Unpacking the numbers in Defence’s new Integrated Investment Plan

Richard Marles with Defence's investment plan and 'National Defence Strategy'. Image: Defence.

Written by

Marcus Hellyer

On Wednesday 23 April, the Albanese Government released its National Defence Strategy (NDS) and Integrated Investment Program (IIP). The NDS was foreshadowed in the Defence Strategic Review (DSR) and is meant to appear every two years, replacing Defence White Papers. The IIP is the first public version of Defence’s acquisition program to be released in nearly four years. The IIP is intended to set out the force structure that embodies the review’s recommendations that were accepted by the Government.

Between the two documents there are a lot of numbers. We’ll try to unpack them here.

The Bottom Line Up Front

For the time poor, here are the key points, which are explored in more detail in the body of this report.

  • The additional Defence funding announced by the Government ($5.7 billion over the forward estimates, i.e., the next four years, and $50.3 billion over the decade) will be consumed entirely by the nuclear-powered submarine program, the general purpose frigate project and exchange rate compensation. There is no new money for anything else.
  • The growth in funding over the forward estimates is not unusually large by historical standards.
  • The new IIP repeats the failure of previous investment programs, hoping to raise acquisition spending to a wildly implausible 42% share of the total Defence budget. Defence has been trying to reach 40% since the 2016 Defence White Paper but never passed 31%.
  • Put another way, delivering the program requires massive, continual increases in acquisition spending. Defence is unlikely to spend this money since it has underachieved against its acquisition budget by $22.5 billion since the 2016 White Paper.
  • The budget contains no compensation for the loss of buying power caused by three years of extremely high inflation.
  • Consequently the new program only addresses the ‘exploding suitcase’ of the capability program by removing large, previously planned capabilities (either completely or moving them beyond the decade). Little to no explanation is provided for these decisions.
  • The IIP doesn’t address ADF’s fundamental people program, namely that it needs to grow by 20,000 but has achieved virtually no growth over the past eight years.
  • Planned spending on the Maritime domain has grown from 28% to 38% of the investment budget. That’s more than Land (15%), Air (14%) and Cyber (7%) combined.
  • No explanation is provided for why this distorted balance of investment provides better support of the new ‘Strategy of Denial’ than any other mix other than statements that this results in a ‘focused force’.
  • That 38% investment in Maritime capabilities represents $114-145 billion over the decade. However, $75-95 billion of that (65%) is programmed just for two capabilities: nuclear-powered submarines and Hunter-class frigates. Since the first of class of those fleets will only enter service at the end of the decade, two-thirds of the Maritime program’s spending (and 25% of all acquisition spending) provides virtually no sovereign capability over the decade.

How much money is there?

The NDS contains a 10-year funding line, following on from the precedent set by the previous Government in its 2016 Defence White Paper and continued in its 2020 Defence Strategic Update. This is a good thing as it gets actual numbers down on paper and is far more valuable than a commitment to a certain percentage of GDP, since predictions of GDP can fluctuate dramatically, resulting in corresponding fluctuations to the Defence funding line. So a line of numbers set out in black and white (on page 67 of the NDS) is to be commended.

This line covers the Department of Defence, the Australian Signals Directorate and the Australian Submarine Agency. For those interested in such things, this is the number that determines defence spending as a percentage of GDP.

The funding starts at $55.5 billion in 2024-25 and grows to $100.4 billion by the end of the financial decade in 2033-34. From where we are now in 2023-24 at a $53.4 billion annual defence budget (Table 8b of the 2023-24 Portfolio Additional Estimates Statements) that’s a very considerable increase of 88.0% in nominal terms (i.e., not taking inflation into account). Calculating the growth in real terms requires making predictions about inflation, which is of course a fraught activity, but if we assume a return to a more normal annual rate 2.5% over the decade, there will be real growth of around 46.5%.

In comparison, relative growth over the preceding decade has actually been greater at 104.2% in nominal terms and 56.9% in real terms. So even though the growth over the coming decade will be considerable in nominal and real terms, in relative terms it’s less than the preceding decade.

Can we see the additional funding?

