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Defence spending: What should we be measuring?

2 May 2014 11:27

The Abbott Government's repeated commitment to build Australia's defence spending back to 2% of GDP within a decade is welcome.

Our defence budget carries a heavy load. In the first instance it must of course provide for the defence of a whole continent and ensure that the responsibilities we have across more than 10% of the earth's surface can be met. More broadly, defence capability must underpin Australia's strategic weight in an ever more competitive region. And our spend must be of a size that assures our strategic ally, the US, that we are not simply bludging off the alliance, and that we do indeed take seriously our own rhetoric about 'self reliance'. 

At its present level (about 1.6% of GDP), the budget is seriously challenged in meeting these objectives. And as Allan Hawke and I showed in the work we did on ADF posture in 2011, the challenge is not just about new-generation ships, submarines, aircraft and other equipment: there is now an additional need for catch-up spending in the unglamorous area of 'enablers' like bases, facilities and fuel supplies.

In short, a move back to at least 2% of GDP is necessary if Australia is to maintain its military standing in the region. 

As Defence Minister Johnston has acknowledged, achieving this goal in the current budgetary circumstances will be a 'significant challenge', requiring as it will a real increase of more than 5% a year for each year of the decade. And for each year the figure is not met, the following years' infusions will have to be greater. 

Yet it would be a distraction to regard 2% of GDP as a panacea, even if it could be achieved. [fold]

As serious guidance for defence spending, there is nothing 'scientific' about the figure. There is no body of work demonstrating that 2%, or any other figure, is the right level of spending in terms either of capability needs for defence forces generally or of proportion of a national economy.

To be sure, Australia spent more than 2% of GDP on defence consistently from 1939 to 1992, and almost reached the supposedly magic number in 2009. A number of significant countries also spend around that level (eg. China and France, according to SIPRI), and indeed in 2006 (before the GFC) NATO members committed themselves to work towards a 2% of GDP target. A number spend above 2%: the US, for instance, has spent around 4-5% over the last decade, and Singapore's ratio of defence spending to GDP, while declining from its past level of around 5%, remained at 3.6% in 2012. In the same year India, the UK, Vietnam, Russia, Taiwan and South Korea all spent more than 2% of GDP on defence, while a much larger number of countries spent significantly less than 2%, including Japan, Indonesia, Canada, Malaysia, New Zealand and most of Europe. 

As an international comparator, percentage of GDP is thus interesting and, tracked over time and between countries, a useful indicator of how governments are reading their strategic circumstances. Yet comparisons based only on GDP embody the usual shortcomings of GDP as a measure of a nation's production or income. 

Another, and in some ways more useful, indicator is available: namely, the percentage of government outlays or expenditure allocated to defence. This is a measure which is entirely in the hands of the government of the day, and has the additional advantage of enabling comparisons within government over time and between spending on particular sectors. In concentrating attention on the issue of where defence sits in the array of alternative uses of a government's limited spending capacity, it enables a sharper and more focused policy debate on the issue of a dollar spent on defence versus a dollar spent on social security (or even tax cuts).

On this measure, the performance of the Howard and Rudd/Gillard governments make for interesting reading. According to DIO figures, Defence's share of nominal government spending ranged from 5.3% in 2003 to 5.7% in 2007, the year the Howard era ended, and reached 5.8% in 2008 before declining to 4.9% by 2012.

The May budget will be the first test of the Abbott Government's commitment to Defence. The percentage of GDP measure is likely to be in play in public discussion, but as an accountability measure, the percentage of government outlays should be subject to no less scrutiny. 

Photo by Flickr user Mark Kilmer.

COMMENTS

6 May 2014 08:17
By

Andrew Carr is a Research Fellow, and Peter Dean is a Senior Research Fellow, at the Strategic & Defence Studies Centre, Australian National University.

There's much we can agree with in Ric Smith's discussion of funding Defence at 2% of GDP. He is right to say that there is no science behind the 2% figure and that it is no guarantee of security. As we have argued in some recent work on this subject, GDP 'hinders more than it assists the development of strategic policy and strategy. It is often misleading as a form of analysis, it will not make up for a strategic deficit and it will be almost impossible to achieve in practice'.

Unfortunately, while government outlay is a better measure in terms of accountability it still leaves the debate around funding and not strategy. Sir Arthur Tange said strategy without funding is not strategy. But equally, funding without strategy is still not strategy. What it can do is give a false sense of security through outsourcing strategic policy to a funding ratio and continuing the debate over money rather than strategy. As the recent Commission of Audit stated, 'the starting proposition for Defence funding should be to determine the defence capability required to successfully counter the various strategic risks Australia could face and then match this with appropriate funding to address the highest priority ones.' A rather blunt rejection of the Abbott Government's 2% pledge. 

Arguably, since the 1980s getting enough funding and efficiently using it has been the primary concern for those interested in Australian defence policy. With the changes in our region and questions over Australia's role in the future, this debate is not enough. The only thing the otherwise ahistorical 1938 comparison gets right is recognising that today is also a momentous period in Australian defence policy. To ensure our security we need a big debate over the ends of national policy — what we want to be able to do, where and how, and what that will cost — rather than simply whether we are doing enough to sustain current efforts.

