The enduring structural distortion from the ADF’s shipbuilding plans

The Defence budget remains an exploding suitcase, now with no room for our Air Force.

Written by

Marcus Hellyer

The Australian government has given up on the idea of designing the Australian Defence Force to be a ‘balanced’ force. Rather, the ADF is to become a ‘focused’ force, ‘designed to address Australia’s most significant strategic risks’ through the ‘impactful projection of military power.’

But rather than a creating a force structure driven by strategy, what Defence’s plans are delivering now and well into the future is a budget-driven force structure dominated by a maritime force composed of large surface ships and nuclear submarines.  The structural effect of the massive and distorting budget demands of these platforms isn’t a temporary one just in this decade, but a new permanent feature of Australia’s defence landscape, with permanent—and quite negative—consequences that will become more obvious for capabilities outside the maritime domain this decade, over the 2030s and even beyond.

This is an entirely new situation for Defence that it may not fully understand itself and which its longstanding business processes for prioritisation and scheduling of investment will not be able to manage.

Over the coming decade 38% of Defence’s total investment program is going on maritime capabilities, more than Land (16%), Air (14%) and Cyber (7%) combined. Less than four years earlier, the 2020 Force Structure Plan dedicated only 28% of investment to maritime capabilities.

Certainly part of the planned maritime investment is driven by the need to compensate for the train wreck—or perhaps better said shipwreck—of the previous government’s shipbuilding plan, which has delivered nothing to date in return for around $10 billion in spending, pushing a huge bow wave of spending in the future in order to deliver the capabilities that this massive waste has so far failed to do.

But is the unbalanced spending in the 2024 IIP merely a short-term adjustment to make up for lost time, or is it the new normal, extending beyond the decade. And if it is, is it sustainable?

The first point to make is that 38% is very different. Warped even. We can illustrate this by looking at Australia’s shipbuilding expenditure as a percentage of the Navy’s budget, Defence’s acquisition budget and the total Defence budget. Without getting into a discussion about what constitutes shipbuilding, we’ll simply define it here as projects that are acquiring new ships—so no upgrades or overhaul activities.

The 2024-25 picture (and a comparison with the US)

Based on the 2024-24 Defence Portfolio Budget Statements, Australia’s estimated expenditure for 2024-25 on shipbuilding is about A$3.6 billion (these figures only cover the projects’ ‘military equipment’ component and don’t include infrastructure and other enablers):

  • SSNs: $2,223 million
  • Hunter-class frigates: $745 million
  • Arafura-class Offshore Patrol Vessels: $469 million
  • There are no numbers in the PBS for the Evolved Cape-class patrol boats and Guardian-class Pacific patrol boats, but combined they are probably around $150 million.

The Royal Australian Navy’s 2024-25 budget (taking the PBS’s Program 2.5 Navy Capabilities plus Program 2.16: Nuclear-power Submarines) is A$13.6 billion. So A$3.6 billion on shipbuilding is around 26.5% of the Navy’s budget.

Defence’s capability acquisition budget is $16,674 million, so shipbuilding is around 21.6% of that. The total Australian Defence budget is A$55.7 billion in 2024-25, so shipbuilding is around 6.5% of the total. We should note that no OPVs have been delivered yet and we are still a decade away from the first Hunter providing operational capability and a similar timeframe for the first SSN.

Whether you think those percentages are too big or too small, those are not ‘normal’ numbers compared to other militaries. By international standards, the Australian defence budget was very evenly divided across the services before the recent ‘re-focusing’. Most militaries don’t spend proportionally as much on their navies. But let’s take a military that is notorious for sharing the pie equally among its services: the United States.

The US Navy’s FY2024 budget is US$243.3 billion and its shipbuilding expenditure is US$32.8 billion. So shipbuilding is 13.5% of the US Navy’s budget. In essence the RAN is spending twice as much of its budget on shipbuilding as the USN.

The picture is similar at the departmental level. The total US Department of Defense’s FY2024 budget is $918.1 billion (including $58.3 billion supplemental funding). So shipbuilding is 3.6% of the US DoD’s budget. Even if we strip away the supplemental funding that largely went to Ukraine and Israel to get down $859.7 billion, it’s still only 3.8%. That may seem low in light of the attention shipbuilding attracts and the concerns that China is outbuilding the US and a higher number could be more strategically appropriate. Nevertheless, those percentages are consistent with shipbuilding’s share of the Navy and Department of Defense budget over the past 10 years. In short, the most powerful navy in the world is built on 3.8% of the total defence budget. And at 3.6 or 3.8% it’s significantly less that the current 6.5% share of the departmental budget here.

