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Begin New Search Topic Economy Content Type Policy Brief Publication Year within 25 Years

61. Japan’s National Economic Security Strategy and Implications for Korea

Author:
Gyu-Pan Kim
Publication Date:
03-2022
Content Type:
Policy Brief
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
This paper defines the concept of economic security strategy as “acts that deviate from the rules of the market economy by using economic power as a source of power in the perception that the state or national economy is threatened.” The scope of Japan's economic security strategy is divided into five categories: first, economic statecraft; second, securing of safety and trust in “critical infra-structure”; third, reinforcement of supply chains in critical materials; fourth, public-private R&D cooperation of critical technologies; and fifthly, cooperation in strengthening global supply chains with “like-minded partners.”
Topic:
International Cooperation, Economy, Supply Chains, Economic Security, and Public-Private Partnership
Political Geography:
Japan, Asia, and South Korea

62. Analysis of Chinese Response Patterns to Diplomatic Friction and Its Influencing Factors

Author:
Jai Chul Heo
Publication Date:
03-2022
Content Type:
Policy Brief
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
As China grows into a global power, it is forming a closer relationship with the international community. In the process, the nation is experiencing increasing levels of diplomatic friction, such as confrontation and conflict with other countries, as well as cooperation. Accordingly, this study analyzes China's response to various forms of diplomatic friction, as Korea seeks an effective response to possible friction with China in the future. More specifically, China's response to diplomatic friction was examined through various cases, with the aim of categorizing China’s response measures based on these examples. In addition, this study aims to prepare for possible friction with China in the future by identifying factors that differ in China's response to diplomatic friction.
Topic:
International Relations, Diplomacy, Sovereignty, Territorial Disputes, and Economy
Political Geography:
China, Asia, and South Korea

63. COVID-19 and Global Value Chain

Author:
Hyoungmin Han
Publication Date:
03-2022
Content Type:
Policy Brief
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
The ongoing spread of COVID-19 has increased biological risks from infectious diseases and limits the movement of human and material resources. Various evidence supports that there is a significant correlation between COVID-19 and the globalized production network. This study aims to analyze the changes in the global value chain structure “before and after” the spread of COVID-19 and derive government-level countermeasures and policy tasks using quantitative data, empirical analysis, case study, and corporate survey.
Topic:
Economy, Global Value Chains, and COVID-19
Political Geography:
South Korea and Global Focus

64. The Effects of Increased Trade with China and Vietnam on Workers’ Earnings and Job Security in Korea

Author:
Kyong Hyun Koo
Publication Date:
04-2022
Content Type:
Policy Brief
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
This study empirically demonstrates that changes in trade structure caused by the rise of China and Vietnam over the last 20 years have had a significant impact on the widening of the income and employment stability gap for Korean workers. An important policy goal for Korea, which is heavily reliant on trade, is to ensure that the benefits of trade and openness are distributed evenly to all classes of society while minimizing the harm. In order to achieve the policy goal, the analysis results of this paper show that it is necessary to institutionalize a systematic process for monitoring changes in Korea's trade structure and preparing response policies from a mid- to long-term as well as a short-term perspective. Furthermore, the results indicate that policy efforts are required to identify blind spots where existing trade adjustment assistance policies, employment insurance systems, and vocational training policies do not adequately protect or support workers, and supplement and improve them. More follow-up research is needed to gain a better understanding of the mechanism by which external trade shocks are transmitted to the domestic labor market in order to develop more effective domestic supplementary measures for trade shocks.
Topic:
Labor Issues, Employment, Inequality, Economy, Trade, and Wage Income
Political Geography:
China, Asia, South Korea, Vietnam, and Southeast Asia

65. Foreign Firms Investment in Inter-Korean Economic Cooperation

Author:
Jang Ho Choi, Jung Kyun Rhee, Yoojeong Choi, and Dae-Eun Lee
Publication Date:
04-2022
Content Type:
Policy Brief
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
This paper examines various channels and issues for foreign firms to invest in inter-Korean economic cooperation with the as-sumption that inter-Korean economic cooper-ation can be resumed after sanctions against North Korea have been lifted, and the same treatment is applied to foreign firms. Foreign firms' investment in inter-Korean economic cooperation will provide a new op-portunity for foreign firms to earn stable profits, while also playing a role in further solidifying the establishment of peace on the Korean Peninsula. Now, inter-Korean rela-tions have fallen into difficulties due to sanc-tions against North Korea and the coronavirus pandemic, making it difficult to resume inter-Korean economic cooperation or to expect foreign firms to invest in inter-Korean eco-nomic cooperation. However, if inter-Korean economic cooperation is resumed, foreign firms' investment in inter-Korean economic cooperation will be prioritized.
Topic:
Foreign Direct Investment, Sanctions, Economy, and Economic Cooperation
Political Geography:
Asia, South Korea, and North Korea