The pledge to spend 2% of GDP emerged from pre-election rhetoric from both sides. Let's hope that now in office, the Abbott Government can put such claims aside and listen to the experts like Ric Smith on the need to seriously think through how Australia can achieve its security. Only once we have a real idea about whether the Government's strategy has any merit can we begin to focus on holding them to account for properly funding it.

COMMENTS

6 May 2014 16:01

Ric Smith, Andrew Carr and Peter Dean all present a compelling case as to why a 2% of GDP target for defence spending does not constitute a strategy. But this completely overlooks the target's purpose. The bipartisan 2% target is not for defence planning, it is for alliance management.

As Ric Smith points out, the 2% target is shared by NATO countries. This alone tells you that the figure is not 'arbitrary'; rather, it serves an important political purpose by demonstrating Australia's fidelity to, and independence within, the ANZUS alliance framework.

Even strong critics of ANZUS such as Malcolm Fraser acknowledge that Australia would need to spend significantly more on defence if we were to let the alliance go. It is universally recognised that our alliance with the US subsidises our own defence spending. The 2% target is aimed at reassuring Washington. It would be incredibly naïve if one were to suggest that the US is going to accept the continued atrophying of Australia's defence budget at no cost to ourselves. Certainly it would not be accepted over some notion that Australia's defence circumstances do not require it, because without the alliance, we would require it.

If Australia does not contribute financially to the alliance we will end up paying in other ways — through the increasing erosion of Australia's sovereignty. This includes expanding the American military presence on Australian soil, deepening our bilateral co-operation on ballistic missile defence, and an open financial commitment to failing American fighter projects.

Without adopting the minimum buy-in as a US ally (which is the NATO figure of 2% of GDP), either the alliance will erode (forcing a dramatic boost to Australia's defence spend anyway), or Australia will face reduced decision-making independence in the Asia Pacific and declining influence in Washington.

I whole-heartedly agree that Australia's defence planning must be based on sound methodology that seeks to maximise the strategic return on every dollar spent, but to suggest that the 2% of GDP defence target should be abandoned on that basis is to make a complete non sequitur.

Photo courtesy of the Defence Department.

COMMENTS

13 May 2014 08:00
By

 By Andrew Carr, a Research Fellow at the Strategic & Defence Studies Centre, ANU, and Peter Dean, a Senior Research Fellow at the Strategic & Defence Studies Centre, ANU.

Crispin Rovere claims that both we and Ric Smith have missed the point: the purpose of setting a 2% of GDP defence spending target is alliance management, not strategy. The problem is that not only is it not strategy, its aim was never alliance management either. 

As we outlined in detail in our Security Challenges article, the GDP pledge by the Coalition started out as an eye-catching comparison between Australia's defence budget in 2012 and 1938. It was in the atmosphere of the changing regional environment and Labor's cuts and delays to Australia's defence budget in 2012-13 that the 1938 comparison was identified, and it soon captured the public debate. Tony Abbott first made the 1938 comparison on 10 May 2012 in his budget reply speech. Over the next several months the Coalition's use of the 1938 comparison slowly morphed from a way of measuring defence in GDP terms in order to attack the Gillard Government to a benchmarking of funding against GDP.

It was on 7 February 2013 that Senator David Johnston first made the 2% pledge and he explicitly stated the Coalition's inspiration was the track record of the Howard Government. The first instance we could find of the Coalition linking 2% of GDP to the NATO alliance standard was on 29 August 2013 when Johnston noted it (practically incidentally) in a debate at ASPI. This is some six months after the Coalition first identified a 2% pledge and fifteen months after Tony Abbott first raised GDP as a point of political comparison for defence spending.

Labor also came around to supporting a 2% target during this period, but it was clearly acting in response to the Coalition's arguments. In the lead up to the 2013 election neither Stephen Smith nor Julia Gillard invoked 'reassuring Washington' as the cause of their new-found support for higher defence spending. Alliance management and '2% of GDP' is a happy by-product rather than the driving force for this decision. 

This is not to say that alliance politics did not play a role. [fold]

During the 2012-13 period a number of prominent US commentators — including Admiral Samuel Locklear (Commander of US Pacific Command), Richard Armitage and Senator John McCain — commented on the decrease in Australian defence spending under Labor, though only Locklear made the NATO comparison (and he got it wrong, claiming it was 2.5% of GDP). But such comments are not new, nor were they promoted in any deliberate way by the Obama Administration to Australia. It's not clear why the Coalition and ALP in early 2013 would suddenly find themselves swayed to spend vastly more on behalf of the US alliance when the Australian Government has kept the alliance strong despite not spending 2% of GDP on defence for almost two decades.

The US (and others) has long recognised that percentage of GDP is just as bad a measure for alliance commitments as it is for setting defence policy. Back in the mid-1990s, the US recognised how crude a measure GDP really is. The 1995 US report on Allied Contributions to the Common Defense noted that 'there is no single, universally accepted formula for calculating each nation's "fair share" of the responsibility for cooperative security', and that while GDP 'is seen as a key indicator of economic well-being...national contributions assume many forms, requiring different measures and analyses.’  

