Perry: Defence Budget (not as bad as you think)

BY DAVID PERRY
© 2016 FrontLine Defence (Vol 11, No 3)

Budget 2016 provided a mix of good news, pleasant surprises and disappointing news for Canada’s military. Despite the scant discussion of the Department of National Defence (DND), the budget actually contained several noteworthy defence related items. DND received some modest new money for infrastructure upgrades, incremental funding for its operations in Syria and Iraq, its planned (but unmentioned) 2% increase to its defence escalator, and the third major deferment of DND’s budgeted procurement money in three years.

The latter measure has attracted by far the most attention, and coloured overall perceptions about the impact for DND. But if the 2016 Budget provides a window into the current government’s thinking about defence, it reflects, on balance, a slightly positive signal. The government kept the big budgetary promise it made during the campaign (the good news), introduced a spending review smaller, thus far, than pledged (some uncertainty), provided some unexpected, albeit small, cash infusions (the pleasant surprises), and continued a trend of deferring procurement funds (the disappointing news), but actually demonstrated how difficult it would have been to actually use the money.

The Good News
Despite pre-budget speculation to the contrary, there was no outright cut to DND’s budget in 2016. While two weeks prior to Budget day it was reported that there would be a $400 million reduction to the DND ‘budget’, this reference was to the cash-based spending in the Estimates. The Report on Plans and Priorities for 2016/2017 showed that final, year-end spending for Fiscal Year 2015/2016 was just over $19 billion, whereas the spending requested in the 2016/2017 Main Estimates was $18.64 B.

While the requested funding for 2016/17 is less than for the previous year, this is largely the result of DND asking for less money for Capital equipment funding than the year before, rather than an actual budget cut.

The requirements for Capital funding vary from year to year, so reductions in the amount requested do not equate to an actual cut to this funding.

Notwithstanding the slight year after year budget reductions, DND actually saw an increase to its baseline Vote 1 (Personnel, Operations and Maintenance) operating budget – as planned.

National Defence has a unique funding arrangement, whereby an automatic annual increase to its budget (known as the defence escalator) is built into the fiscal framework. This funding arrangement means that the department automatically receives a budget increase every year, unless otherwise indicated. While Budget 2016 made no mention of this funding, Department of Finance officials in the budget lock-up confirmed that this escalator was in fact provided.

Under the terms of the Canada First Defence Strategy (CFDS) funding arrangements, DND’s escalator increases by 2% each year. That is, each year, the amount by which the National Defence budget increases is 2% larger than the increase of the year before. Of note, this does not mean that either the defence budget (on an accrual basis) or defence spending (on a modified cash basis) actually increases by 2% annually. In fact, the impact of the annual increase to the defence escalator is less than a 2% rise in either the defence budget or defence spending. Nonetheless, the escalator does provide the department with a predictable funding increase, so long as no other cuts or freezes are applied to the defence budget.

The Harper government’s 2015 budget included a pledge that the annual escalator will increase to 3% annually for 10 years (between 2017/2018 and 2026/2027). In its campaign platform, the Liberal Party of Canada pledged to “maintain current National Defence spending levels, including current planned increases.” The additional $361 million DND received for 2016/2017 is evidence that the new Liberal government has stuck to that campaign commitment thus far.

The total absence of any mention that this campaign promise had been kept, however, is curious. What this means about future defence budgetary intentions, and whether DND will see its escalator increase by 3% in 2017, remains to be seen – will this migrate from the “good news” category to “uncertain” or “disappointing”?

Some Uncertainty
The Budget did provide an indication that the government will conduct a spending review – another campaign promise. Whereas the Liberal Party campaign platform had pledged roughly $3 billion in spending efficiencies, the 2016 Budget announced government-wide “annual reductions of $221 million in professional services, travel and government advertising.” This was described as “a first step” in the spending review, with a pledge that other changes would be forthcoming to “better align government spending with priorities.” The Finance officials in the federal budget lock-up were unable to provide any assessment of the impact of the measures announced so far to DND, however, since National Defence accounts for a fifth of Direct Program spending, it is unlikely that defence spending will be spared. So far, however, the spending review is far less aggressive than what had been discussed in the platform.

