Hard budget choices ahead if New Zealand to be a force for stability

Uncertain times require defence spending to be maintained at the NATO two percent standard, writes Dr Wayne Mapp. What would be the priorities, and could they be afforded within a two percent of GDP defence budget?

Just six months ago, I was arguing that it would be sufficient for New Zealand to maintain defence spending at 1.5 percent of GDP, which was essentially the level of defence spending for the last 20 years.

The accounting change in 2018, which shifted the calculation of New Zealand’s defence spending onto the NATO measure, did not actually increase defence spending, it was simply an accounting exercise. Nevertheless, it was an important change because it provided a proper comparison to New Zealand’s partners, rather than shortchanging New Zealand’s true defence expenditure.

Since then, the Ukraine war has occurred and with it, the unparalleled unity of the West. Finland and Sweden have abandoned their neutral stance that has prevailed since the end of World War Two, and in Sweden’s case, for much longer. Both nations see the importance of being within the umbrella of collective defence.

The war has also provided the impetus for increased defence spending among western nations. The utility test of having enough for the general security environment of the last twenty years, and beyond that, being little more than a tripwire is not sufficient. Defence spending must provide real resilience. Help might be many months away.

In our own region, China is aggressively pursuing a deeper relationship with ten Pacific nations. China’s aspirations go beyond economic issues. In the case of The Solomons, China is seeking a security relationship as well. Two of the ten nations, the Cook Islands and Niue, are actually part of the realm of New Zealand, with New Zealand being responsible for security and defence.

New Zealand, along with Australia, will have to act deftly. Increasing New Zealand’s defensive capability in maritime security and working more fulsomely with the Pacific States, especially through the Pacific Forum, has assumed a new importance.

Even during the period of the so called “benign strategic environment” it was clear that the multiple deployments of East Timor, The Solomons and Afghanistan severely stretched the New Zealand Defence Force. At the peak, when all three deployments were occurring simultaneously, it was not actually sustainable, certainly not for the Battalion Group in East Timor.

We should draw a lesson from the last twenty years, then add on the increased uncertainty of recent times. To my mind, if we keep defence spending at 1.5 percent of GDP, New Zealand will be shortchanging future risk. There would be a real prospect that New Zealand could not meet the commitments expected of us, especially within our own region. There is simply not enough resilience within the Defence Force, or to put it another way, not enough reserve capacity to provide security in uncertain times.

The NATO standard of two percent of GDP, which all NATO countries are now striving to achieve, would increase New Zealand’s defence spending by one third from the existing 1.5 percent of GDP. There is no doubt that this would be a substantial increase. However, it would not be sufficient to introduce new capabilities, such as an air combat force. Instead the increase should be used to strengthen existing capabilities.

I know from experience the level of risk we currently undertake as a nation. I introduced a policy of a daily report on what aircraft were available. There were simply too many times when only one aircraft, across the entire fleet, was available for tasking. Although this was during the various upgrade programmes, when two or three aircraft were in the production process, I understand that the situation has barely improved.

Similarly, with the naval ships. With only two frigates, during the recent upgrade there was a twelve month period when New Zealand had no frigates available. The Army would struggle to field a full Battalion Group. Sustaining it for more than twelve months would be almost impossible.

What would be the priorities, and could they be afforded within a defence budget of two percent of GDP?

Air Force

It is noteworthy that New Zealand has not replaced the P3 Orions on a one-to-one basis. A major part of the reason was cost, although it was considered that the new aircraft would have greater availability. However, the defence demands within our region, including South East Asia have become more demanding, so more capacity might be desirable. Two extra P8 Poseidon’s, with a full range of spare parts, would cost an additional $800 million. At least one extra crew would also be required.

The C130H Hercules have been replaced on a one to one basis, though the Cabinet was offered the opportunity to purchase one or two more. The same argument applies. The increasingly demanding situation, which also includes climate change and thus a greater requirement for disaster relief, means more resilience is required. A commitment to two percent of GDP would mean the two extra aircraft could have been purchased.

This argument also applies to the helicopter fleet, particularly the NH 90, where there is only eight in the fleet. With Australia going out of the NH90, maybe there is a case to acquire some of them. This approach proved very successful with the acquisition of the Australian Seasprite fleet.

Some years ago, New Zealand missed the opportunity to purchase the last two C17 heavy airlifters. As a consequence, New Zealand is unable to airlift the NH90 helicopters and is reliant on the goodwill of the RAAF to provide their C17s to do so. It would make sense to have a fleet of smaller helicopters that can be airlifted by the C130J. Clearly the Augusta 109 can be airlifted, though because of the amount of equipment in these helicopters, they have a limited payload.

The cost of bolstering the core fleets of the RNZAF would add 25 percent to the annual RNZAF budget, with another $250 million in operating costs and around $1.2 billion in capital.

RNZAF Hercules flying in formation with two USAF C-130Js over Auckland.

Image courtesy NZDF.

Army

The Capability Plan presented by Ron Mark in 2018 would have added another 1,000 people to the Army, lifting the numbers to 6,000. This number would guarantee that New Zealand could field a Battalion Group on a sustainable basis.

As with the RNZAF, the annual cost would be in the order of $250 million operating costs. Capital expenditure would also be required, particularly in expanding existing bases. It would be prudent to plan for not less than $1 billion, given the relatively poor state of Defence Force infrastructure.

Navy

The more challenging expansion would be within the Navy. When it comes to replacing the two ANZAC frigates, logic dictates that three ships be purchased. This will require not less than an additional $1.5 billion capital beyond the $3 billion currently envisaged to acquire two ships. Since the replacement ships are not required for another decade, this expenditure won’t be required till then. This is similarly true of the extra crew that will have to be recruited.

The Navy has an additional problem. The Project Protector fleet will need replacing before this decade is out. The Project Protector vessels were bought on the cheap and their deficiencies have been evident during their service. The Project Protector vessels cost $500 million twenty years ago, effectively $1 billion today. Substantially more capable ships will cost considerably more. An increase in funds of 100 percent would be realistic, so a total of $2 billion will be needed.

As with the Airforce and the Army, it would be realistic to plan for an increase in annual operating costs in the order of $250 million. The additional capital costs will be more like $2.5 billion, being the additional frigate and the increased cost of replacing the Project protector fleet with more capable vessels.

Adding it up

Adding all this up means an increase in annual defence operating costs of $750 million. The increase in capital expenditure across the three services will be not less than $5 billion. However, this expense will be spread over a decade, so the increase in capital is $500 million per year.

The 2022 budget continued defence expenditure at 1.5 percent of GDP, made up of approximately $3 billion in operating costs and $1.5 billion in capital costs. The capital expenditure appears in both Vote Defence Force and Vote Defence (MOD), but it seems to a single block of expenditure.

Stepping up from the 2022 budget and building resilience into the Defence Force would require an additional annual cost of $750 million in operating costs and an extra $500 million in capital costs. This amounts to a 25 percent increase in operating costs and a 33 percent increase in capital costs and would result in defence expenditure of 1.9 percent of GDP. Sufficiently close to two percent.

This resilience plan will take most of a decade to implement, particularly in respect of the naval expenditure. Thus, the immediate annual increases will be more modest.

A real increase to the defence budget of five percent per annum, in addition to inflation, will see the defence budget reach 1.9 percent of GDP well before 2030. Decisions to increase the P8 Poseidon fleet from four to six and the C130J Hercules fleet from five to seven could be quickly taken and would be fully implemented within five years.

This would be a clear signal to our partners, particularly Australia and the United States, that New Zealand is serious about our contribution to the security of our shared Pacific region.