OFFICIAL LAUNCH OF
SINEWS OF WAR

MURAL HALL, PARLIAMENT HOUSE

WEDNESDAY, 20 AUGUST 2003
11AM

Thank you very much Mr Chairman, for giving me the opportunity

to launch Sinews of War – The Defence Budget in 2003, and How We

Got There, which was an interesting reminder to me actually, as

to how we got there, and I found it useful. Let me say, before I begin

however, I do not endorse everything that is in this report, you would

be disappointed if I did and ASPI would have no role if all it were

doing was putting down the Government position. I do endorse wholeheartedly

however, the thrust of what comes through in this report about the

need for financial accountability and best value for dollar in the

Defence budget, a point that Hugh White pointed out to me when we

met just earlier, before I came here today. I remarked to Hugh, I

wish he had shown the same concern for the value of taxpayers’ dollar

in all of those ERC meetings when he was in the Defence Department,

but he reminds me he did, and I thank you for that.

In 1996 when I first became Treasurer, the doctrine of

defence was predominantly continental defence of the land mass of

Australia, domination of the sea and air lanes which would be required

for any invading force to come to Australia. In 1996 when I first

became Treasurer, the Defence budget was not analysed by the Expenditure

Review Committee. Defence was given a global allocation, at that time

the global allocation was being maintained in real terms and it was

not considered the role of the Treasurer, the Finance Minister or

the Expenditure Review Committee to go behind the global budget. That

was considered a matter for Defence.

At that time it was difficult to get any fix at all on

the acquisition plans that Defence had, how much was being paid under

them, how much was being drawn down. And in fact, for the first few

Budgets that I was engaged in, we had to fight very vigorously indeed

to actually get the right to look at line items of Defence expenditures.

It wasn’t until quite recently in fact that the Expenditure Review

Committee won the right to go line by line through the Defence Budget

as part of the budgeting process. It was stoutly resisted by Defence

and it proved very difficult to come to grips with some of the items

that lay behind the global budgeting.

The defence of continental Australia and the maritime

and air approaches led to some of the big acquisition decisions which

were made some time ago, the Collins Class Submarine being the most

obvious example. The Collins Class Submarine, which could operate

in warm waters to the north of Australia, was an acquisition which

we entered into as part of the thinking to defend the continental

land mass by denying any enemy the opportunity to mount maritime or

air approaches to the mainland of Australia.

We are still dealing with the Collins Class Submarine

acquisition. We are still trying to come to grips with the expenditures

that were involved in that particular decision. I raise it as an illustration

of the way in which decisions in Defence are made in circumstances

which can change quite dramatically, and the financial implications

of which can be felt long after a decision has been entered into.

And as recently in relation to this Budget, with an allocation for

full stage cycle docking of the Collins Class Submarine we were dealing

with financial implications of a decision which was made probably

15 years, nearly 20 years ago. These decisions come back to haunt

you, or at least to concern you, a very long time after they have

been made.

In 1996 I don’t think it would have been thought that

Australia would be engaged in East Timor, in Afghanistan, in Iraq

or the Solomon Islands. In 1996 we expected that in this financial

year, 2003-2004, defence expenditure would be around $12 billion.

In fact it will be over $15 billion. That is an increase of around

25 percent on what we were expecting for the 2003-2004 year.

Since coming to office, this Government has provided

additional funding, that is funding over and above the forward estimates,

which were maintaining in real terms, additional funding over and

above those forward estimates at some $38 billion. Since coming to

office this Government has provided additional funding, that is over

and above the forward estimates of some $38 billion in respect to

Defence. A very large part of that of course is the Defence White

Paper, providing an additional $27 billion over ten years.

In the most recent Budget, the 2003-2004 Budget, I announced

new spending of $2.1 billion, including $1.3 billion to enhance logistic

support for a range of platforms, the establishment of a special operations

command, and we also, in addition, and this is not counted as Defence

spending, placed an additional $1.8 billion into strengthening Australia’s

domestic security arrangements.

Now in 2003-04, that $15 billion of expenditure will

amount to a little under 2 percent of GDP, around 1.9 percent. There

are some people that argued that is still not enough, that we should

be spending more than 2 percent of GDP. Let me make the point, and

I think it is made very well in this paper, that it is a false analysis

to determine Defence expenditure as a proportion of GDP, because there

are two variables in any such analysis.

