John Faulkner (NSW, Australian Labor Party) Share this | Hansard source

Mr President, I seek leave to speak for 20 minutes.

Leave granted.

The Prime Minister never tires of puffing himself up and taking credit for Australia’s economic performance but, when it comes to managing public spending, it is clear that the Howard government cannot master the basic fundamentals of economic management: fiscal responsibility. The Department of Defence is a case in point. The Defence portfolio budget for 2007-08 is $22 billion—9.8 per cent of government outlays or approximately two per cent of gross domestic product. These funds go towards: the government’s capital program; support and maintenance of platforms and systems; the administrative functions of the department; and, critically, the ADF’s recruiting, training and support of the men and women who defend and protect our country and interests. At long last, the government has recognised the challenge of retention and recruitment and has projected substantial funds in future budgets. I am happy to acknowledge this belated and overdue increased support for the men and women of the ADF.

The 2007-08 budget statement also reminds us of the costs of the current deployments to Afghanistan and Iraq. The economic consequence of this government’s continuing involvement in Iraq is often overlooked. Iraq has cost Australia around $2 billion. Just think of the impact if the equivalent amount of money had been invested in counterterrorism and supporting failing states in our region. Irrespective of who wins the election this year, the next series of defence budgets will be under considerable pressure. That is why budget investments and expenditure of defence moneys must be efficient and effective. It is called fiscal responsibility.

Fiscal responsibility starts with a plan: a plan that takes account of strategic circumstances and provides unequivocal guidance to the ADF and DMO leaders who are charged with its implementation. A plan needs to be kept up to date if it is to fulfil that role, and all stakeholders have to stick to the plan. In other words, the plan is near worthless if it is not updated or if, as we are increasingly seeing, there is political interference. The Defence Capability Plan links the government’s strategic guidance with the practicalities of building and sustaining military options. However, as soon as the strategic guidance becomes old news, the value of the plan is discounted.

The government has failed in fiscal responsibility on two counts: first, the current defence white paper was produced in 2000 with little incremental strategic guidance provided since; and, second, the government has initiated several purchases, including C17 aircraft and new interim FA18 Super Hornet air combat capability that appear to be in response to short-term considerations. Because there is little up-to-date strategic guidance—at least in the public domain—taxpayers are unable to account for where and why funds are being allocated. Commentators are left to speculate, based on the pattern of purchases, what the strategic guidance or direction of the government is. We are all left to wonder if the acquisitions of C17 aircraft, Abrams tanks or the amphibious ships represent a shift in the ADF’s posture.

The Howard government is asking the taxpayer to trust it to wisely use funds which include real budget increases of three per cent annually. But we ought to ask if that trust would be well placed. We ought to ask if we can be confident that a budget line that represents nearly 10 per cent of government outlays is being, and will be, well managed.

Let us start with alignment: alignment between the capability and sustainment plans and the current and projected budgets. Let us look at the reliability of the budget estimates and projections. Dr Mark Thomson, the highly regarded analyst, has in the past six months spoken of the unaffordable Defence Capability Plan. Dr Thomson, speaking on his own account, points to a consistent trend of underestimation. In his speech to the ADM conference this year he identified a $5 billion gap between budgeted operating costs against historical trends, implying that defence is insufficiently funded to operate platforms. And this is before we consider the impact of major new purchases like the air warfare destroyers and amphibious ships. If this is valid criticism, it points to a government failing to recognize cost realities and placing undue stress on the ADF’s finances—or a government whimsically committing to major programs without a full budget alignment.

In the past three years, great improvements have been made inside Defence in restoring confidence in financial accounts and in professionalising the DMO and capability development process. I applaud those efforts of the senior Defence leadership. I note, however, that the government’s own recent study, the April 2007 Defence Management Review, commented on a lack of accountability and cost-consciousness. Furthermore, the review noted the unsatisfactory relationship between the office of the Minister for Defence and the department. Clearly these symptoms are an indictment of the succession of defence ministers under the Howard government and the Prime Minister himself, who has been the one constant during all these ministerial changes.

The Howard government’s record with the defence capital program is now very clear. Cost overruns, schedule slippage and delivery of reduced capability are becoming the standard outcomes from any major program that this government manages. No discussion of the Howard government’s failures in the defence capital program would be complete without reference to the Seasprite. With the Seasprites we have a benchmark of financial mismanagement. The program cost is in the order of $1.1 billion. The government, through the National Security Committee of Cabinet, has rolled the Minister for Defence, Dr Nelson, and decided to expend more money on the Seasprites. In the words of the minister, the Seasprite review:

... examined how to resolve these [performance and safety related] issues so that the best possible capability can be provided to the Royal Australian Navy.

