Significant Increases To Defence Funding
This paper outlines the significant changes to the NZDF¡¦s operating baselines which the Government has made as part of the 2001 Budget. The increase in defence expenditure will not be immediately apparent in the 2001 Budget documentation, due to Government-wide decrease in the rate of capital charge, the continuation of the East Timor deployment, and one-off expenses in 2000/01.
Changes to Defence Baselines
Decisions incorporated in the 2001 Budget increase the net operating funding available for the NZDF (ie excluding capital charge and one-off expense appropriations) by over $300 million over the next five years and around $700 million over the next ten years. As the NZDF¡¦s baseline funding does not cover deployments, the 2001 Budget (as in 99/00 and 00/01) will also provide additional funding in 2001/02 for the East Timor deployment.
The following table itemises the significant decisions incorporated in the 2001 Budget that increase the net operating funding available for the NZDF.
New
baseline funding ¡V excluding East Timor funding
($million, GST
inclusive)
2001/02 2002/03 2003/04 2004/05 2005/06 Annually
in outyears
Service personnel
remuneration 18.45 18.45 18.45 18.45 18.45 18.45
Sustainable
capability baseline 25 37 24 16 16 16
Light Armoured
Vehicles 0 3 31 39 39 39
Total 43.45 58.45 73.45 73.45 73.45 73.45
In
addition to the above new funding, the Government¡¦s
decision to disband the Air Combat Force frees up around
$400 million over the next five years and $870 million over
the next ten which has been retained within NZDF and applied
to upgrading the quality of the other defence capabilities.
The 2001 Budget also incorporates a number of significant technical changes to the NZDF operating baseline as follows. (These changes do not affect the net operating funding available to the NZDF to deliver its defence outputs).
Technical changes to NZDF baseline
($million) 2000/01 2001/02 2002/03 2003/04 2004/05
Government-wide
Capital Charge reduction (10% to
9%) 0 (37) (37) (37) (37)
Capital charge reduction due to
ACF write-down 0 (35) (35) (35) (35)
Other expense
appropriation for write-down of Air Combat Force
aircraft 104 - - - -
Total 104 (72) (72) (72) (72)
2001
Main Estimates
The information in the following trend table will appear in the 2001 Main Estimates for Vote Defence Force.
Appropriation Type ($million, GST
inclusive)
1996/97
Actual 1997/98
Actual 1998/99
Actual 1999/00
Actual 2000/01
Actual 2001/02
Projection
Operating
Flows
Classes of Outputs to be
supplied 1,558 1,577 1,577 1,597 1,666 1,598
Other
Expenses - - 5 77 104 -
Capital Flows
Purchase
or
Development of
Capital
Assets 39 39 41 - 2 -
Total
Appropriations 1,597 1,616 1,623 1,674 1,772 1,598
The
decrease in total appropriations between 2000/01 and 2001/02
is largely due to changes in capital charge reducing total
appropriations in 2001/02, and a one-off ¡§other expense¡¨
increasing total appropriations in 2000/01. This ¡§other
expense¡¨ is a technical adjustment. It is the cost of
writing-down the remaining book value of the Skyhawk and
Aermacchi fleets and their associated assets.
Capital Injections
Implementing the Government¡¦s decisions on the future force structure of the NZDF will involve a series of capital acquisitions across all three armed services to achieve the required capability upgrades. Although the capital acquisition plan has yet to be finalised, it is anticipated that capital injections of around $1 billion over the next ten years may be necessary, with the bulk of it likely to be required within the next 5 years. The actual amount will depend on the specification and timing of individual projects, the contracted prices, and the prevailing exchange rate at the time of purchase.
Funding Implications of the Air Combat
Force
The table below compares the NZDF funding increases (excluding capital charge and funding for the East Timor deployment) set in the 2001 Budget with those that would have been required if the Air Combat Force had been retained.
New Baseline Funding to maintain Sustainable
Capability (excluding Capital Charge and
Deployments)
$million, GST
Inclusive 01/02 02/03 03/04 04/05 05/06
Without Air Combat Force
43.5
58.5
73.5
73.5
73.5
With Air Combat Force
98.5
158.5
184.5
190.5
190.5
Further
increases that would have been required to retain the Air
Combat
Force
55
100
111
117
117
Consequently,
had the Air Combat Force been retained, the Government would
have been required to find an extra $500 million over the
next five years (or $1.2 billion over 10 years) for
operating expenses. The operating savings available for
redistribution within the NZDF as a result of disbanding the
ACF ($400 million over the next five years or $870 million
over 10 years) however are less than this because funding
for the Air Combat Force is currently at a basic level that
could not be sustained on a long term basis.
In addition, by disbanding the Air Combat Force, the Government will avoid the significant capital costs involved in replacing the current A4 Skyhawks. It is unlikely that this capital could have been completely funded off the NZDF balance sheet, and therefore would have required a substantial capital injection from the Government.
2001 Budget
and Economic Fiscal Update
The Budget and Economic Fiscal Update (BEFU) contains a breakdown of government expenditure into 14 ¡§functional groups¡¨, one of which is Defence expenditure, and includes forecasts out to 2004/05 (unlike the trend table that appears in the estimates that only goes out to 2001/02). The Defence expenditure functional group is further broken down into ¡§NZDF Core expenditure¡¨ and a number of other expenses lines.
The total of the NZDF expenditure lines do not directly compare to the NZDF¡¦s total appropriations (as in the main estimates) as the series contained in the BEFU are exclusive of capital charge, excludes departments GST expenses and make adjustments for inter-departmental activity.
Defence Expenses BEFU Table -
($million) 1997/98
Actual 1998/99
Actual 1999/00
Actual 2000/01
Projection 2001/02
Projection 2002/03
Projection 2003/04
Projection 2004/05
Projection
NZDF
Core
expenditure 955 986 996 1055 1055 1065 1078 1080
NZDF
Other expenses - 5 77 104 - - - -
NZDF East Timor
deployment - - 22 26 30 - - -
WINZ East Timor deployment
17 22 19
Other Departments Defence expenses
34 31 51 32 35 34 34 32
GST on Defence Acquisitions
76 8 84 41 14 52 39 -
Total Defence
Expenses 1065 1030 1247 1280 1153 1151 1151 1112
The NZDF Core expenditure line shows an overall upward trend, while the Total Defence Expenses line is affected by the inclusion of one-off expenses. By adding together the two lines ¡§NZDF core expenditure¡¨ and ¡§Other Departments Defence expenses¡¨, however, a truer picture of the underlying trends in overall defence expenses is seen as this excludes:
„h One-off expenses such as NZDF Other expenses, GST payments on Acquisitions and the East Timor deployment; and
„h changes in capital charge expenses.