The Government has stated that there is an additional $5.7 billion in the forward estimates (2024-25 to 2027-28) and $50.3 billion over the decade. We should note that this is additional funding beyond the growth that was already built into the previous Government’s 2016 DWP and 2020 DSU funding models that the current Government took adopted in its first two budgets. Put another way, it’s growth on top of growth.

Because the public version previous funding model only went to 2029-30 and the new one in the NDS goes out to 2033-34, we can’t compare the outer years directly. But if we assume the previous funding model continued to grow beyond 2029-30 at around 5.3% per year then the increase in the new model is very close to $50.3 billion over the decade.

Table 1: Defence portfolio funding over the decade 2024-2025 to 2033-34 (A$B)

PBS 2023-2454.456.859.864.669.673.777.681.786.190.6714.9
NDS 202455.558.461.267.974.879.184.288.395.6100.4765.4
Note: PBS 2023-24 line assumes the 2020 DSU funding model continues to grow past 2029-30 at rate of 5.3% p.a. Its years from 2024-25 to 2026-27 are from the PBS 2023-34. Its years from 2027-28 to 2029-30 are from the 2020 DSU.

The difference is actually greater than $5.7 billion in the four years of the forward estimates and sums to $7.4 billion. That is likely because there is around $1-2 billion in foreign exchange supplementation in 2027-28 that we don’t have visibility of. If we add that into the previous funding model, then a difference of $5.7 billion looks about right.

Where is the additional funding?

As numerous commentators have already stated, very little of the additional funding is in the forward estimates (11.3%) meaning the remaining 88.7% sits in the outer six years. The spending is not front-loaded by any means. Commentators have also noted that this is inconsistent with the Defence Strategic Review and NDS’s assessment of the accelerating deterioration of our strategic circumstances and the need for urgent increases to capability.

Compared to the previous funding model, an increase of $5.7 billion over the forward estimates represents a total increase of 2.4% or a little over half a percent per year on average.

Is this the largest increase over the forward estimates ever?

The Government has claimed that the increase over the forward estimates is the largest ever. Since $5.7 billion is not a large forward estimates increase at all, we assume the Government is referring to the combined increase (i.e., the growth already built into the existing funding model plus the $5.7 billion).

Nevertheless, what the Government is claiming is actually not unusual. Since the defence budget has increased in nominal terms every year except two in the last 25 years, one would expect most years’ forward estimates to represent the largest increase on record—that’s just the nature of a budget line that is continually growing. In absolute terms (i.e., total dollar increase) 2024-25’s forward estimates increase is indeed the largest on record. But five of the previous 10 years also wore that crown until they were overtaken a year or two later. And in relative terms (i.e., percentage increase) six of the last 10 years’ forward estimates are greater than 2024-25’s forward estimates.

When we look at real dollars (i.e., adjusted for inflation), three of the previous 10 years’ forward estimates increases were larger in absolute terms than 2024-25 and five of the previous 10 in relative terms. In short, it’s not a particularly significant claim.

Will this funding line reach 2.4% of GDP?

The Government has claimed that the NDS funding line will reach 2.4% of GDP. Whether that will be the case depends entirely on the rate of growth of GDP, so we can model very different outcomes based on different growth forecasts. If GDP grows at a nominal rate of 5.3% per year over the decade, a rate that is broadly consistent with growth in recent decades, then reaching 2.4% of GDP is credible.

We would note that defence spending as a percentage of GDP can fluctuate significantly in times of economic crisis. For example, in the 2018-19 budget the funding for 2022-23 was predicted to be 2.19%. Over the subsequent five years, the amount of funding for 2022-23 essentially didn’t change, but the percentage of GDP it represented varied significantly. When the Covid-19 economic crisis hit, the percentage soared to 2.35%. Then as GDP rapidly recovered (driven in large part by inflation), the percentage rapidly fell. In actual terms it ended up being 1.94%.

That’s why I prefer a string of numbers set down in black and white over a commitment to a certain percentage of GDP.

What is the effect of inflation on the defence budget?

