The 2024-25 Defence budget: one project to rule them
Unpacking the Strategic Review dollars

$765 billion over ten years gets Australia a weaker military while the AUKUS subs and Hunter frigate spends ramp up.

Written by

Marcus Hellyer

The name of the project to deliver Australia’s nuclear-powered submarines (SSNs) is now public: DEF 1. It’s an appropriate moniker for the one program destined to rule all of Defence.

With the Defence portfolio budget statements (PBS) coming only a few weeks after the release of the National Defence Strategy and new Integrated Investment Plan, we already knew the broad outlines of Defence’s spending plan, but the PBS does provide detail around the SSNs’ march to domination.

The budget papers also confirm the highly aspirational assumption for the new investment plan: that Defence can get on the path to rapidly grow capital investment’s share of the total portfolio budget to 42%. That’s an even higher share than the 39% Defence had planned to achieve in the 2016 White Paper but has come nowhere near in the eight years since. Plans based on bad assumptions usually don’t work.

How much money is it?

But first things first. The consolidated Defence budget (that is, including the Department of Defence, the Australian Signals Directorate and the Australian Submarine Agency) in 2024-25 is estimated to be $55,687 million. The easiest place to find that number is Table 4a on page 16 of the PBS, which also provides a breakdown among those three agencies. The key features of that number are as follows:

  • It’s an increase of $2,356 million (4.4%) in nominal terms over the 2023-24 budget, but only $889 million (1.6%) in real terms. That means this year Defence is only just keeping its nose ahead of inflation.
  • It’s a smidge over 2% of GDP at 2.02%, based on the Government’s estimates for GDP. The 2023-24 Defence budget is estimated to come in a smidge under at 1.99% (Editor’s note: ‘smidge’, like ‘widget’, is a technical economist’s term used here by Dr Hellyer).
  • The Defence budget has now hovered a smidge either side of 2% of GDP since 2019-20 and based on this budget’s numbers it is not going to significantly move past 2% (to 2.12%) until 2027-28.
  • It’s consistent with the figure for 2024-25 in the 10-year funding line set out in the NDS (page 67) of $55.5 billion. The slight discrepancy is likely due to the adjustments in the budget for operations ($172.7m more) and foreign exchange ($35.6m less).

The bottom line is $55.7 billion is a significant amount of money and the Australian public should expect a first-rate defence force in return for that investment.

Where’s the new money and what’s it for?

With the release of the NDS and IIP, the Government announced that there would be $5.7 billion in new money over the forward estimates (the budget year and the following three years) and $50.3 billion over the financial decade. Many commentators have noted the vast bulk of this funding sat outside the forward estimates in the last six years of the decade. From the PBS we can see that it’s even worse that that: $3.8 billion of the $5.7 billion sits in 2027-28, the final year of the forward estimates – at least one and maybe two elections away. That means there’s only $1.9 billion of new money in the next three years. It’s one of the glaring discrepancies between the Government’s stated assessment of the need for urgency in light of our rapidly declining strategic environment and its funding model—it’s only increasing the funding line it inherited from the previous government by around 1% over the next three years.

Last year’s budget referred to a $30.5 billion ‘contingency reserve’ in the decade beyond the forward estimates that could be made available to Defence. That was largely to cover the gap between the funding held for the cancelled Attack-class submarine project and the SSN enterprise. This reserve has now been released and is part of Defence’s funding line (which one can find in the NDS, page 67). Significantly, it also includes $7.7 billion in on-going annual funding from the end of the decade, starting in 2033-24.

SAA previously assessed that virtually all of the new money would be consumed by SSNs and the recently announced general purpose frigate program. Defence officials have now provided us with a breakdown of the new funding.

The $5.7 billion over the forward estimates consists of:

  • the first $3 billion of the now released contingency reserve to cover the SSNs funding gap;
  • $1.7 billion previously announced by the Government to cover the general purpose frigates; and
  • $1.0 billion announced in the NDS to cover the acceleration of capabilities such as autonomous systems and strike weapons.

The $50.3 billion over the decade consists of (this includes the forward estimates numbers above:

  • $38.2 billion of the released contingency reserve (the initial $30.5 billion plus the first year of the on-going $7.7 billion—this covers the SSN funding gap;
  • $11.1 billion previously announced by the Government to cover the general purpose frigates; and
  • the $1 billion listed above to accelerate delivery.