The eventual adoption of the GDP figure as a short-hand assessment of measuring the 'evaluation of fair shares' in NATO revealed that the vast majority of NATO countries don't meet the standard. In 2013 only the UK, US, Estonia and Greece hit the 2% mark; the other 22 countries did not. In the Asia Pacific only one US ally, South Korea (2.6%), spent more than the NATO GDP standard. Japan's defence spending is constitutionally linked to 1% of GDP. According to the Australian Department of Defence's Economic Trends in the Asia Pacific 2014, the Philippines spends only 1.1% GDP on defence and Thailand just 1.5%.

But as we noted in our article, the GDP variable is highly misleading as a form of historical and regional comparison. Japan's 1% provides for the second-largest defence budget in the region (fifth largest in the world), Australia's 1.6 % of GDP accounts for 8% of regional defence spending, while Singapore has to devote 3.7% of its GDP to make up just 3.1% of the total regional spend on defence. GDP also does not take into account differences in the efficiency of forces, specific capabilities, force posture and structure, or the threats on which each country's military forces are focused. 

In the end, if Crispin was right and the Coalition was using its 2% target as an alliance management tool, then it has been unwise. As Mark Thompson has noted, to get to 2% of GDP in the next decade would take real growth rates of 5.3% per annum in defence spending; and even more than that if rumours about today's budget are to believed. As Paul Dibb and Richard-Brabin Smith have noted, 'there is no precedent for such sustained growth except in wartime or acute international crisis, and even then not for such an extended period.' With the current 'budget emergency' and short of a major international crisis or war, chances are that the Abbott Government won't get to 2% of GDP. So if it was an alliance management tool, it looks like the Government has set itself up for failure.

Photo by Flickr user Todd.

COMMENTS

21 May 2014 16:54

It is good to see a widening of the debate on this issue, and Andrew Carr and Peter Dean have done a commendable job of covering the political history of the 2 % of GDP commitment as it has played out in the public debate. It is certainly true that the Coalition exploited Labor's inability to meet the funding pledges outlined in the 2009 Defence White Paper and the subsequent budget cuts made in Defence in pursuit of an elusive budget surplus.

The core policy recommendation made by Carr and Dean, however, is that since the bipartisan target of 2% of GDP is not based on defence planning, it should be abandoned. Even if we fully acknowledge the domestic political optics of the 2% target, this in no way detracts from the target's alliance management utility. The question then becomes: does having a 2% of GDP target undermine defence planning in Australia to such an extent that abandoning it is still justified, despite the cost to alliance integrity? 

Dean's answer appears to be that the US itself does not really care about proportion of GDP as an indicator of alliance contribution. This is hard to sustain given the many public criticisms made by high-ranking US military officers and politicians (cited by Carr and Dean themselves), which have been aimed squarely at Australia's level of defence spending, not Australia's defence planning. As Carr and Dean observe, few NATO allies are currently at the 2% target, and they too have been subject to stern rebukes by US officials, including former defense secretary Robert Gates, who labelled NATOs level of defence expenditure an exercise in 'collective military irrelevance'.  [fold]

Nonetheless, in the wake of Russia's annexation of Crimea, a number of NATO allies have pledged to arrest their defence budget decline, with countries such as Lithuania committing to raising defence spending up to 2% of GDP within five years. Lithuania is not doing this because its defence planning indicates that an $800 million defence budget equips them to resist a possible Russian invasion, but rather to demonstrate to the Americans that Lithuania is doing its bit for the alliance and should be protected. It would hardly make sense for the Lithuanians to double their defence spending if they believed that defence expenditure as a proportion of GDP had no impact on American decision-making.

Carr and Dean also point out that Japan, a close US ally, only spends 1% of GDP on defence for constitutional reasons. Japan has adopted a different alliance management approach: host an American superbase and 50,000 US troops, and be a strategic client of the US. This serves as one extreme example of what 'pay for the alliance in other ways' actually means, and I'm not at all certain that this model is what most Australians would like to pursue. 

It is accurate to say, as Carr and Dean do, that Australia's strategic circumstances are influenced far more by the absolute defence expenditure and overall economic trajectory of countries in our region than by defence spending as a proportion of GDP. For alliance management, however, the reverse is true. Australia having a 2% target helps the US to manage the very excuse implied by Carr and Dean when discussing NATO countries: 'other US allies aren't pulling their weight, so why should we?' The 2% target may not add much strategic weight for a small country like Lithuania, but it helps the US to pressure major players like Germany. 

While I do not believe that Carr and Dean have adequately made the case for abandoning the 2% target in light of the adverse costs to ANZUS, I must stress a unity ticket on the need for Australia's defence planning and capability development to be rooted firmly in a rigorous analysis of Australia's strategic circumstances. Indeed, I expect that a faithful application of Australia's defence planning principles would dictate a strategy requiring defence spending exceeding 2% of GDP, but that debate will no doubt be had as we move closer to yet another defence white paper.

Image courtesy of the Department of Foreign Affairs and Trade

COMMENTS