Overall inflation has had a cumulative impact of 15.8% over the past three years. Fortunately the rate of inflation has moderated since its post-pandemic peak of 7.8% in late 2022 and 2023. However it is still above the Reserve Bank of Australia’s target range of 2-3%. And that target range is what was built into 2016 White Paper funding model, i.e., that funding model included an allowance of around 2.5% for inflation. Therefore, any year of inflation over 2.5% means that funding that was meant to acquire and support capability is simply being consumed by loss of buying power.

So cumulatively over the past three years Defence has lost around 8% of its buying power. The insidious nature of inflation is that the loss of buying power continues on into the future (or until we have significant deflation). Defence receives automatic compensation for fluctuations in exchange rates, but not for inflation so it’s starting the decade in a big hole. Based on its $52+billion annual budget Defence would need to receive an additional $4 billion per year to catch up. That’s more $15 billion over the forward estimates and $40 billion over the decade.

But as we’ll see, the increases over the forward estimates and decade really only cover the cost of SSNs and General Purpose Frigates—there’s nothing there to address the on-going effects of inflation. That means in rebuilding the IIP, Defence has had to remove planned capabilities just to keep its head above water.

What’s the additional funding being spent on?

There is $50.7 billion in new funding over the decade. While a number of projects and capabilities have moved in and out of the new IIP, we can relatively easily account for where the additional funding is going just through two programs.

The first is the SSN enterprise. When the Government released its ‘optimal pathway’ for nuclear-powered submarines in February last year, it said that the SSN pathway would cost $9 billion over the forward estimates. The funding freed up by the cancelled Attack class program was $7 billion, leaving a gap of $2 billion. Over the decade, the gap was $34 billion (a number confirmed in Defence October 2023 Senate estimates brief).

However, those numbers referred to the forward estimates and decade starting in 2023-24. We’ve now moved forward a year. And since the gap between the two submarine programs will grow as the SSN enterprise ramps up over time (because the SSN program is much larger than Attack), the gap is likely now bigger than $2 billion in the forward estimates. With payments each of over $4 billion due to be made to the US and UK to help develop their submarine industrial bases, the forward estimates gap could now easily be over $4 billion.

Similarly, the $34 billion gap over the decade will have grown. In fact the annual gap alone by the end of the decade could be in the order of $6-8 billion meaning the total gap over the decade is close $40 billion.

The second is the General Purpose Frigate project. When the Government released Enhanced Lethality Surface Combatant Fleet—An Independent Analysis of the Navy’s Surface Fleet (more commonly known as the surface fleet review) in February, it said it would provide an additional $1.7 billion over the forward estimates and $11.1 billion over the decade to fund the acquisition of the ‘enhanced lethality surface fleet’. According to the IIP $7-10 billion of that is for the GPF.

When we add these two projects’ funding requirements together, we get a number very close to $5.7 billion in the forward estimates and potentially something close $50 billion over the decade.

The rest of the difference is likely to be made up of foreign exchange compensation at the back end of the decade, which is likely to be in the order of $1-2 billion per year.

To its credit, the Government has added the funding for these programs to Defence’s funding line (the previous Government lost power before the nuclear submarine taskforce completed its 18-month investigation of the way forward, so it didn’t add the funding needed for the SSNs). Without that being done, the Defence budget would be completely broken.

Nevertheless, there’s no new money for any other capabilities in the investment program.

Does the new IIP resolve the exploding suitcase?

Michael Shoebridge wrote that the authors of the Defence Strategic Review would be confronted with an exploding suitcase when they considered Defence’s investment program. That’s because of an expanding range of pressures including:

  • The IIP included a large number of entirely new capabilities for which there were no existing funding and workforce offset.
  • Planned replacement capabilities brought significant size and capability enhancements to existing fleets that came with corresponding acquisition and operating costs.
  • The additional cost of SSNs beyond the cost of the cancelled Attack-class program.
  • The well-known phenomenon of Defence’s initial cost estimates when capabilities first entered the capability program turning out to be significantly less than the final approved budget.
  • Inflation.

This assessment was confirmed by the DSR which noted the high level of overprogramming in the IIP.

The Government has stated that it has addressed overprogramming in the IIP. However, as discussed the new NDS only provides funding for one of these pressures, namely the SSN enterprise. So if the Government hasn’t made the suitcase bigger, it must have removed things from inside it.