The first is Defence expenditure, the second is the size

of your GDP. We could cut Defence spending but increase it as a proportion

of GDP by throwing the economy into recession. We could cut Defence

expenditure but increase it as a proportion of GDP by throwing the

economy into recession. Would Australia have a stronger Defence Force?

No. Because you would be increasing the spending to GDP ratio by dealing

with the second variable. One of the reasons why Defence expenditure

is still around that 2 percent mark of GDP notwithstanding the very

significant Defence build up, is that the Australian economy has grown

so strongly.

If the Australian economy had grown at trend rates back

in the late 1990s rather than a 4 percent plus rate, then our Defence

spending to GDP would have gone through that mark. If the Australian

economy had followed the US economy into recession in 2000-2001, then

the Defence to GDP ration would have gone through that mark. That’s

why the important thing when you look at Defence expenditure is to

look at the actual amounts, rather than to judge by Defence to GDP

ratios.

The second point I am going to make here is this, your

defence capacity increases with the economic strength of the country.

Your defence capacity increases with the economic strength of a country.

What gives a country the capacity to maintain defence is a strong

economy. It gives it the technological capacities, it gives it the

spending dollars, it gives it the people skills. And I have always

believed that an important component of a strong defence in Australia

is a strong economy which is underlying it. And we would never improve

the defence capacity of Australia by undermining, by taking a decision

which undermined our economic strength.

Now the third point that is made in this piece of valuable

research is that notwithstanding the increase in Defence expenditures,

it is important that we have heightened scrutiny in relation to the

way in which the budgets are managed, and the way in which that capacity

is developed. With that, I agree.

It is important, not just that we allocate the dollars,

but it is important that we are getting full value, efficient value

in the decisions that we make. Now we know what some of the difficulties

are in relation to defence. Some of the difficulties are, when you

are engaging in capital acquisition you are buying product which has

not yet been invented. It is very hard to buy a product which has

not yet been invented. If you were only buying a product which had

been invented it might be effective now, but in the ten and fifteen

year timeframes that you are looking at would be outmoded before it

came into use.

The Collins Class Submarine is an example of that. A

decision was made to take a submarine which had not yet been invented,

it had to be built from scratch. The Joint Strike Fighter is another

decision. Australia is now engaged in assisting with some of the research,

but we don’t actually know what is going to be produced yet. We don’t

know what its capabilities, we don’t know if it will be technologically

up to the standards which we require, and you are operating therefore

in very long timeframes. That is a difficulty in relation to defence

planning. Something which I can’t see any easy way of getting over,

but I do know this, that as we improve our management systems, as

we allow in relation to defence acquisition, not just capital costs,

but depreciation costs, running costs, repair costs, as we heighten

our financial management we will get better handles in relation to

those issues than we have had in the past.

It will be said, no doubt, as a result of what appears

to be the media grab coming out of this report, that the Defence Capability

Plan is undeliverable. I do not believe that to be the case. The Defence

Capability Plan is deliverable, and the Government intends to deliver.

But it intends to deliver a capability which meets the current situation

as we now apprehend it. This is the important point. It is important

when you are looking at defence capability to know the challenges

that you want to meet. The challenges that have arisen, which we didn’t

foresee in 1996, the challenges like the threat of international terrorism,

the war on terrorism, the challenges that we now see in the Solomon

Islands, with Australia playing an active role in bringing stability

to a country which threatened to become a failed state.

It would be wrong in relation to defence capability to

say, what was set in a previous environment is immutable. As we said

at the time, these things must always remain under review, so that

we meet the capability which is required according to the best efforts

and the best understanding at the particular time. Constant review,

constant attention to the security environment, constant determination

to meet the capability and to do it in the most effective way. And

the points that are made in this report that underline that, I wholeheartedly

and thoroughly agree with.

Can I say to ASPI, this is a valuable contribution to

the debate. I think that by unlocking this debate outside of just

defence circles, we will get a better understanding, just as I think

unlocking that global budget of Defence back in 1996 gave central

agencies and the Government a better opportunity to contribute to

the financial management issues and the important issues of the defence

capability of Australia. And with that, I officially launch the Sinews

of War – The Defence Budget in 2003 and How We Got There, a valuable

read, not every word of which is endorsed by the Federal Treasurer,

but a valuable read nonetheless. Thank you very much.