, being coordinated by the Attorney-General's Department, to improve whole-of-government crisis communications processes.

As part of the 2006–07 Budget the Government has also made further funding adjustments, agreeing to bring forward Capability Plan funds as a result of improvements in project management performance of the Defence Materiel Organisation (DMO) as well as price and foreign-exchange adjustments.

Workforce and accommodation costs

The total ADF workforce is currently about 1500 below personnel targets. At the same time, there are about 2000 personnel overseas on operational deployment or on international engagement tasks. Our workforce continues to be stretched.

Despite shortfalls in military numbers, Defence continues to meet its operational requirements at the same time as delivering on expanded White Paper programs, and this is continuing to place pressure on the total workforce. A number of recruitment and retention measures have been taken or are planned which will help recover ADF numbers. Significant resources are being applied through the Defence People Plan.

Including new measures, the total Defence workforce will increase to approximately 98 800 by the financial year 2015–16. This figure includes the impact of the HNA initiative and the establishment of the High-Readiness Reserve.

The Government's commitment to increased spending over the period to 2015–16 provides for continuing 2.5 per cent per year increases in military- employee costs. The 2006–07 Budget provides $6.6 billion for the Defence workforce, comprising $5.4 billion for military-employee expenses and $1.2 billion for civilian-employee expenses. Over the next 10 years the workforce budget is programmed to increase from $6.6 billion to $9.7 billion.

Additional funding has been provided for living-in accommodation which, together with funds provided for the Single LEAP project in previous Budgets, should enable all living-in accommodation to be brought to a good standard by the end of the decade.

Capital investment

There are a number of new Defence Capability Plan projects planned for approval in 2006–07, including the Air Warfare Destroyer, Amphibious Deployment and Sustainment, and Overlander Field Vehicles and Trailers. Defence spending on these and other new projects in 2006–07 is estimated to be $277.4 million.

The total Defence spending on approved major capital equipment program in 2006–07 is estimated at $4.5 billion. This figure represents an increase of $1.4 billion compared with the forecast outcome in 2005–06, and includes Heavy Airlift, Airborne Early Warning and Control aircraft and the Armed Reconnaissance Helicopter.

Capital facilities spending in 2006–07 is estimated at $491 million, including major works at Amberley, Holsworthy and East Sale.

Future proposals

The Government has agreed that Defence should bring a range of other proposals for consideration in future budgets, including logistics shortfall funding beyond 2007–08 and force disposition funding.

We are currently undertaking a major review of logistics in consultation with the three central agencies. This is a critical review for us and will involve extensive input by the services and DMO for the next two months. Logistics and NPOC funding are expected to be the key defence spending priorities in the next budget round for 2007–17.

Source: CFO Group

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