Deputy Prime Minister Richard Marles has stated that there has been $22.5 billion in reprioritisation over the forward estimates and $72.8 billion over the decade. It difficult to say with precision what has been delayed, shrunk or cancelled. We should also note that reprioritisation could include adding things to the IIP and it’s not clear if the SSNs and GPS count as ‘reprioritisation’. The IIP is presented at a high level with little granularity such as project names, numbers, scope, budgets and schedules, i.e., the baseline information you need in order to understand what is going on. Moreover, each time the Government releases a public version of the investment program, the formatting is different making comparisons across time difficult.

Nevertheless, a partial list of changes provided by the Government to journalists included the following major muscle movements:

  • Reduction of Infantry Fighting Vehicles from 450 to 129 vehicles (announced as part of the DSR).
  • Removal of maritime mine countermeasure and military hydrography.
  • Removal of a fourth squadron of F-35As.
  • Removal of two Joint Support Ships that would support logistics and replenishment at sea.

The list also included deferral of replacement of major platforms such as the C-17A Globemaster heavy lift aircraft and the EA-18G Growler electronic attack aircraft.

We can also surmise from the IIP itself other key changes such as:

  • Removal of ballistic missile defence.
  • Removal of medium-range ground-based air defence.

It’s not possible to tell from the public information whether those adjustments have reduced the pressure on the exploding suitcase to make it affordable. What we can say with some certainty is that the program is still unachievable.

Is the investment program achievable?

The short answer is no, because it requires Defence to achieve a balance between the three big spending categories of acquisition, workforce and operating cost (including sustainment) that it is highly unlikely to reach. Let’s review recent history because the 2024 program is by no means new and different in this regard; we’ve been here before.

The 2016 White Paper laid out an ambitious acquisition program over the coming decade accompanied by significant real increases in funding. However, to deliver that, Defence would have to raise acquisition’s share of the budget from around 30% to almost 40%. It aimed to hit 35% within five years and 39% by the end of the decade in 2025-26. To achieve that, operating spending was to stay steady around 34% while workforce, traditionally the biggest of the three, would need to fall dramatically from 37% to 26%.

But it’s difficult to increase acquisition spending to that level if you want to use your equipment. That takes people and sustainment spending. Not surprisingly, acquisition spending continued to hover around 30%. Personnel costs did fall, but one could argue that happened in large part by shifting personnel costs to the acquisition and sustainment lines by using contractors and service providers whose costs are covered by acquisition projects and sustainment budgets. That’s probably a key reason why sustainment has risen to 37-39% as workforce has fallen to around 30%,

Despite Defence’s inability to achieve the 2016 White Paper’s spending goals, the 2020 DSU set out an almost identical ramp up, aiming to get to 38% acquisition spending in five years and 40% by the end of the decade in 2029-30. The same result ensued; acquisition has stuck stubbornly at around 30-31% of the Defence budget.

Despite this record of underachievement, the new NDS and IIP actually increase the target that Defence has made virtually no progress towards achieving. Defence aims to reach 34.6% acquisition by the end of the forward estimates and then a wildly implausible 41.9% by the end of the decade. The flipside of that is somehow workforce spending is meant to fall to a mere 25.1% by the end of the decade, despite ADF workforce needing to grow by over 10,000 over the same period

The balance between the Big 3 is set out in Figure 1 below. The vertical line marks where we are today. One will note that the acquisition budget has hovered stubbornly around 29-31% since 2016.

There may not be cosmic rule that says a defence organisation can’t spend more than around one-third of its budget on acquisition, but the Australian Department of Defence hasn’t been able to move past that figure. Ultimately you buy equipment to use it, and using it costs money. And you need people to use it and they expect to be paid. So the more equipment you buy, the more you also need to spend on people and sustainment.

While we are not doomed to repeat history, it’s legitimate to ask why Defence thinks it can deliver a capability program that requires 42% acquisition spending when it has made virtually no progress towards similar targets over the past eight years.