66. Green New Deal for Carbon-neutrality and Open Trade Policy in Korea

Author:
Jukwan Lee, Jongduk Kim, Jinyoung Moon, Jyun-Hyun Eom, Ji Hyeon Kim, and Jungmin Suh
Publication Date:
05-2022
Content Type:
Policy Brief
Institution:
Korea Institute for International Economic Policy (KIEP)
Abstract:
This study focuses on Korea’s Green New Deal policy and global response measures to climate change that affect international trade. A trade policy perspective and approach have been applied while reviewing the carbon-neutral policy pursued by the Green New Deal. We attempted through an empirical analysis to determine whether the expansion of openness helps reduce carbon emissions and simulate the impact of a carbon-neutral policy, such as the EU's carbon border adjustment, on the global economy under global production networks. In addition, the amount of financial support from Korea's Green New Deal needed to offset the negative economic effects of other countries’ independent carbon-neutral policies was derived. This study finally suggests that the effect of the Green New Deal can be expanded through the restoration of openness and global cooperation.
Topic:
Climate Change, International Trade and Finance, Economy, Trade, Carbon Emissions, and Green New Deal
Political Geography:
Asia and South Korea

67. Have trade agreements been bad for America?

Author:
Alan Wm. Wolff, Robert Z. Lawrence, and Gary Clyde Hufbauer
Publication Date:
12-2022
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Many Americans are persuaded that trade agreements of the last 40 years have been a costly mistake. To be sure, open markets leave some people behind, and promises to help those hurt were broken. But on balance, expanding trade has greatly benefited the US economy, and policy approaches taken need to be built on rather than abandoned. Alan Wm. Wolff, Gary Clyde Hufbauer, and Robert Z. Lawrence say more must be done to help those harmed, but protectionism is not the solution. The international trading system needs more outspoken US support and leadership if it is to be maintained and improved.
Topic:
International Trade and Finance, Treaties and Agreements, Economy, and Trade
Political Geography:
Global Focus and United States of America

68. Building downstream capacity for critical minerals in Africa: Challenges and opportunities

Author:
Cullen S. Hendrix
Publication Date:
12-2022
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
Demand for critical minerals—bauxite, cobalt, copper, lithium, nickel, and other minerals that underpin solar, wind, geothermal, and other forms of renewable energy and electric vehicles—is already booming and is projected to continue to grow at a rapid pace. Africa’s mineral-rich developing economies could benefit greatly from this increase in demand. Many African economies have vast critical mineral reserves, and their nascent industrial sectors imply vast export potential. These countries could increase the benefits they reap from these minerals by building downstream capacity in processing—the steps that turn mined ore (bauxite, iron ore) into refined intermediate goods (aluminum, steel). To do so, however, they need to improve their infrastructure, investment climate, and governance and learn to navigate an increasingly complicated geopolitical environment. Hendrix assesses the challenges facing four critical mineral–rich developing African economies: Guinea (bauxite); the Democratic Republic of Congo (cobalt); Madagascar (graphite and nickel); and Mozambique (graphite). The solutions he offers include (a) embracing hydropower potential—which is vast in these countries—while paying attention to social costs and distributive impacts, (b) exempting refinery-related capital goods and industrial inputs from import duties, (c) locating downstream capacity in areas of relative stability, and (d) leveraging external policy anchors to provide policy stability and transparency.
Topic:
Natural Resources, Economy, Supply Chains, and Minerals
Political Geography:
Africa and Global Focus

