The claim
With the war in Ukraine grinding on, the federal government has been facing pressure to increase its supply of military hardware to the eastern European nation.
In an interview with the Seven Network’s Sunrise program, Opposition Leader Peter Dutton said the Department of Defence was “reluctant to send more equipment” because “they just can’t afford to absorb” the expense.
“In the latest budget the government cut $1.5 billion from defence, so they’re already scratching around trying to find savings,” he said.
Did the government cut $1.5 billion from defence in the May 2023 budget? RMIT ABC Fact Check runs the numbers.
The verdict
Mr Dutton’s claim is misleading.
Defence budget statements show that Labor plans to spend $1,463.7 million less on the Department of Defence than what the former Coalition government planned to spend over the same three-year period, excluding automatic funding top-ups to maintain defence’s buying power when the Australian dollar falls.
But Labor’s defence budget cannot be said to contain a “cut” because funding would still rise year on year in both nominal and real terms over the forward estimates.
The same holds if defence spending includes the Australian Signals Directorate, a statutory body inside the defence portfolio which is budgeted separately but commonly accounted for in calculations of defence spending.
And, importantly, Mr Dutton was referring to future spending figures, which experts noted may never come to pass.
Furthermore, approximately half of the nominal difference between Labor’s and the Coalition’s budgeted spending over the three financial years to 2025-26 is the result of funding transfers to the ASD for cyber capability.
Though this $726.9 million will not be available to the Department of Defence, it’s not clear it ever would have been. As one expert noted, the ASD procurement budget is handled as part of the department’s budget, with funds transferred to the directorate upon approval of projects.
Moreover, by Mr Dutton’s logic, the Coalition would have also been responsible for a “cut” in its final budget, due to large transfers from the department to ASD.
All this being said, experts told Fact Check the spending set out for these three years reflects the funding trajectory set by the Defence White Paper in 2016, and that much in the strategic and budget environment has changed since then.
For example, despite the real increase in defence spending, neither Labor’s latest budget nor the Coalition’s pre-election budget gave the department extra funding to cover the recent spike in inflation.
Source of the claim
Fact Check asked Mr Dutton’s office for the source of his claim. A spokeswoman pointed to the May 2023 defence budget brief from the Australian Strategic Policy Institute (ASPI), a non-partisan think tank which is partly funded by the Department of Defence.
Entitled The Big Squeeze, the report notes that the “urgency of demands” upon the Department of Defence is not reflected in its short-term funding.
“The only increase in the Defence budget over the next three years is compensation for the increased cost of imported military equipment flowing from a fall in the value of the Australian dollar,” the report said.
With this compensation excluded, the report found there was a $1.5 billion difference between what the Coalition budgeted to spend over the 2023-24, 2024-25 and 2025-26 financial years and what Labor’s latest budget allocated for the same three year period.
Should foreign exchange movements count?
ASPI’s report said that “compensation for adverse foreign exchange movements” had been excluded from its calculations.
Marcus Hellyer, who formerly authored ASPI’s defence budget reports and is now head of research at Strategic Analysis Australia, told Fact Check this referred to “automatic” budget adjustments to preserve defence’s buying power.
The department receives extra funding when the Australian dollar falls relative to the US dollar, he said.
“And similarly, it also loses money if the Australian dollar goes up.”
David Uren, a senior fellow at ASPI and an author of the most recent report, told Fact Check that this compensation was to account for defence’s “large US-dollar purchases”, which cost more when the Australian dollar goes down.
He argued that to establish whether the budget had increased or decreased the Department of Defence’s buying power, these automatic adjustments must be excluded.
Peter Robertson, a professor of economics and dean of the University of Western Australia’s School of Business, whose research work includes international comparisons of defence spending, agreed with this approach.
“…it makes sense to not add in the [foreign exchange] adjustments since they don’t buy anything extra, but just reflect higher costs,” he said.
Crunching the numbers
The defence portfolio budget statements contain figures for total defence department funding (Table 4a) and also foreign exchange adjustments (Table 2).
