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FM AMEMBASSY CANBERRA
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INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUEHBN/AMCONSUL MELBOURNE PRIORITY 6604
RUEHPT/AMCONSUL PERTH PRIORITY 4869
RUEHDN/AMCONSUL SYDNEY PRIORITY 4856
RHHMUNA/CDR USPACOM HONOLULU HI PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEKDIA/DIA WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 CANBERRA 000754 
 
NOFORN 
SIPDIS 
 
E.O. 12958: DECL: 08/14/2019 
TAGS: PGOV PREL MCAP AS
SUBJECT: AUSTRALIA'S DEFENSE WHITE PAPER: IS IT AFFORDABLE? 
 
REF: CANBERRA 454 
 
CANBERRA 00000754  001.2 OF 003 
 
 
Classified By: Political Counselor James F. Cole for Reasons 1.4 (b) an 
d (d). 
 
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SUMMARY 
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¶1. (SBU) Australia,s 2009 Defense White Paper, released in 
May 2009, envisions the nation,s largest military buildup 
since World War II.  How Australia will pay for this buildup 
is less clear.  Recovery from the recession and a return to 
fiscal surplus will require budgetary sacrifices.  The 
military faces ingrained problems with poor budgeting, cost 
overruns, and delays in delivering new equipment exacerbated 
by efforts to prop up local defense industries.  Reaching the 
White Paper's targets will require sustained political will 
to address the funding challenges.  Hope lies in ADOD,s 
challenging but promising plan to reform the way it does 
business and generate enough savings to fund the buildup. 
End summary. 
 
-------------------- 
"AUSTRALIA BULKS UP" 
-------------------- 
 
¶2. (U) Australia,s 2009 Defense White Paper assessed that 
China,s rise and the potential retreat of US regional 
primacy increases Australia,s strategic risks (reftel).  To 
manage this risk, it prescribes an impressive upgrade to the 
Australian Defense Force,s (ADF) capabilities, including 
replacing 6 Collins Class submarines with 12 long-range 
submarines, replacing their Anzac frigates with 8 larger 
frigates, and acquiring up to 100 F-35 Joint Strike Fighters. 
 Following the White Paper's early May release, local 
newspapers featured headlines like &Australia muscling up8 
and &White paper orders huge military build-up.8 
 
¶3. (U) The government said its plan was &fully costed and 
affordable.8  The White Paper set out the following funding 
measures: 
-- 3% real growth in the Defence budget to 2017-18, 
-- 2.2% real growth in the Defence budget from 2018-19 to 
2030, 
-- 2.5% fixed indexation to the Defence budget from 2009-10 
to 2030 (to offset inflation), and 
-- a Strategic Reform Program (SRP) to identify savings of 
A$20 billion over 10 years. 
 
--------------------------- 
FUNDING INCREASE OVERSTATED 
--------------------------- 
 
¶4. (SBU) The White Paper,s 3% real annual growth in the 
Defense budget continues a funding trajectory established 
almost a decade earlier under the previous Howard Government, 
so it does not represent an increase in funding growth.  In 
fact, according to Mark Nixon of Ernst and Young Australia, 
which does some work for Defence, real annual growth in 
military spending in the past decade was higher, averaging 
over 4%. 
 
¶5. (SBU) Nixon explained that the prior indexation regime, 
which offsets inflation by indexing the ADOD budget to the 
non-farm GDP deflator, overcompensated Defence in the years 
prior to the recession because a mining boom lifted the 
non-farm GDP deflator far more than the increase in 
underlying defense costs.  At its high, the non-farm GDP 
deflator reached 7.8%.  The White Paper sets the new 
indexation regime at 2.5%, reducing the chance that the 
government overshoots in funding growth to ADOD.  Thus, 
Defence will probably see less real funding growth in the 
coming decade than the previous. 
 
¶6. (U) Noting that the cost of maintaining military 
capability exceeds inflation, the GOA-associated think tank 
ASPI estimated that in order for the ADF to &tread water,8 
its budget must grow in real terms by 2.6% per year. 
Qits budget must grow in real terms by 2.6% per year. 
Therefore, analysts viewed the White Paper,s decrease from 
3% to 2.2% real growth beginning in 2018-19 as wholly 
inadequate. 
 
¶7. (U) ASPI also estimated that, assuming that the ADF is 
able to achieve the SRP,s goal of A$20 billion in savings, 
 
CANBERRA 00000754  002.2 OF 003 
 
 
the White Paper,s funding plan would provide A$29 billion in 
new money (measured in today,s terms).  ASPI calculated that 
achieving a force structure similar to that outlined in the 
White Paper would cost significantly more, at about A$37 
billion.  Furthermore, apart from White Paper initiatives, 
the May 2009 budget shows ADOD must use A$15 billion over the 
next four years to remediate shortfalls from prior 
initiatives. 
 
------------------------- 
PROMISED FUNDING DEFERRED 
------------------------- 
 
¶8. (U) Military budget analyst Mark Thomson noted that the 
government probably will not deliver on the 3% real annual 
growth to 2017-18 stated in the White Paper.  The May 2009 
budget gives more to the ADF this year but in subsequent 
years takes away A$8.8 billion of the money promised by the 
White Paper.  The government gradually returns this money to 
Defence beginning in 2016-17 so that real growth averages out 
to the 3% and 2.2% trends stated in the White Paper by the 
2020s, but this would not allow 3% real growth by 2017-18. 
 
