Defence Portfolio
Briefing to the Incoming Government 2005
Votes: Defence and Defence Force (continued)
The NZDF Operating Baseline
The Operating Baseline contains four elements:
- Operating (fuel, ammunition, equipment maintenance, spare parts, and other consumables).
- Personnel.
- Depreciation.
- Capital charge.
The primary source of revenue for the NZDF is Revenue Crown with only 1.0% of NZDF funding coming from third parties (Revenue Department and Revenue Other).
The Budget 2005 Estimates of Appropriations provide for operating costs during 2005/06 of approximately $1.6 billion and a capital injection of $410 million for the Defence Long-term Development Plan and Defence Sustainability Initiative projects. The following two pie charts show the operating costs distributed by cost category, and by Service.
View text equivalent of the above two pie graph images.
In the first chart, the highest cost is personnel. In the second chart, the three Services each share approximately one third of the budget with the Army having the largest share, and the Navy and the Air Force approximately equal. HQ NZDF and HQ JFNZ each have a small share. The makeup of each Service budget, however, is quite different.
The next chart is a composite bar chart, which shows the NZDF budget by Service and cost category.
Text equivalent of the above bar graph is not available by the New Zealand Defence Force.
Personnel costs represent the highest proportion of each Service's operating expenses. This reflects the number and level of personnel required to operate, maintain and support the current military platforms. Together, personnel and operating costs make up almost 70% of the operating budget. It should be noted that the three Services operate in different ways:
- The Army has significantly higher personnel costs, reflecting the fact that armies are personnel intensive.
- The Air Force has significantly higher operating costs, reflecting the fact that maintaining and operating aircraft is cost intensive.
- The Navy activities attract higher levels of depreciation and capital charge, reflecting the equipment orientation of this service (most notably the frigates).
Both the Air Force and the Navy are responsible for most of the NZDF capital charge as they are very much asset dependent Services (ships, aircraft, airfields, dockyards etc).
Variable Costs
A significant feature of the operating cost component of the NZDF is the breakdown between fixed and variable costs. Some 95% of the total costs are fixed costs that cannot be easily changed in the short-term. These include personnel costs, capital charge, depreciation and the operating costs associated with significant equipment and property holdings which cannot be disposed of easily. The variable costs that can be changed in the short-term are those associated with consumables such as ammunition, fuel, rations, travel costs, repairs, and maintenance. Variable costs are critical to achieving and maintaining operational effectiveness.
Movement in the New Zealand dollar against the major overseas currencies is another variable cost. In the past, when the New Zealand dollar converted to US$0.40, considerable pressure was placed on variable costs such as fuel, spares and services purchased overseas. The current relatively high value of the New Zealand dollar as compared to the US dollar, provided it is sustained, helps to relieve some of this pressure and other continuing pressure felt from the price increases for military consumables and spares.
Additional Costs
The Government purchases annual outputs from the NZDF at DLOC and known activity levels. If the Government decides to activate force elements as part of an unplanned initiative, the additional costs associated with generating OLOC, the deployment, and the sustainment of the force for the duration of the task, need to be met. These additional costs are appropriated under Output Class: Operationally Deployed Forces.
The 2005 Budget established a new Multi Year Appropriation (MYA) to provide the funding necessary for most routine deployments carried out in support of the United Nations and other agencies as approved by the Government. The MYA expected to cover such costs from 2005/06 to 2007/08 totals $67 million. It is expected that Cabinet would consider any extraordinary proposals on a case-by-case basis.
Defence Spending in New Zealand
Further to the values agreed during Budget 2005 for 2005/06, a proposal has recently been submitted to the Minister of Finance and Minister of Defence (Joint Ministers) inviting approval to transfer an operating surplus of $19 million from 2004/05 to 2005/06. Additionally the recovery as a capital injection, of a $41 million profit on the sale of assets realised during 2004/05 has been proposed. The expense transfer had previously been approved in principle by Cabinet, while the capital injection proposal is in accordance with arrangements that have also been previously agreed. It is intended that each of these matters be recognised as part of the October Baseline Update (OBU).
Year |
Annual Appropriation 2005 Budget |
Multi Year Appropriation 2005 Budget |
Currently |
DSI/ |
Total Cost |
|---|---|---|---|---|---|
2005/06 |
1,596.387 |
22.333 |
1,618.720 | 1,618.720 |
|
2006/07 |
1,627.561 |
22.333 |
1,649.894 |
72.761 |
1,722.655 |
2007/08 |
1,655.103 |
22.333 |
1,677.436 |
130.791 |
1,808.227 |
2008/09 |
1,685.176 |
1,685.176 |
199.897 |
1,885.073 |
|
2009/101 |
1,685.176 |
1,685.176 |
285.681 |
1,970.857 |
|
2010/112 |
1,685.176 |
1,685.176 |
394.263 |
2,079.439 |
|
2011/122 |
1,685.176 |
1,685.176 |
462.899 |
2,148.075 |
|
2012/132 |
1,685.176 |
1,685.176 |
475.889 |
2,161.065 |
|
2013/142 |
1,685.176 |
1,685.176 |
534.387 |
2,219.563 |
|
2014/152 |
1,685.176 |
1,685.176 |
530.651 |
2,215.827 |
- The first year (2005/06) of the DSI, and Project Protector costs until 2008/09 have now been appropriated through the 2005 Budget, with the outyear costs and rollout year changes to be appropriated in future budget rounds.
- Unless otherwise agreed the values appropriated for 2008/09 will "rollover" to 2009/10 and outyears.
- Based on forecast NZIER GDP 2005/06 to 2009/10 then extrapolated to 2014/15.
- The total costs and forecast GDP comparisons do not provide for future capital injection values.