69. Bad news for the Fed from the Beveridge space

Author:
Olivier Blanchard, Alex Domash, and Lawrence H. Summers
Publication Date:
07-2022
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics
Abstract:
The Federal Reserve seeks to cool an overheated US labor market to ease wage hikes and reduce job vacancies, without a painful spike in unemployment. But empirical evidence indicates that these goals have never been accomplished together and remain unlikely now. In fact, fighting inflation will require a reduction in job vacancies and also an increase in unemployment. The inverse relationship between job vacancies and unemployment is measured by the Beveridge curve, named after a British economist. Blanchard, Domash, and Summers find that the Fed’s hope that vacancies can be decreased without increasing unemployment flies in the face of historical empirical evidence. The current low unemployment rate and the very high vacancy-to-unemployment ratio suggest that the labor market is overheating and the natural unemployment rate has increased. It has increased about 1.3 percentage points from its pre-COVID level, implying the labor market is even more overheated than suggested by the current unemployment rate.
Topic:
Economy, Unemployment, and Labor Market
Political Geography:
North America and United States of America

70. Advancing a framework for the stabilization and reconstruction of Ukraine

Author:
Patrick Quirk and Prakhar Sharma
Publication Date:
10-2022
Content Type:
Policy Brief
Institution:
Atlantic Council
Abstract:
Russia’s illegal and unprovoked war on Ukraine has shattered peace on the European continent and created tectonic shifts in the transatlantic security architecture. The Kremlin’s invasion has decimated Ukraine’s economy and infrastructure, and left tens of thousands of innocent civilians wounded or dead as part of a war-crime ridden military campaign. At the time of writing, Kyiv is making slow advances in the South and East with the help of significant Western military and economic aid, yet the outcome of the conflict continues to hang in the balance. A prolonged stalemate and some variation of a negotiated settlement seem most likely, with a Russian victory remaining a distant possibility.1 Absent an absolute Kremlin victory, Ukraine will need to stabilize vast swathes of its territory and reconstruct the social and industrial infrastructure therein.2 Due to their proximity to Ukraine and long-standing economic, political, and social connections, transatlantic allies and partners will most likely be deeply involved in this effort and will be significantly affected by its end result. The purpose of this issue brief then is to help Ukrainian, North American, and European policymakers consider stabilization and reconstruction needs and have a playbook in place regardless of the circumstances or outcome.
Topic:
Security, Defense Policy, Diplomacy, Science and Technology, Reconstruction, Economy, Business, Innovation, Resilience, Russia-Ukraine War, and Stabilization
Political Geography:
Russia, Ukraine, Eastern Europe, and United States of America

71. How the Chinese government is financing its way to becoming a techno-superpower

Author:
Ngor Luong
Publication Date:
11-2022
Content Type:
Policy Brief
Institution:
Atlantic Council
Abstract:
On October 7, the Biden administration announced a new rule to control exports of advanced-computing semiconductor chips to China. As the United States works to cut off technology and capital flows to China, Beijing’s desire to achieve technological self-sufficiency is greater than ever. In fact, during the 20th Party Congress in the following week, Xi Jinping further pledged self-reliance in technology to gain a competitive edge in the tech competition with the United States. Under Xi Jinping’s leadership, China has sought technology-focused securitization to build an innovation system that supports its broader economic, societal, and geostrategic goals. In response to the economic impact ranging from the ongoing COVID-19 pandemic to the US-China trade and technology war, the Chinese Politburo unveiled the new “dual circulation” strategy at a Central Financial and Economic Commission meeting in 2020. At its core, dual circulation aims to reduce China’s vulnerability to external shocks, and to increase the country’s self-reliance to better guard against global volatility. The Chinese government works to improve China’s innovation-building capacity by attracting foreign capital and technology know-how in order to maximize their benefits while retaining overall control of the system. Beijing is committed to becoming a state-led and self-sufficient techno-superpower. In doing so, the Chinese government is consolidating its influence in both the domestic market and overseas markets where Chinese firms are active, while simultaneously mobilizing public, private, and public-private investment vehicles to support these tech ambitions. A number of its financial mechanisms have already spanned decades, but others have emerged recently. The decade-long mechanisms have yielded mixed results, while the successes of the new ones remain to be seen. It can thus be expected that the Chinese government will continue to further assert itself in all aspects of the innovation system by providing financial support and political guidance for critical and strategic industries. Within this context, this paper examines the various forms of financing vehicles that involve a range of diverse actors to support China’s whole-of-nation approach in an effort to achieve self-reliance in technology. To conclude, this paper assesses the mechanisms’ successes and shortcomings as well as areas to monitor going forward.
Topic:
Science and Technology, Economy, Business, and Innovation
Political Geography:
China and Asia

