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Thursday, March 23, 2017

Bad News for Defence: Budget 2017

By: David Perry, CGAI Senior Analyst

On March 22, the Government of Canada published a federal budget with nothing but bad news for Canada’s Department of National Defence (DND). This budget, the second for Prime Minister Justin Trudeau has removed a massive amount of money - $8.48 billion - set aside to buy Capital equipment and build infrastructure over the next twenty years. This shift, the largest ever re-profiling of the money earmarked to buy new kit and buildings for the military, is bad news for three reasons. First, the budget indicates that either the defence procurement system the Liberals inherited has not improved over the last year, or that the Trudeau government is choosing to remove the funding. Second, while defence funding has been shifted before, never have defence dollars been removed more than six years into the future. This budget removes defence funding allocated out through 2035-36, taking away future procurement funding that was scarce to start with. Third, the budget signals that Canadians should expect their new defence policy to reflect a military with significantly less money than it had prior to March 22, 2017.

Budget 2017 And Defence – Disappearing Capital Funds

The only statement of major significance for DND in Budget 2017 relates to a major shift in procurement funds. This is the fourth such shift of procurement money announced since 2012, but the first to announce a reallocation spanning more than six years (these shifts are outlined in Table 1 below). As the budget states:

The reallocation of $8.48 billion of funding from the 2015 – 16 to 2035 – 36 period to future years is required to accommodate two key capital projects: the procurement of fixed-wing search and rescue aircraft, and the modernization of light armoured vehicles that were originally scheduled to receive only partial upgrades. While there is sufficient funding available for these projects, the expected profile of large-scale capital funding does not align with the timing of expenditures associated with these projects.1

Aside from the two projects identified in the budget plan itself, finance officials in the budget lock-up were unable to identify any other projects implicated in the shift of funds. This leaves the move largely unexplained. The contract for the Fixed-Wing Search and Rescue Aircraft was signed late last fall and the one for the most recent tranche of Light Armoured Vehicle Upgrades announced in February 2017. The contract for the former is worth $2.4 billion in the acquisition stage, while the one for the latter only $440 million. Even if both projects were cancelled completely or delayed in their entirety beyond 2036 (and there is no indication that they were cancelled or delayed at all) they could account for at most $2.84 billion of the funding that is being shifted. This leaves another $5.6 billion worth of shifted funds totally unaccounted for, and the overall move effectively un-explained.

Procurement Problems or Reductions by Choice?

The Trudeau government inherited a procurement system chronically unable to spend all of the funding allocated for DND to buy new equipment and build infrastructure. In his first budget in 2016, Finance Minister Bill Morneau reprofiled $3.7 billion in Capital funds, citing an inability to spend the money. Having been in office for only five months at the time of the 2016 Budget, the Liberals cannot not be faulted for having shifted money that the previous government was unable to spend.

Twelve months later, however, responsibility for the shift of Capital funding outlined in the 2017 Budget, more than twice as large as any that preceded it, falls squarely on the Liberal government. Either $8.48 billion worth of procurement delays have developed since March 2016, or the money was reprofiled for other reasons.

Table 1: Budgetary Reprofiling of DND Capital Funds ($B)
 11/1212/1313/1414/1515/1616/1717/1818/1919/2020/2121/22Total
Budget 2012*-0.400-0.500-1.300-0.700-0.300-0.100     -3.540
Budget 2014**  -0.592-0.575-0.900-1.075     -3.142
Budget 2016***    -0.205-0.090-1.319-0.911-0.684-0.507 -3.716
Budget 2017****     -0.197-0.017-0.102-0.014-0.091-0.512-8.480
Total-0.400-0.500-1.892-1.275-1.405-1.462-1.336-1.013-0.698-0.598-0.512-18.878
*A total impact of $3.54 billion was announced in Budget 2012, Table 6.3, p. 236. The annual reductions depicted are those shown in Budget 2012, Table 6.3, p. 236, and do not sum to $3.54 billion
** Budget 2014 Table 4.1.1, p. 260.
***Budget 2016 Table 6.1, p. 204 and Information provided by Government of Canada Officials
**** Budget 2017 Table 3.2, p. 204 and p. 186. Only $933 million was accounted for in the budget document - leaving the total depicted well short of the $8.48 billion that was indicated to have been shifted.

A Long-Term Capital Crunch

All three of the previous shifts of budgeted procurement funds have occurred citing procurement problems and an inability to actually spend the money available. This budget defers funding over the next two decades. This is especially surprising because prior to Budget 2017, DND was facing an acute shortage of funds needed to buy new equipment and rebuild infrastructure in the future. Public documents indicated that before the changes made in Budget 2017, DND needed roughly another $2 billion a year annually, on average, in additional Capital money to acquire all of its planned projects and that was before the Liberals announced plans to buy not one, but two fleets of fighter jets. Budget 2017 indicates that after 2021-22, DND will have $7.5 billion less funding through 2035-36 to buy new kit and build new buildings, just when it needed the money the most.

A Less Ambitious Defence Policy

The 2017 federal budget is particularly important for DND because it sets the fiscal framework for the Liberal’s new defence policy. This budget is a crucial indicator of the type of defence policy the Trudeau government will publish because, in Canada, defence policy has historically followed defence dollars, not the other way around.

In an interview during the budget lock-up, Finance Minister Bill Morneau indicated that the Defence Policy Review will indicate the Liberal government’s level of ambition for Canadian defence policy. Budget 2017, by removing funding over the next two decades, suggests quite strongly that the forthcoming defence policy will lower Canada’s level of defence ambition.