¶9. (U) Moreover, Thomson argues that in 2016-17, the 
government will be trying to achieve a politically important 
budget surplus following several years of recession-related 
deficits, and that defense spending historically contracts 
during Australia,s post-recession recoveries. 
 
------------------- 
FUZZY MATH ON COSTS 
------------------- 
 
¶10. (SBU) In addition to overemphasizing the revenue side of 
the White Paper, Thomson suggested that Defence may have 
underestimated the future costs of acquiring and servicing 
new platforms.  He pointed out that the Defence Capability 
Plan released in July shows recurrent problems of cost 
overruns and delays in equipment acquisition.  Thomson also 
suggested that Defense may have underestimated future 
personnel costs, which consumes the largest slice of its 
budget.  The 2009 GOA budget used per capita growth rates for 
the cost of military and civilian personnel that are 
respectively 50% and 66% lower than the historical averages. 
 
¶11. (C/NF) In a meeting between US Navy Admiral Benedict and 
Stephen Gumley, CEO of the Australian Defence Materiel 
Organisation (DMO), Gumley was unable to explain how the 
costing for the equipment of the White Paper came about. 
However, ODC contacts at DMO, which handles the ADF,s 
equipment acquisition and servicing, were confident that the 
ADF would be able to achieve the White Paper,s capability 
upgrade.  To address any financial constraints, they appear 
prepared to sell Defence real estate and to push back the 
timeline for acquisitions. 
 
---------------------- 
GETTING MORE WITH LESS 
---------------------- 
 
¶12. (C/NF) Even if costs remain manageable and Defence 
receives the supposed 3% real annual growth in Defense 
spending, about two thirds of the &new8 money for pursuing 
initiatives under the White Paper must come from A$20 billion 
of savings anticipated by the Strategic Reform Program (SRP). 
 Spread throughout the life of the program, budget analyst 
Thomson estimates that the SRP is equivalent to saving 7% per 
year on the ADF,s budget, significantly more ambitious than 
previous spending reform programs.  (Note: Australia,s 
military budget for 2009-10 is about A$26 billion.  End 
note.) 
 
¶13. (C/NF) A senior GOA Treasury official believes that 
Q13. (C/NF) A senior GOA Treasury official believes that 
significant savings within ADOD of up to 10% per year, more 
than that envisioned by the SRP, is feasible and reasonable. 
He noted that ADOD's budgeting and execution is the worst in 
the federal government because unlike other departments, the 
Departments of Treasury, Finance and Prime Minister and 
Cabinet exercise no oversight on formulating the budget or 
reviewing effectiveness.  Ernst and Young,s Mark Nixon, who 
provides ADOD with some assistance on the SRP, expressed 
similar sentiments, noting that there is considerable area 
for improvement in budgeting and efficiency. 
 
¶14. (C/NF) The Treasury official believes that by committing 
 
CANBERRA 00000754  003.2 OF 003 
 
 
the ADF to increased capability and funding it out of the 
SRP, the GOA will have a stronger base from which to hold 
Defence,s feet to the fire in instituting reforms.  Nixon 
was more pessimistic, noting that there is deep cultural 
resistance within Defence to change.  On August 13, PM Rudd 
appointed Ian Watt, formerly Secretary of the Department of 
Finance and Deregulation and known for his competence in 
handling the economic crisis, as Secretary of Defence.  This 
change may indicate an attempt to establish a Defence 
leadership capable of carrying out significant financial 
reforms. 
 
¶15. (C/NF) One area of potential savings regards procurement. 
 Australian defense analyst Hugh White said that a domestic 
shipbuilding lobby, particularly in South Australia, 
encourages major naval acquisitions sourced from expensive 
domestic shipbuilders.  Because the small domestic 
shipbuilding industry cannot achieve the same economies of 
scale as that of the U.S., its costs per ship are 
significantly higher.  For example, budget analyst Thomson 
noted that the ADF's three Hobart class air warfare 
destroyers cost up to 30 percent more than comparable 
off-the-shelf vessels available from the U.S.  Defence 
claimed the markup was only 4 percent. 
 
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COMMENT 
------- 
 
¶16. (C/NF) The Defense White Paper is as much a political and 
diplomatic document as it is a strategic and force structure 
planning document.  To a domestic audience that traditionally 
views the left-leaning Labor party as weaker on defense, Rudd 
wants to look tough on security.  To the U.S., Australia 
wants to signal that it is pulling its weight in the 
alliance.  PM Rudd has made clear that it was also a signal 
to China and to the region that Australia is committed to 
doing what it can to maintain the strategic balance in East 
Asia.  While the Defence White Paper presents a bold force 
upgrade, funding is uncertain.  Most of the major 
acquisitions are planned for much later, so the government 
does not have to focus on footing the bill for the time 
being.  Budget pressures, especially in the wake of the 
recession, and cost overruns may delay acquisition of new 
platforms.  However, if Defence can find the political will 
to reform inefficient budgeting and programming, particularly 
by procuring from the U.S. rather than domestically, it will 
be able to achieve the needed savings to pursue its ambitious 
plans. 
 
Clune