72. Processing Trade and Global Supply Chains: Towards a Resilient “GVC 2.0” Approach

Author:
Lucian Cernat
Publication Date:
05-2022
Content Type:
Policy Brief
Institution:
European Centre for International Political Economy (ECIPE)
Abstract:
In the current global context marked by economic fragility, growing uncertainty and geopolitical conflicts, ensuring the smooth functioning of global supply chains becomes more important than ever. Supply shortages, higher freight costs, higher commodity prices and strong demand increase will trigger inflationary pressures for all economic sectors dependent on global value chains (GVCs). As part of global efforts to enhance the resilience of GVCs, this paper makes the case for a broader discussion about the untapped potential of processing trade, a relatively unknown trade facilitation option available in many countries around the world. Processing trade has been credited with stimulating China’s participation in GVCs, in combination with foreign direct investment (FDI) attraction and industrial upgrading. However, processing trade is not just a Chinese phenomenon. In the EU, significant trade flows (over 200 billion euros in 2021 alone) benefitted from a double-digit trade cost reduction, thanks to the EU processing trade provisions. Different types of processing trade arrangements exist in over 70 countries worldwide (including in the EU), as a way to facilitate the integration of developing countries in global production chains. However, these unilateral schemes have different requirements and co-exist without any attempt to facilitate their inter-operability along complex global supply chains. This paper argues that there is a pressing need for a global reflection on how best to promote a better integration between these national processing trade schemes. One option is to promote a “GVC 2.0” approach that offers key recommendations and best practices for processing trade along GVCs. Such a coordinated “GVC 2.0” trade facilitation initiative would not only make GVCs more resilient for countries that depend on global sourcing for their critical economic activities, but it will also reduce the inflationary effect generated by the unnecessary trade costs associated with GVC activities.
Topic:
European Union, Economy, Trade, Resilience, and Supply Chains
Political Geography:
Europe

73. Which mergers should the European Commission review under the Digital Markets Act?

Author:
Christophe Carugati
Publication Date:
12-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Large digital platforms acquired 1149 firms in various economic sectors between 1987 and July 2022. The European Commission reviewed only 21 of these mergers as most did not meet the European Union merger control turnover threshold. This suggests under-enforcement, with some problematic mergers escaping merger review and thus posing competition risks. The EU Digital Markets Act, which entered into force in November 2022, imposes obligations on firms that are considered ‘gatekeepers’ in relation to some core platform services, such as online search engines. In particular, these firms must now inform the Commission of all their intended acquisitions. This, in combination with Commission guidance on referrals by EU national competition authorities of mergers for review, should ensure more merger reviews in the digital sector. Current European Commission guidance on referring cases for merger review is flexible but impractical as it relies on theories of harm rather than clear and objective criteria. Without clarification, there could be over-enforcement in which unproblematic mergers are reviewed, human resources are allocated inefficiently and legal uncertainty persists. The Commission should issue new guidance on which digital mergers are likely to be problematic, thus triggering referral for merger review. This is likely to be the case when the target’s user base overlaps with that of the acquirer, when the target is a leader in a future critical market and when the target is active in a core platform service.
Topic:
Economy, Innovation, European Commission, and Digital Markets Act (DMA)
Political Geography:
Europe

74. How to implement the self-preferencing ban in the European Union’s Digital Markets Act

Author:
Christophe Carugati
Publication Date:
12-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Large online platforms are intermediaries between end-users and business users. They sometimes propose their own products and services alongside those of rivals. This can lead to platforms promoting their offers over those of competitors in so-called self-preferencing. The European Union Digital Markets Act (DMA) bans large online platforms under its scope from treating their own products and services more favourably that those of rivals when ranking, crawling and indexing. Platforms – or gatekeepers in the DMA definition – should apply transparent, fair and non-discriminatory conditions when ranking products and services. However, the identification, detection, compliance with and monitoring of self-preferencing is complex and resource-intensive. It requires a case-by-case approach and access to and analysis of platform data and algorithms. The DMA allows gatekeepers to promote their own products and services if rivals are subject to the same treatment. Nonetheless, the DMA neither defines equal treatment nor the main elements of self-preferencing, thus preventing platforms within the DMA’s scope from correctly applying the prohibition. To ease enforcement, the European Commission should issue guidance on what constitutes self-preferencing under the DMA, outlining two main principles. First, gatekeepers should use objective and unbiased parameters to determine ranking, indexing and crawling. Second, gatekeepers should demonstrate equal treatment. The guidance will make compliance easier. The Commission should then monitor compliance by appointing and ensuring sufficient rotation of external auditors to avoid capture by gatekeepers. The Commission should also work with competent national authorities that develop technological tools. When monitoring flags a risk of non-compliance, the Commission should then further specify the ban on self-preferencing on a case-by-case basis.
Topic:
European Union, Digital Economy, Economy, Innovation, and Digital Markets Act (DMA)
Political Geography:
Europe

