The Shape of New Zealand's Defence - A White Paper (November 97)

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Chapter VI (Six) - Financial Resources

Introduction

Expenditure on a defence force is one of many priorities, and all decisions on Government spending must maintain a fiscal discipline that enables the country’s long term economic aims to be reached. In peacetime and without any foreseeable threat New Zealand has never spent more than modest amounts on defence. However, what was spent has helped the country play a significant part in international affairs.

Investments made in defence capabilities are long term ones with major equipment such as ships and aircraft having lifetimes measured in decades. Frequent changes in direction are not sensible and they are costly in terms of equipping and training the forces. Prudence dictates that the Government should set realistic defence goals and pursue them consistently and effectively. To be effective, New Zealand’s defence spending must be fiscally sustainable.

Expenditure control is an essential feature of responsible fiscal management. It brings about efficiency improvements that assist the Government in meeting its commitment to reduce spending, making each dollar spent more productive and increasing public sector saving. The Government is determined to maintain (and where appropriate increase) social spending, while holding the growth in public spending below the growth in the overall economy until total spending is below 30% of GDP.

It will therefore be necessary to constrain defence costs, while continuing to maintain our defence capabilities at a credible but sustainable level. Defence, like any large enterprise, must operate on a businesslike basis to drive the maximum return from the taxpayers’ investment. Some of the more salient features of defence as a business are outlined at Annex B.

New Zealand Defence Force Management Review

In order to constrain defence costs and ensure that every opportunity is taken to manage the NZDF as efficiently as possible, a Defence Management Review was initiated by the Chief of Defence Force. This review incorporates a number of investigations into major functional areas and real estate holdings which are outlined below.

• The possibility of out-sourcing to commercial firms is under investigation. This includes Army depot-level equipment support and warehousing at Trentham, and Air Force aircraft and aeronautical equipment maintenance at Woodbourne. The new commercial support arrangements will be implemented early in 1998. The feasibility of commercialising the Navy’s port services is also being studied.
• A review of defence inventory holdings will occur in parallel with the introduction in mid-1998 of a replacement supply management information system. This will utilise best commercial practices to achieve lower costs and increase efficiency.
• A rationalisation of the Army’s command structure will occur in mid-1998 with the merger of the two existing field headquarters.
• A review of real estate holdings has been commissioned and will be completed by early 1998. The review is examining the NZDF’s long-term real estate requirements with a focus on reducing infrastructure expenses, consistent with defence operational needs. The review encompasses a feasibility study of transferring the ownership of Service housing while continuing to provide adequate and affordable housing for NZDF personnel.
• The four remaining Andover aircraft will be withdrawn from service and alternative arrangements will be introduced for the multi-engine training of pilots destined for the Hercules, Orion and Boeing 727 aircraft. Arrangements for the lease of aircraft and their operation under a commercial support regime will be in place by mid-1998.
• Support for the Air Force basic pilot training is being commercialised. The contractor will provide support for the air trainer aircraft on a turnkey basis, and the Air Force will supply the flying instructors. The new arrangements will start by mid-1998.
• A conservative estimate of the savings to be derived from these initiatives are:
  • Operating Expenses
    Annual savings estimated at $8 million, rising to a potential $45 million by 2003/04.
  • Capital Investment
    A likely net saving of $215 million over twenty years.

Defence Funding Levels

An increase from the existing funding level is required in order to sustain a credible defence effort in the future. However, in present fiscal circumstances, and because of the commitment in the Coalition Agreement for increased spending in other areas, there is a need to constrain any extra funding in the short term. The baseline funding of the NZDF will only increase by $25 million next year, but this will gradually build up so that the average baseline increase over the next five years will be about $72 million. Similarly, over the next five years capital injections could be as much as $300 million. These injections will be re-paid in later years, once the block obsolescence problem associated with replacing ships, aircraft and vehicles acquired in the 1960s has been overcome, with a consequential decrease in the requirement for capital investment.

There are some positive economic benefits from this. For example, two thirds of the cost of the two ANZAC ships New Zealand has purchased will come back to New Zealand in jobs spread across a wide spectrum of companies (there are now over 600 companies involved in building the ANZAC ships). Another benefit is the transfer of technology to New Zealand through the involvement of industry in this technologically sophisticated work.

This increased level of defence spending is both affordable and sustainable. It can be accommodated within the Government’s overall spending limits under the Coalition Agreement.

With the expected growth in the economy, the proportion of the country’s wealth allocated for defence will remain more or less constant. We are currently spending about 1.3% of GDP on defence (inclusive of GST and Capital Charge) and this will not change.

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