It’s a good thing that the Government has now provided the funding for the SSN gap and the new frigates, but there’s only $1 billion across the decade for anything else.

We should also note that with all the new money being consumed by SSNs and frigates, there’s nothing to compensate Defence for the high rates of inflation over the past three years that have meant Defence has lost around 8% of its buying power. Defence would need an additional $4 billion per year on going to make up that lost ground.

The rise of the SSNs—finding the numbers

The IIP stated that the cost of the SSNs would be $53-63 billion over the decade. The budget statements let us see the cost over the forward estimates. However, finding the cost of the SSN program in them is not completely straightforward, but Defence officials assisted SAA in unpacking the numbers.

Essentially Program 2.16: Nuclear-Powered Submarines in the PBS provides the cost of the submarines (Table 37 on page 92). The Australian Submarine Agency is responsible for delivering the SSNs and spending the money in Program 2.16. The funding required to run the ASA, though, is in a separate section of the PBS (Table 1 of ASA’s budget statements on page 186). We need to combine these figures to get the total cost over the forward estimates. We can see from Table 1 below that those figures sum to $13.5 billion over the forward estimates’ 4 years.

Table 1: Planned expenditure on SSN program 2024-25 to 2027-28 (A$m)

 2024-252025-262026-272027-28FE total
Program 2.162,8072,7531,2494,975811,785
Total 3,1903,1841,7775,35313,504

Source: Defence PBS

There is no individual line for ‘industrial uplift’ payments, i.e., the funds that Australia is providing to the United States and United Kingdom to expand their submarine production capacity to be able to provide submarines to Australia. That is contained within the $8.3 billion operating expenses line in Program 2.16—part of the $11,785 in Table 1 above. Based on the numbers the Government has announced for those transfers, they are likely to make up most of that $8.3 billion. Interestingly, because the funds provided to the US and UK don’t provide us with a capital asset, under accounting standards they can’t be ‘capitalised’ and have to be treated as operating expenses. You can’t reposess and sell a second-hand industrial uplift payment.

The other place where we can get a number for the cost of the SSN program is from the Top 30 military equipment acquisition projects table (Table 54 with Project DEF 1 on page 127). Planned expenditure for 2024-25 is $2,223 million for the project’s military equipment and $368 million for other inputs to capability (e.g., facilities, science and technology support, etc)—by far the biggest project in the Defence portfolio. The only other time in history a Defence project has passed $2 billion in annual spend for military equipment were the two peak years of F-35A aircraft delivery and it took that project over a decade to ramp up to that. DEF 1 has shot up to there with a bullet.

The rise of the SSNs—the changing balance

The recent IIP provided the broad outlines of the changing balance of investment in Defence capabilities, with a massive swing towards Maritime capabilities. For example, Maritime capabilities now make up 38% of the investment program, more than Land (16%), Air (14%) and Cyber (7%) combined. SAA has discussed the big picture as well as the impact on other capabilities. The PBS provides us with more detail to understand that changing balance.

We can, for example, compare the funding of the Navy (Program 2.5, page 63), Army (Program 2.6, page 67) and Air Force (Program 2.7, page 70) and in particular their capital expenditure. But to get a full picture of the investment in the Navy’s capabilities, we need to add in Program 2.16: Nuclear-powered submarines. Accountants might have to look away for a moment since they don’t regard Program 2.16’s total budget as capital as it also includes operating expenses. But since a big chunk of Program 2.16’s operating expenses are industrial uplift payments to the US and UK to help us acquire SSNs, the non-accountants among us can regard them as part of the broader acquisition budget.

Table 2: Capital expenditure by service, 2024-25 to 2027-28 (A$m)

 2024-252025-262026-272027-28FE Total
Air Force2,5302,6353,1563,17511,496
Program 2.16 (SSNs)2,8072,7531,2494,97511,785
Navy + Program 2.166,9997,2726,46810,15330,892

Source: Defence PBS

This confirms the breakdown presented in the IIP. Essentially the Navy with the SSN program rivals the Army and Air Force’s investment budgets combined. And that essentially starts from now; it’s not something happening at the back end of the decade when the first Virginia-class SSN is handed over by the US Navy.

