Budget 2014: Back to 2007?
Budget 2014 announced more “budget adjustments” for the Department of National Defence, the fourth budget since 2010 to do so. The two most significant measures are a two-year operating budget freeze, and a re-profiling of $3.1 billion in DND’s capital accrual space beyond the current fiscal planning framework. As a result of Budget 2014, the defence budget, in accrual terms, is now lower than it was the year before the Canada First Defence Strategy was launched, adjusting for Consumer Price inflation.
The 2008 CFDS built on significant budget increases in 2005 and 2006, and pledged “predictable, long-term funding” thereafter for the next 20 years. Under this system, the defence budget did grow as predicted between 2008/2009 and 2010/2011. Since 2011/2012, however, the budgetary amounts for defence have been reduced progressively. While CFDS was intended to provide DND with $490 billion over 20-years, budget cuts in 2011 and 2012 have reduced this amount by $32 billion over that planning period.
In addition to these outright cuts, operating budget freezes have eaten into the planned allocations for readiness. The three-year operating budget freeze introduced in 2010 forced DND to redirect $355 million a year from operations and maintenance funds, toward personnel spending, in order to pay for wage increases. The operating budget freeze announced this February will force a similar redirection away from O&M.
Assuming the impact is comparable to what occurred in 2010 (despite multiple requests, DND would not, or could not, provide the actual details at the time of writing), this would strip away roughly another $230 million in operations and maintenance funding. Because of their long-term annual effect, the total impact through 2028 will see roughly $9 billion in funds that would have otherwise been spent on training, maintenance and repair and overhaul go to fund personnel expenses. In combination with the budget cuts, themselves heavily skewed toward readiness spending, O&M spending has been disproportionately affected by the budget reductions.
Finally, the capital program has been shifted to the right, to the tune of $3.1 billion in 2014. This shifts the budgetary funds set aside for capital equipment to some point in the future, after 2019. A similar shift of $3.54 billion occurred as a result of Budget 2012. In combination, the department’s accrual space for capital has seen $6.64 billion removed in the near term, and deferred down the road.
This is a reflection of the mismatch between the ambitious recapitalization plan outlined in CFDS, the capital funding earmarked to support it, and the ability of both the government and defence industry to deliver that equipment to the Canadian Armed Forces on schedule.
Dating back to 2007/2008 an average of roughly $1 billion each year in DND’s Vote 5 Authorities was not spent as intended, and either transferred, carried forward, re-profiled, or lapsed. As a result, the government was able to remove DND’s accrual space, since it was essentially unneeded. The investment cash provided for equipment purchases has gone un-spent, as the recapitalization of the Canadian military has been delayed by several years. Consequently, the accrual space that would have been used to account, in budgetary terms, for these purchases, is not yet required. Because of this, the government could remove the funding, without technically cutting DND’s budget. In this sense, the movement of funds is not overly significant – it was money that would not have been spent anyway. For the government’s bottom line, the shift was significant, as it provided a quarter of the total government expenditure savings in Budget 2014.
The root cause of the shift, however, is a problem. Persistent delay across the defence capital program, with essentially every project in NSPS late, means older, increasingly less capable equipment is kept in operation, and project budgets steadily erode. Whereas recently DND was starved for capital funds, now it effectively has more money than it can actually use.
The recently launched Defence Procurement Strategy counts as one of its goals delivering the right equipment to the military in a timely manner, so hopefully this situation will be improved soon. Participants at CADSI’s Armed Forces Outlooks, however, suggest that the actual impact of this new strategy is not yet clear, even to members of Canada’s acquisition workforce. Until these changes are rolled out, Defence will continue to have more money than it can actually use.
Dave Perry is the Senior Security and Defence Analyst for the Conference of Defence Associations Institute. The views expressed are those of the author and not necessarily of the Institute.