If we combine the US DoD’s procurement, Research, Development, Test and Evaluation, and military construction budgets into something resembling Australia’s acquisition budget the total is US$322.6 billion. So shipbuilding is around 10.2% of acquisition spending.

The comparison is summarised in Table 1 below.

Table 1: Shipbuilding as a percentage of defence spending, Australia and the USA

Shipbuilding as a % of…Navy’s budgetAcquisition budgetTotal budget
Australia 2024-2525.6%21.6%6.5%
Australia coming decade26-33%11-14%
USA FY 202413.5%10.2%3.8%

We should also note that Australia’s defence budget is predicted to be around 2% of GDP in 2024-25 while the US’s is around 3%. So we are spending on shipbuilding a much higher percentage of a budget that is a much lower percentage of GDP.

The decade picture

But Australia’s 2024-25 budget is not representative of the coming decade—shipbuilding and its call on the Australian defence budget is just ramping up here, so that 6.5% is going to grow significantly.

The new Integrated Investment Program gives the picture over the financial decade to 2033-34. Shipbuilding is listed at $85.2-108.7 billion consisting of:

  • SSNs and infrastructure: $53-63 billion
  • Hunter-class frigates: $22-32 billion
  • General purpose frigates: $7.0-10 billion
  • Arafura-class OPV: $3.2 -3.7 billion

There’s some infrastructure and probably some operating costs in there, but we’re not including $7.0-10.0 billion in landing craft since the IIP doesn’t classify them as maritime capability. This also doesn’t include $6.5-8.5 billion in Hobart-class destroyer upgrades or the Collins-class submarine life of type extension ($4.0-5.0 billion) as we are only including new acquisitions, not upgrades. Overall, the $85.2-108.7 billion is a reasonable figure for us to use for ‘shipbuilding’.

Defence’s total acquisition budget as $330 billion, so shipbuilding will be 26%-33% of that. And according to the National Defence Strategy, the total Defence budget will be A$765 billion over the decade, so shipbuilding will be 11%-14% of the total Defence budget. That’s around twice as much as 2024-25’s 6.5%. And we’ll be spending over three to four times as much, percentage wise, as the US’ 3.6-3.8%. Unfortunately we don’t have a figure for the Navy’s budget over the decade.

One might argue that the US DoD has to acquire and sustain a much broader range of capabilities than its Australian counterpart, such as its nuclear deterrent and bombers. However, the US spends around 3% of GDP on defense compared to Australia’s 2%, so that extra percentage point covers a lot of the broader force. We are never going to be able to do a completely consistent apples to apples comparison, but however you look at it, 11-14% compared to 3.8% shows a fundamentally different set of priorities.

Is this forever or are we just making up for a lost decade?

The key question is whether 11-14% is a decade-long blip while we get shipbuilding back on track and save the Navy from oblivion or shipbuilding’s share of the budget for the long term. On the evidence we have, it looks much more like the latter.

Defence has had projects in the past that consumed a very large percentage of its acquisition budget. The original ‘classic’ Hornets alone hit 45% of Defence’s acquisition budget in 1984-85. And shipbuilding hit 52% of the acquisition budget in 1992-93 when the Anzac-class frigate and Collins-class frigate programs were in full flight.

That might suggest that shipbuilding at 26-33% of the acquisition budget over the coming decade isn’t remarkable. But those earlier programs were fundamentally different. Unlike our current approach to shipbuilding, they weren’t continuous. The Hornet program was done and dusted in a few years. Shipbuilding grew to over 50% of the acquisition budget in the 1990s. But the frigates and submarines were delivered as fast as possible and both projects reached a one-year delivery drumbeat, so spending didn’t stay at that level because the projects wound down. Shipbuilding was under 10% of the total acquisition budget at other times.

