Lowy Institute

Debate: Australian budget

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The annual budget always offers a world view beyond the tax and spend hoopla. In previous decades, the US and Japan were the north and south stars to guide fiscal navigation. Over the past ten years, the China constellation has shone ever brighter. Kevin Rudd's recent China speech outlined various dark scenarios: China as a threat, China as a direct competitor with the US for control of the international system, or China as self-absorbed mercantilist bully.

There's not much evidence of those outlooks lurking in the budget crystal ball. No one needs to teach Treasury about one of the iron laws of politics: follow the money. Treasury can ignore Rudd's geo-political worries and glory in the geo-economics: the best terms of trade since the middle of the last century and Australia back to four percent growth by 2011-12. Read More

Here's the terms of trade golden glow, rendered in Treasury speak: 

The terms of trade are forecast to rise by 14¼ per cent in 2010-11 to their highest level in 60 years, largely due to strong price rises for Australia’s iron ore and coal exports, driven by a recovery in global demand.

In analysing the elements in the glow, China keeps popping up — the size and impact of Beijing's economic stimulus package gets several mentions along these lines:

While demand for non-rural commodities from many of our markets diminished, in line with decreased industrial production, this was offset by an unexpectedly large increase in Chinese demand. China’s demand for coal and iron ore increased substantially in 2009 on the back of the Chinese Government’s stimulus package.

Treasury is duly grateful for the China boom: the 10 per cent growth performance is again noted, but has long ceased to be cause for any particular comment. The China effect is given its due, though, as Australia skips away from the global financial wreckage:

Australia has largely avoided the business failures and large-scale employment losses that have occurred in many other countries, providing a solid foundation for the recovery. The positive outlook is being increasingly underpinned by an improved global outlook and by our close trade links to the rapidly growing Asian region, and in particular China.

China has lifted Treasury over the international rocks so regularly in the past decade, it no longer gets much of a gee whiz treatment in the international economic assessment. What is different this year is a special chapter: STATEMENT 4: BENEFITING FROM OUR MINERAL RESOURCES: OPPORTUNITIES, CHALLENGES AND POLICY SETTINGS. This chapter is partly another shot from Treasury about the new tax on the miners. Yet another way of rendering the Statement 4 headline would be: China and India — How fast can these rockets go? And can Australia hang on?

Economists are born to misery.  So, in the way of Treasury, the fact of the strongest terms of trade in a lifetime has to be dealt with as a bane as well as a blessing. Statement 4 is a discussion of the natural resources curse, de-industrialisation and how the economy will have to change its structure because of mineral prices that will stay high for quite a while.

Read Statement 4 as a 30 page meditation on what the emerging Asian giants will do to the internals of Australia's economy and society. This is more than the terms of trade: it's about the terms for Australia’s future economic settlement.

Photo by Flickr user thepismire, used under a Creative Commons licence.

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The Rudd Government has announced an increase to international development assistance for the next financial year from $3,818 million in 2009-10 to $4,349 million in 2010-11.

It's a decent increase in challenging times which the government says is consistent with its commitment to scale up ODA to 0.5 per cent of GNI by 2015-16.

Foreign Minister Stephen Smith’s media release says Australia’s ODI/GNI ratio is forecast to increase to 0.33 per cent over the 2010-11 financial year. Last year, however, Mr Smith’s media release on the aid budget said the ODI/GNI ratio was forecast to increase to 0.34 per cent in the 2009-10 financial year.

A ratio that appears to be going backwards would seem to indicate that the Rudd government is not as committed as it claims to manage the scale up of Australian aid. 

The Australian's Jennifer Hewitt argues the government has made a budget saving of $207 million by not increasing aid as much as it could have, the ABC's Sean Dorney also draws attention to apparent inconsistencies in the government’s commitments while The Age’s Tim Colebatch says $1.1 billion will be cut from forward estimates of the aid budget over the next four years.

But the government has a rather complicated explanation for this apparent backtracking on page three of the AusAID budget. Australia has implemented new international accounting standards to calculate GNI, which increases GNI by around four per cent. GNI has also increased due to economic growth. The government has decided it will not apply its promised ODA/GNI targets to the higher GNI.

Last year’s ODA/GNI ratio was not the forecast 0.34 per cent but in fact 0.31 per cent, which validates Mr Smith’s statement that Australia’s commitment to aid increased. But the small increase puts more pressure on future budgets if Australia is to meet the 0.5 per cent target in 2015-16.

The lesson I have drawn here is that if you want a good news story on Australia’s aid commitments, it’s not worth comparing this year’s budget with last year’s budget or indeed looking at forward estimates.

Photo by Flickr user origamidon's photostream, used under a Creative Commons licence.

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There's no joy in the budget for Australia's diplomacy. The deficit we reported last year and reiterated this year continues unabated.

There's been a modest increase, as Hamish McDonald termed it this morning. The Departmental appropriation is up to $1.328 million, $83 million more than last year (or a 6.7% increase). The Department's administered expenses (programs which it oversees but lacks ultimate control, such as the funding of the Australia Network and the running of the Shanghai Expo) fell by around $100 million.

But the real picture is much more complex. Australia still has the fifth lowest number of embassies overseas of all OECD nations (even Finland and Iceland have more). The number of our diplomats overseas was almost halved between 1989 and 2009. There are no signs of the 75 new staff overseas or 20 new missions over ten years which we recommended last year to raise Australia's diplomatic representation to a more competitive level.