The Pleasant Surprises
Two modest budget measures were unforecasted good news for defence. First, DND received an unexpected increment for addressing its infrastructure requirements. The $200.5 million over two years is a modest boost for a department with tens of thousands of buildings and works across dozens of bases nationwide. It is nonetheless a welcome infusion of money in an under-resourced sector of its budget. The funding, to be dispersed across upgrades to jetties, air fields, ranges, housing units, reserve armouries and northern operating infrastructure, represents investments DND will no longer have to fund within its own budget.

The budget also contained incremental funding for the mission in Syria and Iraq. For most of the past decade, the Canadian military has funded some or all of its incremental expeditionary mission costs out of its existing budget envelope. For example, during the mission in Afghanistan, DND had to absorb over $3 billion dollars in operational costs out of its existing budget. Redirecting funding in such a manner to offset unforeseen contingency operations makes it difficult to conduct sound long term budget planning. If this indicates a return to the previous practice of providing DND with incremental funding for the bulk of its operational costs, it will be a welcome change. In recent years, the $306 million provided in Budget 2016 would have been redirected from other planned DND budget items.

The Disappointing News
The aforementioned items were all positive news for DND’s Operations and Maintenance, Personnel and Infrastructure funds. In contrast, the outlook for its Capital Equipment purchases wasdisappointing, as some of the funding that had been set aside in the fiscal framework for procuring Capital equipment was removed.

A total of $3.7 billion in DND’s accrual space that had been set aside in the fiscal framework between 2015/16 and 2020/21 was removed and redistributed evenly between 2021/22 and 2044/45. The accrual space is a budgeting construct that had been introduced with the CFDS in 2008. It set aside a portion of DND’s budget to account for the annual amortization expenses associated with the purchases of major defence equipment.

The funding construct is somewhat analogous to a home mortgage in the sense that, for most Canadians, the purchase cost of your home does not count against your monthly budget, and instead only your mortgage payment does. To relate this back to the Capital Equipment funding dynamic, while the Bank (in this case Finance Canada) has to pay the seller in full for the cost of your house (or for DND, Irving or Seaspan for naval ships), you only pay the Bank your monthly mortgage payment (for DND, its annual amortization charges for the ships). While you might have the money set aside to pay your monthly mortgage payments, if your real estate agent can’t actually close a deal for you to buy a house, you don’t actually have to pay your mortgage (even though you could have, financially).

The 2016 budget made clear by publishing a table depicting both the previous and revised profile of the accrual space that this basic dynamic explains why DND could not use all the money set aside.

The CFDS created the accrual space construct for DND in 2008 on the premise the DND could immediately start recapitalizing all of its combat fleets. To make full use, right away, of all the accrual space set aside for this recapitalizaiton would have required several 10s of billions worth of purchases and delivery of major equipment, in just a few years. While some progress has been made, the full scope of planned reinvestment simply has not happened on schedule, because the procurement system cannot move the money fast enough.

As a result, the Department of Finance is moving the money into the future, not to prevent purchases, but because DND has been unable to buy equipment.

In doing so, the funding was redistributed evenly over the subsequent 25 years, increasing the annual budget allotment for Capital equipment. This will actually provide defence with a small degree of additional flexibility to account budgetarily for additional equipment purchases in future years.

The reaction to the defence portions of Budget 2016 has been largely pessimistic, particularly within the defence industry, due to the reprofiled Capital funding. The defence section placed by far the largest focus on that budget measure, understated the impact of the infrastructure and operational funding, and did not mention the escalator increase at all, so this reaction is understandable. This sentiment also likely reflects a widely held expectation that the Liberals would reduce defence spending. For those expecting that outcome, the Budget certainly lent itself to that interpretation.

The Future
It is impossible to know, at this point, what the future intentions are. This Liberal government inherited a situation where the procurement system remains unable to make full use of the funding available. Realistically, the new government could have done little to fix that situation in only five months in office. After all, the previous government was unable (or unwilling) to do so in the decade they were in power. Thus, the government may have been happy, or not, to remove this funding from the fiscal framework and punt it into the future. It does not seem as though they had much choice. Whether they choose to fix this situation to prevent it from happening again in 2018 will be the true test of whether they were happy to save the money in this budget, or actually would have preferred to spend it.

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Dave Perry is the Senior Analyst of the Canadian Global Affairs Institute.