Notably, successive budgets may make multiple adjustments to the same financial year. For example, the October 2022 and May 2023 budgets both contained adjustments for each of the three years covered by Mr Dutton’s claim.
With these adjustments excluded, Labor’s latest budget allocated $49,020.5 million to the department in 2023-24, $50,553.8 million in 2024-25 and $52,927.5 million in 2025-26.
In cumulative terms, this equates to $152,501.8 million over the three years, which is $1,463.7 million lower than the $153,965.5 million detailed in the Coalition’s final (March 2022) budget.
Behind the numbers
While Mr Dutton spoke of a $1.5 billion “cut” to “defence”, the budget papers show that around half of the reduction in planned spending was due to funding transfers to the Australian Signals Directorate (ASD), a statutory agency within the defence portfolio.
The graph below shows that, over the three years, transfers to ASD accounted for $726.9 million of the total $1,463.7 million reduction.
In previous analyses of defence spending, Fact Check included ASD funding because until 2018-19 the budget reported the directorate’s funding as part of the Department of Defence, making its inclusion necessary when making consistent historical comparisons.
Mr Dutton made his claims in the context of providing military hardware to Ukraine, a function that the ASD does not fulfil. But the ASD is still a function of defence, as evidenced by its inclusion in the government’s Defence Strategic Review.
Dr Hellyer said that after ASD became a standalone statutory agency, funding transfers from the department continued as a course of “normal business”.
He explained that the department holds the money for ASD projects until they receive government approval, after which “the money is picked up and moved over to ASD so it can run those projects”.
The Department of Defence would not confirm whether its recent transfers were for funding that was always destined for cyber capability, or funding that was originally slated to be spent on military hardware then redirected to ASD.
If “defence” is taken to include ASD, the difference between Labor’s and the Coalition’s planned spending between 2023-24 and 2025-26 is $787.7 million — around half of what Mr Dutton claimed.
But was it a ‘cut’ or a ‘saving’?
Mr Dutton has used ASPI’s report to make a claim about a reduction in future spending relative to what the Coalition planned to spend, which he labelled a “cut”.
In previous instances, Fact Check has found that a reduction in spending cannot be called a cut if that spending is rising year on year in inflation-adjusted (real terms).
ASPI’s Mr Uren told Fact Check that his report “does not say defence spending has been cut”.
“It says the only increase was an allowance for a fall in the Australian dollar … and that excluding that, funding was down.”
Referring to the same reduction, Professor Robertson opined that “any objection to the word ‘cut’ would just be semantics”.
But the Coalition has in the past argued that a reduction in funding cannot be called a cut if spending is rising.
In 2020, for example, then-communications minister Paul Fletcher cited Fact Check’s work to reject suggestions that his government had cut funding to the Australian Broadcasting Corporation, arguing that nominal spending continued to rise.
(His claim that ABC funding was rising was found to be misleading because funding declined once inflation was taken into account.)
On other occasions, too, the Coalition has referred to reductions in various budget areas as “savings” rather than cuts.
And under the logic of Mr Dutton’s latest claim, it would appear that he as defence minister would have been responsible for a “cut” to Department of Defence spending.
Dr Hellyer noted that the Coalition, in its final budget, had made large transfers to the ASD for the directorate’s REDSPICE (Resilience, Effects, Defence, Space, Intelligence, Cyber, Enablers) program.
These transfers were worth a total of $2,653.7 million over the years 2022-23 to 2024-25, according to the March 2022 portfolio budget statements.
As a result, planned Department of Defence spending (excluding foreign exchange adjustments) decreased between the Coalition’s last two budgets.
Dr Hellyer said it was “hypocritical for the Coalition to say Labor has given defence a budget cut, when it essentially created [several billion dollars’ worth] of new funding commitments by expanding ASD, but without adding any new money to the defence portfolio”.
Real defence spending
To establish whether planned defence spending is subject to a cut, Fact Check has analysed defence spending in real terms, consistent with previous fact checks.