The 2008-9 operating budget (excluding those administered expenses) was $1.1 billion, but this was stripped to $893 milion when programs and resources were pared back during the year. The 2009-10 budget was $1.2 billion, and that was about what was spent (but only after cuts of over $100 million over the next four years were announced back in November, taking back half of the boost heralded in the budget). On this sort of track record, this year's meagre injections look decidedly shaky.

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Here's what's in the pipeline:

  • $68 million over two years for civilian engagement in Afghanistan
  • $52 million over two years to transition the Baghdad Embassy towards civilian security arrangements
  • $30 million over four years for a new passport system

That's about it, really.

Interestingly, there were 16 new items in the budget last year (such as funding the Security Council bid, the International Commission on Nuclear Non-proliferation and Disarmament, enhanced diplomacy and regional engagement and feasibility studies for new embassies). There are only four new items this year.

I guess there's not much scope for initiative when the budget keeps being squeezed. 

Photo by Flickr user ed ludwick, used under a Creative Commons licence.  

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Major Gen (Retd) Jim Molan is author of Running the War in Iraq.

Here's a new slant on Treasurer Wayne Swan's new budget — this is a Defence-based budget!

If it was not for Defence — specifically the $8.8 billion that was deferred in last year's budget from the 2009 Defence White Paper only ten days after the White Paper was published (see p.13 of this ASPI report) and which does not appear to have been put back into this budget — no way could we be back in surplus in three years' time.

In truth, though, it is getting harder to come to any conclusion on Defence's financials, because the process is even murkier than usual.

We chat about the budget and the equipment being bought, but none of us can really make a judgement on efficacy. The four things that make it so difficult are: the wide bands of time in which projects are to be delivered; the lack of correlation between strategy, money spent and capability delivered; the lack of any expression of how all the capability might be used at any one time over the next thirty years; and the use of what are delightfully called 'savings'.

So there is no link from strategy down to the tactical level of capability, perpetual deferments are facilitated because there is no importance put on having equipment all working at the same time to achieve a joint effect, and it is very difficult to strictly differentiate between 'savings' and money gained from just lowering operating costs (ie. not doing things).

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The result seems to be that the ADF is forever in the procurement or acquisition phase (that is, buying and bringing equipment into service) but rarely does it all come together in a way that equates to anything like an ability to fight jointly.

At some stage in the next ten to twenty years, it would be nice to have everything the government says will be procured in existence and working at the same time. Then we will have a defence force that can do something. Surely, this is what lies behind the 2009 Defence White Paper.

At the moment and for the foreseeable future, for all the money that we spend, I cannot see when we are going to have a defence force that can conduct a sophisticated joint fight. The only way we know bits of the ADF can fight as individual Services is because we take individual units and put them under our allies' control.

The headline expenditure on defence was that $1.1 billion was to be spent to protect our soldiers. That is great. It would also be really good if the Government now set about to protect the people of Uruzgan in Afghanistan. Protection of the population is the essence of counter-insurgency, and the concept of 'population protection' is used repeatedly, but quite erroneously, in Defence media releases.

But I challenge anyone to show that Australian forces, even in their half of Uruzgan, can protect anything but a tiny proportion of the population at any one time, and then only for very short periods of time, so that even some levels of intimidation are prevented. 

To support the ISAF war strategy of 'disrupt, dismantle and defeat' using the ISAF tactical techniques of 'shape-clear-hold-build-transition', we have certainly got to protect our own soldiers, but we must also protect the Afghan people in our part of the province. One is pointless without the other.

 Photo by Flickr user GustavoG, used under a Creative Commons license.

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John Hannoush writes in response to my post:

Is it reasonable to assume that number of overseas missions is a reliable indicator of diplomatic efficacy? Maybe Iceland or Finland are being a bit wasteful. A targeted approach might work better: for example, we could use as an indicator numbers of staff working in countries of high priority. If we were significantly cutting staff numbers at the Washington mission, for example, that would presumably be of concern.  If we decided to get rid of the mission to the Holy See and accredit from Brussels, that might not be of such moment.

Good point. At the time of the Blue Ribbon Panel report, around 40% of Australia's posts overseas were small posts, a number which has grown sharply since 2000. With the best of intentions, staff at small posts often struggle to meet the most basic commitments, and if accredited to more than one nation, there's little scope for much beyond the minimum required to maintain formal diplomatic relations.

Our argument, though, is that we need more diplomats overseas, and not simply a shuffle between posts. In the face of budget pressures, the simplest solution is often to cut overseas posts because they are costly to maintain.

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There are some anomalies in the OECD nations' diplomatic representation overseas. France, Spain and the UK have more posts than the US (perhaps a post-colonial legacy). The Iceland and Finland strategies definitely look peculiar.

However, on any view, our 91 missions compare poorly with the OECD average of 150. Australia has the 14th largest GDP but comes in 26th in terms of number of diplomatic missions. While this might be a clumsy measure of diplomatic efficiency, Australia needs effective overseas representation in a time of increasing globalisation. Our argument is that cutting posts overseas because of relentless budget pressures does not serve our international interests.

Photo by Flickr user tiffany bridge, used under a Creative Commons license.

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