Conservative and Liberal MPs trade blame for failed Military Procurement

By: David Pugliese, The Ottawa Citizen

OTTAWA — The Conservatives and Liberals traded barbs in the Commons Wednesday, arguing about who was to blame for failed military equipment purchases after an Ottawa Citizen article revealed some of the Canadian Forces key acquisitions will see their funding delayed.

The Liberal government’s budget, released in late March, calls for $3.7 billion in spending on equipment to be delayed until 2021 or later.

But the Citizen revealed that some of the military’s top equipment programs — including projects to buy new Cyclone maritime helicopters and Arctic patrol vessels — will be among the projects to see their funding delayed.

Citing the Citizen article, a trio of Conservative MPs launched attacks on the government, accusing the Liberals of cutting the defence budget.

“Unfortunately, here in Ottawa our military is entering another era of darkness,” said Tory defence critic James Bezan.

But John McKay, parliamentary secretary to Defence Minister Harjit Sajjan, said it was the Conservative government that left military procurement and funding in a mess.

McKay said no money is being cut from the defence budget. Instead of fixing procurement and financial problems, he said the Conservatives were “climbing in and out of fake airplanes,” a reference to former defence minister Peter MacKay’s $40,000 press conference during which he posed in a model F-35 jet.

THE CANADIAN PRESS/Adrian Wyld/File - Then-defence minister Peter MacKay checks out the cockpit of a mock F-35 Joint Strike Fighter following an announcement in July 2010 that the federal government would be purchasing a number of the jets. The purchase never went through.

“Had the former government actually done its work, then the procurement cycle would have matched the fiscal cycle and accordingly we possibly would have had some procurements met,” McKay said.

Besides delays in funding for the Arctic patrol ships and Cyclone helicopters, the budget plan would affect the CF-18 replacement, the modernization of the Halifax-class frigates and a program to provide new communications equipment to soldiers. Another $2.6 billion in equipment funding – not yet earmarked for specific gear — will also be withheld until 2021 or beyond.

It is unclear how some of the programs, such as the Cyclone helicopters, which are now being delivered, might be affected by the decision.

Conservative MP Cheryl Gallant said the plan to delay funding for the Cyclones is similar to then Liberal prime minister Jean Chéetien’s decision in the 1990s to cancel the EH-101 maritime helicopters.

Some analysts have voiced concern the $3.7 billion won’t be returned to the DND.

But Ashley Lemire, a DND spokeswoman, noted in an email, “some major projects experienced delays in their original timelines, which resulted in funds needing to be moved forward to future years.”

Military Budget 2016: Funds frozen for ships, choppers, fighters

By: David Pugliese, National Post (National Edition)

Key programs not immune to budget delays

Some of the Canadian military’s top equipment programs already underway — including projects to buy maritime helicopters and Arctic patrol vessels — will have their funding delayed as the Defence Department tries to deal with the Liberal government’s first budget.

Released in late March, the budget delays $3.7 billion in spending on equipment until 2021 or later.

But details provided to Postmedia by the department outline how even key military equipment programs just getting underway are not spared the funding freeze. Money is being withheld from programs that include:

Arctic offshore patrol ships ($173 million withheld)

Future fighter aircraft (CF18 replacement; $109 million withheld)

Cyclone maritime helicopter ($90 million withheld)

Halifax Class modernization and frigate life extension ($71.1 million withheld)

Integrated soldier system project ($39.4 million withheld)

Another $2.6 billion in equipment funding — not yet earmarked for specific gear — will be withheld until 2021 or beyond.

It is unclear how some of the programs — such as the Cyclone helicopters now being delivered — might be affected by the removal of funding.

In addition, construction has already begun on the Arctic offshore patrol ships; the first ship is to be in the water by 2018.

Defence sources have suggested the government could account for the $3.7 billion by delaying or cutting back on buying spare parts or other equipment for the ongoing projects, or delaying the arrival of some of the equipment.


Defence analyst Martin Shadwick said he was surprised active programs were being targeted. He noted that the Cyclones are supposed to be replacing the Air Force’s aging Sea King helicopters, a contract originally signed under Liberal prime minister Paul Martin in 2004.

“One possibility is that the Sea Kings will have to keep flying longer,” said Shadwick, who teaches strategic studies at York University in Toronto. “Or maybe systems that were supposed to be added to the aircraft won’t be.”