Figure 1: Balance of the Big 3, 2016-17 to 2026-27

Can Defence pump the increased acquisition funding through the system?

We just noted that Defence has made no progress in increasing its percentage of acquisition spending. We can examine that issue in another way, namely in the absolute growth needed to achieve the acquisition program. Over the coming decade, to deliver the capability program set out in the IIP, Defence will need grow acquisition spending from $15.9 billion in 2023-24 to $42.1 billion in 2033-34. That’s an increase of 165%, far outstripping the overall growth in the Defence budget. The new NDS and IIP don’t provide figures for the year-on-year increases in the acquisition program, but they will need to be very large to sum to 165% over the decade.

Despite the somewhat hyperbolic claims of the Government about the uniqueness and novelty of the new program, we’ve also been here before with the 2016 WP and 2020 DSU. Annual acquisition spending was meant to increase 148% over the White Paper’s decade and 160% over the DSU’s decade. However, Defence has not managed to achieve those planned acquisition spending increases.

In fact, Defence has underachieved against the 2016 plan by around a massive $22.5 billion ($137.5 billion versus $160.5 billion) to date. Moreover, we can’t say that Defence’s performance is improving; last year alone it missed by $5.1 billion. This year is looking like missing by $4.7 billion, but that could still grow. Last year Defence’s performance was so bad, its acquisition spending actually went backwards for the first time since the previous Labor government was in power.

The bottom line is, if you are not spending the money, you are not getting the capability into service. Defence will not be able to spend the money, ergo….

It’s a mystery why the Secretary of Defence, who is accountable for the Defence Department’s budgets, puts up plans to the Government that are inherently unachievable.

We’ve moved on from a balanced force, haven’t we?

Yes, we certainly have. The IIP provides a convenient answer to this question in a pie chart on page 11, reproduced below. The table show investment divided up by domain.

Figure 2: Proportional investment for the decade 2024-24 by domain

Source: 2024 Integrated Investment Program, online.

It is a quite remarkable distribution. We are all of course aware of the massive spending that is planned for SSNs and frigates, but to see the proportions set out is quite confronting. The 38% of spending on Maritime is not only greater than either Land (16%) or Air (14%) alone, it’s greater than Land and Air combined—with Cyber (7%) thrown in for good measure. 38% spending on maritime capabilities far outstrips any precedent. We truly have moved well past a balanced force.

As a point of comparison, here’s the corresponding table from the 2016 IIP.

Figure 3: Balance of Investment over the decade to FY 2025-26

Source: 2016 Integrated Investment Program, online.

Maritime and Anti-Submarine War is only 25% (noting that there was also some maritime capability in Air and Sea Lift as well as Land Combat and Amphibious Warfare).

And here the corresponding table from the 2020 Force Structure Plan. There the Maritime domain was 28%, far short of the current 38%.

Figure 4: Proportional Capability Investment for the Decade 2020-2030

Source: 2020 Force Structure Plan, online.

What have we moved on to?

It’s clear we’ve moved on from a balanced force. But what have we moved on to? The NDS states that the ADF is now becoming a focused force. However, it’s not quite clear what it is focused on doing since the NDS states (page 7) that the ADF still needs the capacity to:

  • defend Australia and our immediate region;
  • deter through denial any potential adversary’s attempt to project power against Australia through our northern approaches;
  • protect Australia’s economic connection to our region and the world;
  • contribute with our partners to the collective security of the Indo-Pacific; and
  • contribute with our partners to the maintenance of the global rules-based order.

That pretty much covers every task in every part of the world which doesn’t sound very focused. The NDS also says that the ADF force structure is focused on deterrence and supporting a ‘Strategy of Denial’. It doesn’t really say who it is trying to deny or deter from doing what. One can assume it’s China, but from doing what exactly is not quite clear. Whatever it is, we seem to need significant maritime capabilities to deter China from doing it—but only at some point in the distant future.

We’ve noted that Maritime capabilities absorb an unprecedented 38% of the acquisition budget over the coming decade. Those are split into two main categories: Undersea warfare at $63-76 billion and Maritime capabilities for sea denial and localised sea control operations (when somebody comes up with as clunky a title as that, you know we are in the realm of deep conceptual confusion) at $51-69 billion. Those total to $114-145 billion with a mid-point at $129.5 billion.