75. Completing Europe’s banking union: economic requirements and legal conditions

Author:
Thorsten Beck, Jan Pieter Krahnen, Philippe Martin, Franz Mayer, Jean Pisani-Ferry, Tobias Tröger, Beatrice di Mauro, Nicolas Veron, and Jeromin Zettelmeyer
Publication Date:
11-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The European Union’s banking union project started in mid-2012 in response to the euro-area crisis, with the goal of breaking the bank-sovereign vicious circle. The objective was also to restore private liability in banking and to move towards an integrated supranational market for banking services. For all the progress achieved in the past decade, particularly in banking supervision, these aims have not yet been accomplished. This Policy Contribution analyses the deficiencies of the current framework and identifies possible responses, in line with three levels of reform ambition. We label these ‘incremental’ (broadening the scope for private-sector burden-sharing in future cases of bank failures), ‘real’ (effectively breaking the bank-sovereign vicious circle), and ‘cosmic’ (a single, seamlessly integrated banking market). European policymakers should set their sights on the second level, which we view as achievable within the current decade, requiring new EU legislation but no change to the European treaties.
Topic:
Regulation, Economy, Crisis Management, European Central Bank, and Banking
Political Geography:
Europe

76. Lessons for Europe from China’s quest for semiconductor self-reliance

Author:
Alicia Garcia-Herrero and Pauline Weil
Publication Date:
11-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Semiconductors are a critical input to production of information and communication technology and many other goods. The major economies want to be able to produce chips at home to avoid excessive dependence on supply chains in an increasingly unpredictable world, where trade is being compromised because of national security concerns. China was first in terms of timing and scale of funding to support its its semiconductor industry. Since 2015, China has spent $150 billion upgrading its semiconductor industry. Success, however, has been limited. China’s massive industrial policy effort has been most successful in increasing capacity for assembly of chips, though that is also the least value-added part of the semiconductor supply chain. Progress on chip design and fabrication in China remain underwhelming. The United States has also started implementing its $50 billion package to support the production of chips. The European Union, meanwhile, has not yet fully finalised its main semiconductor initiative, the European Chips Act. China’s experience offers a number of lessons. First, chip fabrication requires massive fixed asset investment and, therefore, large subsidies, but with no guarantee of success. Second, one reason for the underwhelming results of China’s semiconductor policy is US containment, through export controls and other measures. In this respect, the EU should find it easier than China to upgrade its chips industry but, given the costs, focusing on the highest-end part of the supply chain would be the best approach. Assembly and production of lower-end semiconductors already face overcapacity, given the financial resources already invested by China.
Topic:
International Relations, European Union, Economy, Trade Policy, and Semiconductors
Political Geography:
China and Europe

77. How have sanctions impacted Russia?

Author:
Maria Demertzis, Benjamin Hilgenstock, Ben McWilliams, Elina Ribakova, and Simone Tagliapietra
Publication Date:
10-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Russia’s invasion of Ukraine has triggered a series of sanctions imposed by the European Union, the United States and others. Sanctions included restrictions on Russia’s financial industry, its central bank and its coal and oil exporters, in addition to general export controls. Meanwhile, foreign companies have withdrawn voluntarily from the Russian market as a result of a ‘self-sanctioning’ trend. We assess the impact these sanctions have had on Russia’s economy in the immediate aftermath of the invasion and more structurally. Russian fiscal revenues have not suffered from sanctions sufficiently to reduce the length of this war. Effective management by the Bank of Russia has prevented financial instability and has therefore also protected the real economy. However, this picture of economic containment is coming to an end. Russia’s fiscal revenues are now beginning to take a hit; given the breadth of sanctions, the economy will suffer in the medium to long term. The voluntary departure of a large number of western firms, eventual energy decoupling by the EU and Russia’s inability to find equal alternatives will damage the Russian economy severely. As the Russian economy closes in on itself, it will become harder to find reliable data to evaluate the extent of the hit. Still greater sanctions coordination across the globe is needed to isolate the Russian economy, limit the flow of income into Russian coffers and therefore help stop the war.
Topic:
Governance, Sanctions, Economy, and Russia-Ukraine War
Political Geography:
Russia, Europe, and Ukraine

