“Currently, the share of [gross domestic product] spent on Defence – at 1.59% – has fallen to its lowest level since 1938.” Liberal Party press release, 2 September.
The Coalition yesterday announced its new defence policy. According to the press release, an Abbott government would aim to “strengthen Australia’s defence capabilities” and “stop the under-investment in Defence.”
As part of its argument to increase funding to the Department of Defence, the Coalition has repeatedly said that the current levels of spending are at their lowest levels since 1938.
The Opposition has been raising this issue for some time; shadow treasurer Joe Hockey mentioned it in a National Press Club address more than a year ago, and again at his recent debate against Treasurer Chris Bowen.
But is that claim about Australia’s spending on Defence falling to its lowest share of gross domestic product since 1938 accurate? And importantly, does it matter as much as the Opposition claims?
Defence spending over the years
In the 2013-14 Budget brought down under Prime Minister Julia Gillard’s government, the Labor government planned to spend 1.59% of GDP on Defence.
According to the Australian Strategic Policy Institute, the last time we spent below this level was in 1938, when Australia spent 1.55% of GDP on defence.
Other members of the Opposition have also referred to spending being at its lowest level since 1937. But in 1937 we spent far less at 1.06% of GDP.
So the 1938 claim is correct.
Projected versus real spending
However, there are two important caveats to note. First, the numbers can change. After all, budgets are just estimates.
So while the the Gillard Government intended to spend 1.56% of GDP on Defence in 2012-13, it actually spent 1.60% because of later changes to spending and the nation’s GDP.
If the 2013-14 estimate rises just 0.01% it will eclipse the 2012 figure, and thus the comparison with 1938 will no longer be valid.
Second, Defence tends not to calculate spending as a percentage of GDP. If we use other types of measurement, there is no comparison between today’s spending on Defence and that of the late 1930s.
For instance the Australian government spent £9357 Australian pounds on Defence in 1937 and £17,006 pounds in 1938, which would in current figures be around A$778 million and $A1,114 million respectively.
In 2012-13 the Department of Defence spent more than that every three weeks in its annual budget of A$25.4 billion.
In recent years, measuring how much the Australian government spends on Defence as a percentage of GDP has become increasingly popular.
But, as a look at the Howard government’s experience shows, it’s not a good measure for understanding whether the government is increasing or decreasing the defence budget, let alone spending enough to protect the nation.
Over the life of the Howard government, the Defence budget doubled from A$10.4 billion to A$19.9 billion. Yet for six of the 11 budgets the Coalition handed down from 1996-2007, as a percentage of GDP Defence spending fell to the lowest level since 1938.
How could that be possible? Simply because while Defence spending went up, Australia’s GDP went up even faster.
Meanwhile the Rudd government in 2009 spent 1.94% of GDP on Defence, far above the high water mark of the Howard government. Partly this was because of new funding, but mainly it was because a drop in Australia’s GDP from the Global Financial Crisis. In short, this measurement is more tied to the nation’s economic performance than government investment in defence.
The flaw in measuring Defence spending as a percentage of GDP is even more apparent when you examine the regional context. Across Asia Japan spends 1% of its GDP on Defence yet accounts for 20% of Asia’s defence spending. Singapore spends 3.7% of its GDP on Defence and accounts for only 3.1% of regional spending.
Australia sits in the middle. We spent 1.60% last year and accounted for 8% of regional defence spending. Thus, the higher your GDP, the more ships, planes and tanks you can buy.
This brings into question the assumption, as implied in the 1938 claim, that the security of the nation requires meeting a particular ratio between the size of our nation’s economy and the size of our Defence budget. In the last few months, a target of spending 2% of GDP on Defence has been adopted by both the Coalition and Labor.
Quite why this ratio is required is unstated, it appears to be just a “magic number”, as ASPI has dubbed it.
Mind the gap
There is a more accurate way to judge if the federal government is spending enough on Defence.
The 2013 White Paper was viewed by many analysts as providing a reasonably clear-headed assessment of the changing regional order and what Australia needed to do to have some confidence in our security.
Yet, there is a gap of up to A$33 billion between what is needed to pay for the various capabilities the Gillard/Rudd government have committed to in the White Paper and what they are currently planning to spend on Defence.
This gap, not the percentage of GDP, is what matters for assessing how the government is managing the Defence portfolio.
The Coalition’s claim is correct. That said, the GDP comparison that both major parties have been using is misleading and one that, if adopted, would also make the Howard government look cheap on Defence. There are other, better ways to assess if the government is spending enough on Defence.
By its nature, this claim by the opposition is hard to substantiate – we can’t know for sure until we see the final calculations of Australia’s GDP and our defence outlay for 2013-14.
As the author notes, the budget estimates an outlay of around 1.59% of GDP. But Mark Thompson of the Australian Strategic Policy Institute (a recognised authority on defence financial management) puts it closer to 1.67% of estimated GDP.
This is a figure within the range of Defence appropriations as a proportion of GDP that have persisted for several decades. It does not represent a return to the post-depression parsimony of Australia in the early 1930s.
By the late 1930s defence related expenditure was accelerating. By 1937 and, certainly 1938, a concerted program of rearmament was underway with the establishment of armaments factories in Australia and the purchase of warships (such as the cruiser HMAS Hobart in 1938) from Great Britain. The figures in the article reflect this accelerating activity by 1938.
Yet, in the 1930s, the method of accounting defence expenditure almost certainly had different elements compared to current standards. Certainly, changes in accounting for areas such as defence housing and retirement benefits over the last few decades has made meaningful comparisons of expenditure on defence difficult.
It is possible that some of the costs of 1930s rearmament may have been accounted under different procedures to that used today. This may favourably revise the estimate for the proportion of GDP represented by Defence expenditure for 1938 compared to that for 2013-14.
But to echo the author, there are better ways to look at appropriate levels of defence spending than making comparisons with GDP levels across the last century. - Derek Woolner.