Figure 1: F/A-18 and shipbuilding as a percentage of Defence acquisition spend

Continuous shipbuilding in the Australian context won’t be like that. First, we aren’t getting the first Virginia-class SSN until 2032, towards the end of this financial decade, all going well. At that point, construction of SSN-AUKUS will have only just started. Delivery of the first SSN-AUKUS won’t occur until the end of the second decade around 2042 but we’ll be spending on it throughout the 2030s. But we won’t deliver SSNs as fast as Collins; a three-year drumbeat is more likely (and consistent with the United Kingdom’s record). So to reach a fleet of eight boats, the SSN program will be building AUKUS-SSNs into the 2050s—the third decade. Moreover, once the fleet hits eight boats in the early 2050s, it will be time to seamlessly replace the initial three Virginia class boats with more AUKUS-SSNs. So the build—and the spend—will continue.

With surface combatants, the first Hunter will enter service towards the end of the first decade. But there will be a need to set the drumbeat to stretch out the build process so that the end of production aligns with the schedule to replace the initial vessel to avoid inconvenient valleys of death. So Hunters will be delivered on a two-year drumbeat, throughout the second decade. The build of six Hunters will be followed seamlessly by three vessels to replace the Hobart destroyers, at which point we will need to flow into the seamless production of replacements for the Hunter. So the spend will stay at a similar level for at least three decades under the current plan. Of course, it may be possible to build those ships faster—if rapidly delivery becomes a higher priority than continuous build cycles—but that will of course require even more cash flow, pushing the shipbuilding spend even higher.

The spend on the GPFs will also stretch well beyond the coming financial decade with their delivery likely lasting until the end of the second decade if we can get close to Government’s desired one-year delivery drumbeat. So again, there’s no cash flow relief any time soon.

To summarise, when we look at Defence’s plans, it looks like a very high (even distorted) spend on shipbuilding is built into its acquisition plans well beyond the coming decade and probably well into the second and third decade. It’s the new normal.

It’s ‘forever’ so what’s the force structure impact?

The question is, what impact will that have on the broader force structure? To enable that planned shipbuilding spend over the decade, the Government has made a number of key decisions capability ‘trade offs’. For example, the Air Force is acquiring no new aircraft this decade beyond those already on order. Defence has also given up planned ballistic-missile defence and medium-range air defence systems. Two multi-role replenishment and logistics ships are also gone. That’s just part of a long list of ‘reprioritisations’.

It’s hard to see how decisions such as these are moving the ADF away from a balanced force that tried to do everything to a force focused on impactful projection as part of a strategy of denial: air power is fundamental to projecting force; air defence is fundamental to protecting the forces you project and the bases they project from; and logistics ships are essential to sustain projected forces. And does anyone seriously think small frigates that can barely protect themselves provide ‘impactful projection’ in any meaningful sense?

Since the IIP only gives a single-decade picture, it’s possible that these capabilities and the hundreds of other adjustments that have been made to the IIP have been moved into the second decade rather than cancelled outright. But as we’ve just seen, the distorted spend caused by our shipbuilding ambitions continues into the second and third decades.

Moreover we haven’t even discussed the vastly increased operating cost of the future fleet—you only need to consider it will be 80,000 tonnes of submarine compared to the current 20,000 and 3,000 submariners compared to 800, and a frigate fleet that’s four times the tonnage of the Anzacs with over six times the number of missile cells to get a sense of the continuing distorting cost drivers of our planned maritime capabilities. The pressure isn’t going to let up.

So where will budget space open up to replace retiring capabilities let alone acquire new ones? As existing capabilities reach their life of type, the list of things jostling for space in the shrunken budgetary space left over from shipbuilding will expand. The exploding suitcase of mismatched capability ambition and available funding that the Defence Strategic Review was meant to address has simply been extended for decades rather than resolved.

Several observers have suggested that the coming decade will be difficult for the ADF since important new capabilities such as ships and submarines won’t be delivered until the end of the decade. That’s true, but it may not be the best way to view the situation. Rather, under the current plan the ADF is looking increasingly like it will be a distorted force for the long term, not a focused one.

 As always there are only two options to address this: revise the acquisition plan so that it is achievable and affordable within the available funding or increase the Defence budget well beyond the Government’s planned spending. But since the Government has just finished a long sequence of reviews into force structure, it’s clearly landed where it wants to be. However, it’s hard to see how it’s done anything other than prolong Defence’s slow motion capability train wreck for another two decades.