Derek Woolner is a Visiting Fellow at the Strategic and Defence Studies Centre, ANU. He was Director of the Foreign Affairs and Defence Group in the Commonwealth Parliament's research service till 2002.

In an earlier post, I outlined how the economic turbulence of the 1970s, '80s and '90s hamstrung the plans of governments of both major parties to sustain and develop the capabilities of the Australian Defence Force.

Since the Defence organisation seems likely to face another period of restricted funding, a look at the nature of the spending constraints of last century and how they built pressure on defence policy may indicate something about the future of the ADF.

The 1976 White Paper contained an objective of reducing organisational overheads and redirecting savings towards operations. But as the decades rolled on and appropriations continued to be squeezed, the quest for efficiency became a search for the means to sustain capability.

To do this, financial management focused on the control of recurrent costs, with personnel reductions the central objective. In the period between mid-1985 and the beginning of the 21st century, 45,000 full-time defence organisation positions were removed. And beginning in 1981, the ADF was reduced from 72,500 personnel to 50,000.

The greater part of defence civilian personnel reductions came from the privatisation or corporatisation of production facilities and naval dockyards. Kim Beazley, a great salesman of government assets, modernised an organisational structure originating in the Second World War in the process of moving expenditure from personnel to acquisition and sustainment.

The Chief of the General Staff (later renamed Chief of Army) was explicit about diverting personnel costs to fund capital investment. When explaining a 1985 reorganisation disbanding some Army units and amalgamating others with the Reserve in the shedding of 677 personnel, he commented that the 'reductions were in line with budget strategy of placing maximum emphasis on procuring capital equipment.'

This policy continued to the end of the 20th century. When elected in 1996, the Howard Government held defence spending at Keating Government levels, but it sought funding flexibility through the Defence Reform Program (DRP), expected at maturity to yield savings of $1 billion per annum from changes to defence management.

Yet these savings were based on the permanent strength of the ADF being reduced to 42,500, so when Chief of the Defence Force General John Baker persuaded the Government to reconsider and authorise a strength of 50,000, $632 million of the DRP's savings disappeared in a puff of accountancy. As other savings also failed to materialise, the DRP was left promising a recurrent yield of little more than $100 million, just at the time events in East Timor were catching the attention of the Australian public.

In operation for almost two decades, the financial strategy of diverting appropriations from personnel to acquisition failed. The proportion of the defence budget spent on personnel and equipment changed little across the period. Chief of the Defence Force Admiral Allan Beaumont explained in 1995: 'we've had to use a lot of those funds to pay our people salary increases, and therefore we haven't been able to put as much into capital equipment as we wanted.' That situation pertained until the 2000 White Paper.

Defence was competing in a distorted wages market but it was government fiscal strategy to restrict wage settlements that distorted the Defence budget. By the 1990s, federal departments were reimbursed for only a portion of any wage rises granted, departments then finding the difference from within their annual appropriations. For Defence, this meant siphoning funds from the acquisition budget.

Major combat capabilities were lost in decades up to 2000. The RAN lost its capacity to operate fixed-wing aircraft at sea and, later, the ability to provide air defence to any substantial collection of shipping. The RAAF retained its major combat capabilities but spent decades waiting without success for the support, in early warning and modern tanker aircraft, to make them operationally effective. The Army lost 30% of its deployable force with two Regular battalions disestablished.

There were other areas of saving, particularly cutbacks of operating costs. Usually minor in financial return, cumulatively their effects could be severe. After decades of restrictions, only 7% of Army vehicles were fully taskworthy by 1997.

When the Government began to contemplate its response to developments in East Timor, it accepted that the ADF could not support an intervention in its then current state. The $183 million it allocated in March 1999 to bring 1 Brigade, based in Darwin, up to a level of operational readiness was some indication of effects of long term underfunding.

Yet the Government's agreement to fund an additional 3500 Service personnel to sustain East Timor's secure transition to nationhood was more significant. With commitment to further wages cost growth tied to the demands of ADF operations, the era of savings gleaned from personnel reduction was over, at least for a time.

Thus the commitment to East Timor set the funding parameters for the 2000 White Paper and left little alternative to providing sustained real increases in funding. Today, with the sequence of operational deployments coming to an end, the question is whether personnel reductions are again a financial option.

Photo by Flickr user DVIDSHUB.