In some cases, the equipment projects are relatively new. In late July, the Conservative government announced that it had awarded an initial contract to Quebec-based Rheinmetall Canada Inc. to provide gear for the integrated soldier system project. That project aims to outfit soldiers with improved communications and computer equipment that can be worn on the battlefield.

Defence sources say the budget decision could affect later portions of the project.

In other cases, such as the recently upgraded Halifax Class frigates, the Royal Canadian Navy had planned a series of follow-on enhancements to keep the ships sailing until they can be replaced starting sometime after 2026.

During the election the Liberals promised to immediately launch a project to buy replacement aircraft for the CF-18s.

But the CF-18 fighter replacement project is one of the areas in which spending is being delayed, indicating that it won’t move as quickly as the Liberals originally claimed, said Shadwick.

Finance Minister Bill Morneau has insisted that moving the funding to a later date does not mean the defence budget is being cut.

Kilford: Military forgotten in big-spending Liberal budget

Opinion Piece Written by: Chris Kilford
Defence will never be party’s priority,

For the new Liberal government and despite plenty of evidence to the contrary, it appears that maintaining military hard power is, like … so yesterday.

Pity, then, the poor staff in National Defence Headquarters as they set about transforming our “multi-purpose, combat-capable” Canadian Armed Forces into something, well, less so.

With this latest federal budget, and with a larger than forecasted deficit, we now know the money for defence just isn’t there.

Instead, the capital spending needed to keep our existing military forces even barely afloat has been postponed until at least the next election in 2020.

Of course, the previous government also deferred big-ticket procurement spending. And to be fair, this government needs time to consider what our defence priorities will be and how best to meet them.

But then again, with deficit spending set for at least the next five years, it’s unlikely defence will ever be a spending priority.

Indeed, we appear to be re-visiting the past and heading back to a time very much like that in which then-prime minister Pierre Trudeau found himself almost 50 years ago. Shortly after the 1968 election, he launched a formal defence review, rejecting the military’s first draft “on the grounds that it amounted to nothing more than a reaffirmation of current policy” that was simply unaffordable but, more so, unnecessary.

What he wanted was “fresh thinking” but in truth his mind had already been made up. For him, defence spending was wasteful, especially when there were far more pressing domestic needs.

His real aim was to slash military expenditures as much as one could get away with, including withdrawal from NATO altogether. In the end, Canada’s NATO contribution was cut in half, important capabilities were shed and personnel numbers tumbled.


Pierre Trudeau was also very concerned that having Canadians train military forces in the developing world would lead to all sorts of foreign entanglements.

For example, the Canadian-trained and mentored Ghanaian military overthrew the government in 1966. So, in 1971, he put an end to foreign military training schemes.

Nor did he, unlike his son, think much of sending Canadian blue helmets overseas. Peacekeeping, according to his 1971 Defence White Paper, had “too often been frustrating and disillusioning.”

Presciently, the document noted that many conflicts “have their roots in subversion and insurgency, and therefore will not lend themselves easily to resolution through the use of internationally constituted peacekeeping bodies.” Not much has changed. Today’s peacekeeping missions, which more often involve UN troops in combat, continue to be thankless, miserable and never-ending.

What to do, then? Even when we do have an idea of what sort of military we need, finding the right balance between people, equipment, infrastructure and readiness is never easy. Military planners are also faced with numerous constraints.

Suggesting changes to the reserves or reducing the civilian workforce has always been a political hot potato, along with any talk of “divesting” bases.

Depriving Canadians of a chance to see the Snowbirds is also off the table, so no savings there. Nor can you opt for cheaper Chinese equipment.

Turkey tried that, and for some reason it just didn’t go over well in Washington.

Nevertheless, a government which appears to be in favour of a more robust and active foreign policy ought to be supported by a well-equipped, combat-capable armed forces. But this budget tells a different story. Canada is likely to end up with a much smaller, less responsive military than we have today, largely focused on the home front and the occasional, symbolic assignment abroad.

Major capabilities will wither or disappear. More importantly, so will our future policy options. 

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Chris Kilford is a fellow at the Queen’s Centre for International and Defence Policy. He is also the former Canadian Defence Attaché to Turkey.