There was no mention of ‘fix the problem’. We still do not know if the additional $60 million expenditure will be sufficient to satisfy the original operational requirements for this helicopter. However, we do know that the government’s priority was all about minimising the political damage.

The multibillion-dollar budget blow-outs of the past 10 years have left little or no credibility in the government’s budget projections. Think of the interim Super Hornet capability, the Joint Strike Fighter, the amphibious ships or the air warfare destroyer. There is simply no way of knowing how these projects will be funded in the future. There is no way of knowing what other capability requirements might suffer as a result of the uncertainty surrounding future capital investment. There is no way of knowing if the pay and conditions of ADF members will be affected in the future or if there will be an impact on recruiting and retention.

The cost of supporting the platforms and weapons systems represents a further major slice of the budget. Before commenting on how the government manages this part of the defence budget, it is instructive to consider the realities of the defence budget. Much of the defence budget is locked in. By that I mean that it almost falls into the non-discretionary category. Personnel and other costs for the three services and costs of maintaining the services of the Defence Support Group, the Defence Materiel Organisation and the administrative functions are largely ongoing, given a particular force structure. Add to these cost elements the expected capital expenditure, which in any year can vary from plan due to timing differences, most often due to delays in major acquisition programs.

So here we have the challenging element of the budget model. The higher the value of capital assets acquired, the greater the cost of supporting these assets. In a tight budgetary environment, the higher the value of capital assets, the lower is the fund for support. It is also reasonable to conclude that, when overruns in any particular program occur in the acquisition phase, there is less money for support. We cannot have confidence that this big-spending government has provided for support costs. With inadequate support funding, capital assets are underutilised or not fully available for training and operational deployments.

On 8 May 2007, Minister Nelson elaborated on the budget announcement of $4 billion additional funding for logistics and support. The minister’s statement includes some puzzling claims:

The additional funding will boost inventory stock holdings and allow for improvements in inventory management and accounting practices to lead to a more functional and efficient inventory management system.

The application of better ‘inventory management’ practices usually means lower and more targeted expenditure on spares and consumables, but this does not seem to be Minister Nelson’s meaning. There is the worrying implication that stocks and spares have been so run down that operations have been affected. And we are still left to wonder how much of the $4 billion will be spent on inventory management and accounting practices. We are left to wonder if this funding allocation is to get better systems and to wonder where all of this places project JP2077, the enhanced military logistics information system. This investment in major new physical distribution assets will have an impact on the Defence Integrated Distribution System, the DIDS contract, which is still not fully operational or performing to the original specifications. I quote the minister again:

Australian Defence industry will be a major beneficiary of this boost in funding.

If indeed it is a boost in funding, presumably due to the purchase of additional spares and consumables, we are entitled to ask why these support requirements were not already programmed into the budget projections for the platforms; or, if these requirements arise from a new level operational tempo, we are entitled to ask why these costs have not been placed to the account of the Iraq, Afghanistan or other deployments. The minister yet again:

Together with other new Budget measures, additional logistics funding is a key component of the Government’s commitment to providing the resources, equipment and services needed by our servicemen and servicewomen.

I would hope that any Australian government would fully provide for the men and women of the ADF. Based on the minister’s statements, we have to wonder if this Howard government has in fact done so to date. The Howard government’s scorecard on fiscal responsibility in the Defence portfolio is a solid fail—a fail on managing major acquisitions and a fail on optimally funding support of the platforms to ensure serviceability and availability.

Many questions about the government’s approach remain, and getting the answers to those questions will not be easy. This is a government that has a history of nondisclosure. In 2003, the Senate inquiry into materiel acquisition and management in Defence urged enhanced reporting of major program status. This was echoed by the government’s own Kinnaird review. The ANAO has also recommended that regular and systematic project reporting be instituted. Labor also supports the concept of regular independent reporting of the top 30 DMO projects.

Fiscal responsibility is underpinned by disclosure of timely and relevant information and a willingness to allow scrutiny. The Howard government clearly does not subscribe to this view. The last word on this matter should go to Dr Thomson, to whom I referred earlier. He is quoted in the Australian Financial Review of 25 May 2007 as saying:

With an election due this year transparency of future Defence costs is vital.

Unfortunately it does not seem that the Howard government is listening.