Unpacking the DSR dollars
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

Like all big policy statements, the public version of the Defence Strategic Review (DSR), released on 24 April this year, is a mix of the good, the bad and ugly. Of course, depending on your point of view, a piece of information (or its absence) could fall into any one of these categories. Here’s my take, with a particular focus on what really counts, namely the money behind it all.

First up, the total pot of money. The good news is that the pot isn’t decreasing from what was previously planned over the forward estimates, i.e., the current budget year and the subsequent three (on a pedantic note, the DSR doesn’t say whether it means the forward estimates starting in 2022-23 or 2023-24; we’ll assume the DSR means 2023-24 to 2026-27).

Deputy Prime Minister Richard Marles has said that Defence can do what it needs to do ‘over the course of the forward estimates within the current resources which are provided for Defence.’

Let’s assume those current resources are the funding line that the previous government left behind and which was confirmed by the current government in its October 2022 budget. Over the four years from 2023-24 that will be around $224 billion. Depending on GDP growth, that will average around 2.1% of GDP.

Of course, if you were hoping for an increase to the defence budget, this is bad news. Richard Marles acknowledged that beyond the forward estimates ‘defence spending will need to grow. A recommendation of the DSR is that we do need to see a growing defence budget, and it is absolutely our expectation that defence spending over the medium term, over the decade, will grow above the existing trajectory of growth that we inherited from the former government.’

But there’s no information in the DSR on what the reviewers think that growth should be, what the government expects it can provide, or when any additional funding will start.

So for now we can only assume Defence is still working towards a line of numbers first set out by the previous government in its 2016 Defence White Paper and then extended in its 2020 Defence Strategic Update. That means despite the talk of unprecedented strategic uncertainty, nothing has changed in Defence’s funding.

But now we get to the ugly—what exactly is going on within that funding envelop over the next four years? Again, the public DSR only gives us a high-level picture. The government has said the cost of the DSR over the forward estimates will be around $19 billion (let’s put aside another pedantic point that the entire $224 billion allocation over this time should be put toward implementing the DSR). From the government’s announcements we can identify around $16.9 billion in DSR-related measures in the forward estimates:

  • Nuclear-powered submarines: $9 billion
  • Long-range strike and the Guided Weapons and Explosive Ordnance enterprise: $4.1 billion
  • Strengthening northern bases: $3.8b
  • An indeterminate amount of innovation funding

The government has also said that it is ‘reprioritising’ $7.8 billion worth of programs to deliver the DSR recommendations, which suggests $11.2 billion, or more than half, of the DSR implementation was occurring anyway. It’s not clear what existing measures are counted in the $19 billion. For example there is already $1.2 billion of work occurring at RAAF Base Tindal in the Northern Territory and $568 million in runway upgrades occurring on Cocos Island.

But Defence still has to find $7.8 billion. That might sound easy when it is working with $224 billion. And we should acknowledge that Defence is already getting a lot of money; it should be able to deliver significant military capability for that.

One the problems with the existing investment plan is that it just wasn’t delivering in relevant timeframes; for example, over the 2020s, Defence is getting around $575 billion yet it was not getting a single new missile launcher to sea. The public has a right to expect governments and Defence to do better.

Nevertheless, the level of reprioritisation will force Defence to do some contortions that will make it very uncomfortable. First, according to the DSR, Defence’s acquisition budget was already overprogrammed by 24% across the forward estimates. That’s not surprising; Michael Shoebridge and I have been referring to Defence’s over-stuffed and exploding funding suitcase for some time.

A certain level of overprogramming is prudent, as some projects will always be delayed, but this is high, even by Defence’s standards. And that’s before Defence tries to implement any DSR recommendations.

Second, the government has said the SSNs enterprise will require $9 billion in the forward estimates, while the cancelled Attack-class submarine program would have required $6 billion in the same period. That sounds like a $3 billion gap, but we can’t be confident that the full $6 billion is still sitting in a pot in the basement of Russell Offices. It’s likely a lot of that has already been harvested for measures that have been announced in the past 18 months- like the $9.9 billion for the REDSPICE cyber spend), so the gap is probably even bigger.

And third, it’s not clear if $7.8 billion is the total amount required or just the starting point.

In its time-tested fashion, Defence has begun the process by killing off a bunch of rats and mice—a myriad of small facilities and ICT projects. But cancelling refreshes to barracks won’t deliver the offset dollars required (and it can only be regarded as mixed messaging and a questionable retention strategy when Defence says people are its most important asset but makes them work in facilities dating back to World War II).

Which brings us to the sacrificial elephants, namely the sharp reduction of infantry fighting vehicles from 450 to 129 and cancellation of the second tranche of self-propelled howitzers (a classic example of something that is good, bad and ugly, depending on your perspective).

Surely reducing the number of IFVs by nearly three-quarters will free up a big chunk of that program’s $18-27 billion budget? Overall, yes, but we would do well to remember that Defence is a business (admittedly a rather strange one), and cash flow is crucial for all businesses. When the dollars are required is just as important as the total number of dollars required. So, if the government still wants 129 IFVs on the same schedule as the first 129 of the previously conceived program, it will require the same amount of money in the forward estimates and won’t free anything up. And if it wants them faster, it will increase the short-term cash requirement.

Similarly, since the money for the second tranche of self-propelled howitzers wasn’t scheduled to start until after the forward estimates, its cancellation does nothing to contribute to the $7.8 billion needed before then.

And that gets us to one of the more curious elements of the public DSR.

After all the briefings and thinking over the months the reviewers were hard at work, the document is virtually silent on maritime capability, other than thinking out loud that the Navy needs a mix of ships that includes a larger number of smaller vessels and handballing the problem to a future review. But again, it’s not clear how this approach will free up money in the forward estimates unless the government cancels the Navy’s big ship project, the Hunter-class frigate that is heading toward spending $1 billion per year. Cutting the number of Hunters doesn’t help; reducing it from nine to, say, six ships will only start to free up cash in the late 2030s.

We’ll probably see a few more pieces of the puzzle next week when the budget is released, but don’t expect too much. The details of the budget were being prepared as the original, classified version of the DSR was being delivered to the government. It’s highly unlikely that Defence has developed a detailed implementation plan or investment plan, let allowed flowed that into the budget statements.

Still, it will be worth checking whether there have been changes to sustainment budgets or changes to individual projects’ cash flow. Those will be indications of the salami slicing that is occurring across the portfolio to fund DSR measures.

And a final example of the ugly. The DSR makes the truly strange claim that the previous government made $32.2 billion in spending announcements about establishing a guided weapons (GWEO) enterprise that were unfunded. This number defies credibility, particularly when the current government has criticised the previous government for not making any decisions about what weapons it would build here, or how many, or on what schedule. If an enterprise doesn’t have a scope or schedule, how can you say what its cost is, let along that it is underfunded by $32.2 billion?

Such claims do little to build confidence in the analysis underpinning the DSR.