The other quite remarkable thing is how dramatically the Air Force’s acquisition budget has fallen. It peaked at $4,635 million in 2020-21 but falls to $2,530 million this year and remains well behind the other two services for the rest of the forward estimates (we don’t have data beyond that). In part that’s because Air Force is completing the recapitalisation of many of its fleets. But it’s also because it’s not getting any new aircraft this decade beyond those already on order and its toe dip into the water on autonomy looks like Boeing’s Ghost Bat and not much else.

That said, it’s not all going to Maritime capabilities. Back in 2019-20, the Army’s capital spend was on $2,629 million. It’s up to $4,166 million this year and passes $5 billion in the last two years of the forward estimates. That’s driven by armoured vehicles, helicopters and long-range fires (see Table 54 for this year’s planned spend). While there have been many complaints about the reduction in the Army’s planned infantry fighting vehicle fleet (from 450 to 129), the Army is still undergoing a significant recapitalisation.

Unresolved problems—spending the acquisition budget

The NDS documentation stated that Defence aims to raise acquisition spending to 42% of its budget by the end of the financial decade. That’s a problem since it has been aspiring to hit 39% or 40% since the 2016 Defence White Paper but has been stuck at around 29-31% since that White Paper, which is eight years ago now. The PBS confirms that this is still the case in 2023-24 and 2024-25. Defence simply has not spent its planned acquisition budgets. Since the White Paper Defence has underspent on acquisition by around $25 billion. And it seems to be getting worse—2022-23 missed by around $5.1 billion and 2023-24 by $4.8 billion (it differs a little depending on which ‘original’ target you measure against). PBS 2024-25’s target of $16,674 million represents a shortfall of $3.5 billion.

Figure 1: The Big 3—Defence spending by major cost category, 2010-11 to 2027-28

Source: Defence PBS and annual reports

Despite that the PBS plans a rapid ramp up, both in dollar terms and as a share of the portfolio budget, hitting $23,028 million and 35.1% respectively by the end of the forward estimates. Certainly history doesn’t determine the future, but based on Defence’s historical performance, one should be sceptical. Of course, signing cheques to the US and UK is one way to easily boost acquisition spending, so some hefty industrial uplift payments could help Defence hit its numbers.

The flip side of Defence underspending on its acquisition budget is that it has significantly overspent against its sustainment budgets. Over the decade since the White Paper, it’s overspent by $19.3 billion compared to its White Paper target. If we set the ‘original target’ as the first time a year enters the PBS’ forward estimates it’s not as bad but still $9.9 billion.  That’s partly because if acquisition is slow, you end up operating older systems at higher cost for longer.

It’s hard to see Defence hitting its extremely ambitious acquisition numbers without constraining its sustainment costs, something it hasn’t been able to do yet.

Unresolved problems—stagnant workforce growth, growing workforce costs

It’s no secret that Defence hasn’t been able to get anywhere close to achieving its ADF workforce growth targets. Based on the numbers in the PBS, it’s only grown by 181 people in the eight years since the 2016 White People and still needs around another 20,000 to operate the planned capabilities in the IIP. It’s short of its 2024-25 target by 5,355. 181 in eight years is bad when the ADF is meant to have grown by 1,000 a year on average.

However despite the lack of workforce growth, Defence has consistently overspent on workforce, by between $3.9 and $6.6 billion depending on the target you use. Again, this is not a situation that is improving. In 2023-24, Defence overspent its workforce budget by $919.5 million. Overall workforce costs grew by $1,470 million (10.3%) in 2023-24 even though ADF numbers went backwards by 400 (although APS numbers grew by around 1,500). According to Defence, the cost growth is driven by inflationary pressures including salaries, housing and healthcare.

As with sustainment cost increases, it’s hard to see Defence hitting its acquisition spend against the run of play with personnel expenses growing both faster than inflation and faster than it has planned for. That problem compounds if magic happens and the ADF does grow rapidly, as the per capita workforce cost is also growing.

Over the coming weeks we’ll explore various aspects of the IIP and PBS and delve into some more detail around specific programs and projects.

Dr Marcus Hellyer is Head of Research at Strategic Analysis Australia.