However only two projects dominate that spending: the SSN enterprise at $53-63 billion and the Hunter-class frigate at $22-32 billion. Again those two figures sum to $75-95 billion with a mid-point at $85 billion. Two capabilities alone consume $85 billion (remember those figures are just the spend over the decade, not the total acquisition cost). That’s 65.6% of the Maritime spend. If we multiply 38% by 65.6% we can see that 25% of Defence’s acquisition spend over the decade goes on just two capabilities.

But it gets worse because those projects—all going well—will only have just started to deliver actual capability by the end of the decade. The first Hunter is due to be delivered in 2032 and enter service in 2034. The first SSN is scheduled to be handed over to the RAN around 2032—all going well in Defence’s most complex megaproject ever. And even then, one submarine or frigate does not a capability make.

In summary, we get virtually no in service, sovereign capability in return for 25% of Defence’s acquisition spend over the coming decade—and Defence has had to give up or defer a lot of planned capability to achieve that result. Whatever the balanced force is moving on to, it’s going to take a lot of time and money to get there with little medium-term return on that investment.

Does the new plan address Defence people problem?

Much ink has been spilled pointing out how badly Defence has missed its uniformed workforce growth targets. The 2016 White Paper put the ADF on a growth path that was reinforced by the 2020 DSU. Unfortunately, the ADF has not come close to achieving its targets.

Incidentally the NDS misrepresents this, stating that ‘between 2020‑21 and 2022‑23, ADF recruitment has achieved approximately 80 percent of its target growth, equating to a shortfall of over 4,400 ADF personnel.’ It might have achieved 80% of its target recruitment, but due to separations, it has achieved virtually no actual growth. Since the 2016 White Paper it has grown by only around 400—that’s less than 10% of its target growth, nowhere near 80%.

The NDS notes that the number of permanent ADF personnel was meant to grow to 80,000 by 2040. Considering it has grown by only 400 in the past eight years and has another 20,000 to go, one is entitled to feel some scepticism about Defence’s ability to get there. Unfortunately the NDS doesn’t offer much of a strategy to achieve that goal, beyond repeating the usual mix of measures that have been tried over the past decade.

If you can’t grow the workforce, the other solution is to shrink the future requirement. The NDS/IIP doesn’t say that has occurred, but if large programs with new workforce requirements have been cancelled (e.g., BMD, logistics ships, etc), then that may have resulted a reduced future requirement. On the other hand, new programs like SSNs and general purpose frigates have further increased the growth requirement.

The NDS/IIP doesn’t say what the new requirement is, but it does say Defence is developing a new workforce plan. Stay tuned.

We should also note that over the past decade, Defence’s workforce spend has increased by 15.8% in real terms even though the number of its full-time employees has barely changed. That means the ADF’s workforce costs on a per capita basis are growing much faster than inflation. Some of the annual increases have been substantial. This year workforce spending was meant to grow by around $550 million, but the mid-year budget update changed that to $1,478 million. That’s a 10.3% increase on last year even though ADF personnel numbers barely moved. And since many of the measures the NDS proposes to address the people problem involve financial incentives, that growth is likely to accelerate.

So if Defence does come even remotely close to achieving its ADF growth targets of around 20% over the decade, its workforce spending will have to grow dramatically. That’s another reason why is target of 42% acquisition spending seems hopelessly ambitious.

As a side note, despite the Government’s claims that 20,000 workers will be involved in the SSN enterprise, so far it has remained resolutely silent on the number of submariners needed to support the future SSN force. It’s difficult to believe this is because they just don’t know. The optimal pathway with the number and kind of submarines has been determined. Sufficient work has been done to develop a reasonable understanding of the number of submariners need to run the training, regulator and safety functions. Therefore Defence must have a pretty good idea of what the number is. We can be certain it will be several times larger than the current 750-800 supporting the Collins. The larger the figure, the harder it will be to achieve a viable, sovereign Australian SSN capability. Therefore, it’s reasonable for the Australian public to expect the Government to share the figure.