Shortly before the recent election, the previous government released a defence budget that continued its record of delivering the funding it promised in the 2016 Defence White Paper (DWP) and subsequent 2020 Defence Strategic Update (DSU).

This year, the consolidated defence funding line (including both the Department of Defence and the Australian Signals Directorate) is $48.6 billion, which is 2.11% of GDP based on the Budget papers' estimates of GDP. That funding represents a very substantial nominal growth of 7.4%. It's the 10th straight year of real growth, but with inflation running hot, it's hard to determine a precise percentage; we've estimated it at 3.8% based on the Budget papers, but, if inflation stays around 5%, the real growth figure will be less. That will hurt Defence. Just as inflation eats into Australian families' budgets, it's eroding Defence's buying power.

Despite disruptions to supply chains, Defence and its industry partners have achieved significant increases in acquisition spending. While Defence may have fallen short of its acquisition spending target in 2021-22, it still achieved a $2.1 billion increase on the previous year, which was itself a $1.5 billion increase. That's translating into growing local spending, both in absolute terms and in relative terms compared to overseas spending. We've written previously that the Australian defence industry will need to eat a very large elephant as Defence's acquisition and sustainment budgets grow.

So far, it's demonstrating that it has the appetite to do that.

Capability continues to be delivered across all domains. There's no doubt that the ADF is getting better. But we're seeing the realisation of risks inherent in an acquisition program built around megaprojects. Such projects take years or decades to design and deliver, while spending huge sums for little benefit in the short term. When they encounter problems, those problems are big. The Attack-class submarine program has cost over $4 billion and delivered nothing. The Hunter frigate program continues to experience delays and won't get a vessel into service for over a decade. The Boxer combat reconnaissance vehicle project has spent close to $2 billion, but only 25 training vehicles have been delivered. While the nuclear-powered attack submarine (SSN) program has the potential to deliver a huge step-up in undersea warfare capability, it's the mother of all megaprojects and has a risk profile to match. As the megaprojects ramp up (with over $20 billion in infantry fighting vehicles potentially added to the list of committed funds), their cash flow requirement will increase, tying the government's hands at a time of rapidly growing strategic uncertainty and evaporating warning time.

The new government will have some significant issues to address. Perhaps the biggest one is the size of the defence budget. The incoming government has said that it supports the current level of funding. While that continues to grow in real terms, it was originally developed in 2015 and hasn't changed since then, despite the significant worsening of our strategic circumstances. Russia's illegal and unjustifiable invasion of Ukraine has reminded us that war has not gone away and remains a tool of authoritarian states. China's influence in our near region is growing and could result in a permanent Chinese military presence. The US is looking to its allies and partners to do more, as they must.

As always, the government will need to adjudicate between competing priorities for funding. At a time when Australians are dealing with the rising cost of living, spikes in energy prices and the grinding pressure of housing affordability, it may be tempting to reduce defence spending in the face of competing budget priorities. However, the government should be aware of the results of doing so. The budget is already full, with no pots of unallocated cash. Any short-term windfall delivered by the cancellation of the Attack-class submarine is already gone-as the cancellation of the SkyGuardian armed uncrewed air vehicle to help deliver a $9.9 billion offset for the REDSPICE cyber program reveals. So even holding the defence budget strictly at 2% of GDP will result in substantial, multibillion-dollar reductions to the DSU funding line, inevitably leading to cuts in capability.

Furthermore, it's not clear that the DSU funding line is even sufficient to deliver the current investment plan. That program includes platforms far larger or more numerous than those they're replacing as well as entirely new capabilities, all requiring a much larger workforce. Many capabilities have ended up costing more than was originally budgeted for in Defence's investment plan. The SSN program will cost significantly more than the Attack class; it's anybody's guess how much more. So the first order of business should be for the government to understand the affordability of the current plan.

Then it will need to assure itself that the planned force structure is aligned with what the government thinks the ADF should be doing. It's easy to make a case for the tactical utility of any capability, but how does it fit in the overall strategy? The government will need to make decisions about which sovereign capabilities it needs to hold and where it can rely on allies and partners. And the nub of our current security challenge is that the former are growing while the latter are shrinking.

A further challenge that the government will need to consider is Defence's people problem. The number of contractors in Defence's external workforce continues to grow at significant cost, but Defence can't deliver its ambitious capability program without them. Is that growth the best option available to Defence or simply the only one? Moreover, the investment program will require 20,000 more uniformed personnel to operate the capabilities it's acquiring. With the ADF averaging net annual growth of only 300, is that target attainable? And, if it's not, is the future force structure viable?

In these testing times, the government needs to seize every opportunity available to it to increase capability rapidly, even if that means overruling Defence's long-term vision for the future force. That means doing more with what we're already getting, such as increasing the lethality of the offshore patrol vessels that are soon to enter service.

There are encouraging signs that Defence is engaging more actively with 'the small, the smart and the many'; that is, cheaper, disposable, highly autonomous systems that can be produced rapidly by Australian industry. Investing more heavily in such systems is a crucial hedging strategy against the risk inherent in the megaprojects; plus, such systems will figure heavily in future warfare, whatever may become of the megaprojects.

Similarly, the new AUKUS partnership's advanced technologies programs and the sovereign guided weapons enterprise offer the prospect of delivering meaningful capability soon. Yet we're two years into the guided weapons enterprise and still have heard nothing about which weapons will be produced and how it will be done. We can't apply the kinds of timelines and processes inherent in the megaprojects to these lines of effort.

Overall, the government has its work cut out for it. Whatever path it chooses, it will need to bring the Australian public along on the journey. To do that, the government will need to reset the conversation about the defence budget and how it's spent. That will require a commitment to transparency, accountability and sharing information. That means accepting the risk that bad news will get out along with the good, but an informed public is fundamental to democracy.

Readers are warmly encouraged to download the full Cost of Defence 2022-2023 report.

Here's a handy list of the Cost of Defence reports for the past decade...

• Cost of Defence 2021-2022
• Cost of Defence 2020-2021 Part A
• Cost of Defence 2020-2021 Part B
• Cost of Defence 2019-2020
• Cost of Defence 2018-2019
• Cost of Defence 2017-2018
• Cost of Defence 2016-2017
• Cost of Defence 2015-2016
• Cost of Defence 2014-2015
• Cost of Defence 2013-2014
• Cost of Defence 2012-2013