Nominal figures, inclusive and exclusive of foreign exchange adjustments, have been converted to 2022-23 dollars using inflation forecasts from the 2023-24 Budget Paper No. 1.
(Data for the 2026-27 financial year has been excluded from the foreign exchange series, as underlying foreign exchange adjustments for that year are not available in previous budgets.)
Adjusted for inflation, the data shows that Department of Defence spending, as laid out in Labor’s most recent budget, rises year on year.
Including ASD in the figures produces a similar result, with spending continuing to rise every year.
David Hayward, an emeritus professor of public policy and the social economy at RMIT University, agreed that these figures showed a real increase and “not a cut”.
“Defence spending is increasing in nominal and real terms. That is not a cut. It is an increase,” he told Fact Check.
Nonetheless, experts said that inflation was still an issue for the defence budget.
Dr Hellyer said that the spending laid out in the most recent budget largely reflected the amounts set out in the Defence White Paper, released in 2016.
Those figures were underpinned by an assumption that inflation would be closer to 2 or 2.5 per cent per year, he said, but with inflation running much higher, “essentially … you’re losing an additional 5 per cent in buying power per year”.
“It doesn’t take long until you’ve lost … 10 per cent of your budget in real terms. So that far outstrips the loss of a few hundred million dollars through savings or transfers to other departments.”
Thinking forward
In its report, ASPI makes reference to the recent Defence Strategic Review 2023, which “sets the agenda for ambitious, but necessary, reform to Defence’s posture and structure”.
The institute notes that the DSR was released within weeks of the budget, and that “there is, therefore, a disconnect between the two”.
“This can be addressed and will be through a series of further reviews and specific activities to be progressed by Defence in the coming year,” the report added.
“There are significant additional bodies of work yet to be finalised that will affect the future defence budget; all indications point to a steady and possibly substantial rise.”
Andrew Carr, a senior lecturer at the Australian National University’s Strategic and Defence Studies Centre, told Fact Check the DSR was tasked with identifying “funding and investment needs, but not to do a full defence budget”.
“From what I understand talking to those involved, there are many costs still being determined across the board … So the government decided not to use this year’s budget to identify the real long-term trajectory for defence spending.
“Next year we’ll be in a much better position to know if the government will meet the challenge before it on defence. This year they should get a status quo grade while the real work goes on behind closed doors.”
Professor Hayward said the problem with Mr Dutton’s claim was the use of forward estimates in the budget, because “what happens in the future can never be known in advance”.
“I can say with some confidence it is highly unlikely that the estimated budget for defence in three years’ time will turn out to be the amount that is spent.
“In each of the next two budgets, defence expenditure will be varied; in that sense, the second, third and fourth years of the forward estimates never come.”
Principal researcher: RMIT ABC Fact Check managing editor Matt Martino
Sources
- Peter Dutton, Interview with Network Seven’s Sunrise, June 27, 2023
- Peter Dutton, Doorstop Interview, June 27, 2023
- Peter Dutton, Address to the 63rd Liberal Party Federal Council, June 17, 2023
- Australian Strategic Policy Institute, The big squeeze, May 30, 2023
- RMIT ABC Fact Check, Peter Dutton says the Coalition achieved ‘record’ defence spending after it fell to the lowest level since 1938 under the previous Labor government. Is that correct?, September 28, 2022
- Department of Defence, Budget 2022-23 (March) portfolio budget statements, March 29, 2022
- Department of Defence, Budget 2022-23 (October) portfolio budget statements, October 25, 2022
- Department of Defence, Budget 2022-23 portfolio additional estimates statements
- Department of Defence, Budget 2023-24 portfolio budget statements, May 9, 2023
- ABC Fact Check, Fact check: Has public hospital funding been cut by $50 billion?, June 23, 2014
- RMIT ABC Fact Check, Paul Fletcher says ABC funding is rising each year. Is he correct?, July 16, 2020
- RMIT ABC Fact Check, Fact check: Did the government cut $1.2 billion from aged care funding?, October 16, 2018
- Budget 2023-24, Budget Paper No. 1, May 9, 2023
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