78. Will Ukraine’s refugees go home?

Author:
Uri Dadush and Pauline Weil
Publication Date:
09-2022
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
About 15 percent of the population has fled Ukraine since the start of the Russian aggression in February 2022. Nearly 4 million Ukrainians have already registered in European Union countries. Based in part on evidence that few refugees return voluntarily to poor countries once they settle in rich countries, even once security is re-established at home, it can be expected that large numbers of Ukrainian refugees are likely to remain in European host countries, and will likely be joined by others, including many men that remained to fight when the conflict is over. Ukraine already has a long history of emigration. Its shattered economy, the likelihood of a protracted conflict and significant uncertainty with regard to its final status reinforce the argument that most refugees will not return and many more will join them. EU nations must prepare for. There will be large short-term costs and long-term economic gains from Ukrainian immigration in Europe. The best way to help Ukraine, and to moderate the likely outflow of its people, will be to assist in the country’s reconstruction, and not to place artificial impediments to the immigration of individuals who have already suffered greatly.
Topic:
Migration, Governance, Reconstruction, Refugees, Economy, Trade, and Russia-Ukraine War
Political Geography:
Russia, Europe, and Ukraine

79. Behavioral Responses to Supply‐​Side Drug Policy during the Opioid Epidemic

Author:
Simone Balestra, Heige Liebert, and Nicole Maestas
Publication Date:
12-2022
Content Type:
Policy Brief
Institution:
The Cato Institute
Abstract:
In the last 20 years, the use of prescription opioids has grown dramatically in the United States. Since 1999, the number of opioid prescriptions increased by 300 percent, surpassing 255 million prescriptions in 2012 (81.3 prescriptions per 100 people) before declining to 153 million prescriptions by 2019 (46.7 per 100 people). Opioids may be an effective analgesic for acute pain, but they are also associated with high risks of addiction and overdose. Death rates from opioid poisoning tripled between 2000 and 2014, contributing to a stunning reversal in 1999 of the long‐​running decline in midlife mortality. The increase in overdose deaths was initially driven by prescription opioid poisonings, but the more recent surge in deaths has been attributed to illicit opioids such as heroin and fentanyl.
Topic:
Economy, Drugs, Public Health, and Opioid Crisis
Political Geography:
North America and United States of America

80. The Cost of Defence: ASPI Defence Budget Brief October 2022–2023

Author:
Marcus Hellyer
Publication Date:
11-2022
Content Type:
Policy Brief
Institution:
Australian Strategic Policy Institute (ASPI)
Abstract:
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). The Albanese government’s first budget was not designed to focus on Australia’s security situation or defence spending. Tasked with sharing Australia’s difficult economic situation with the Australian public, the budget has more immediate fish to fry. For those Australians who want to see increased defence spending, this was not going to be that budget as it would have directly undercut existing defence reviews due within months. Certainly, the Prime Minister has stated that the government will do whatever is necessary to ensure Australia has the defence force it needs in these strategically uncertain times. But this budget gives no indication of how much the government is willing to spend to do that. With the Defence Strategic Review (DSR) under Stephen Smith and Angus Houston conducting its work and not due to report until March next year, the government has stuck with the existing funding line it inherited from its predecessor. That’s an artefact of the 2016 Defence White Paper—a document developed in a different era and quickly overtaken by events. So Defence is in a holding pattern while the government keeps its powder dry and waits for Smith and Houston (noting their interim report has recently been handed to the government). No doubt it has had conversations with the DSR leads indicating its comfort zone for additional spending, but that hasn’t been made public. What we can say from the information set out in this budget is that any increase to defence spending will require difficult reprioritisation. While the government received a revenue windfall this year due to high commodity prices, those are forecast to return to normal. And with the government committing to deliver the tax cuts agreed by its predecessor, its income is under further pressure. At the same time, it’s facing five growing spending pressures: interest on the growing debt, the National Disability Insurance Scheme, health care, aged care, and defence—and that’s before any increase to the existing defence funding line. The result is a forecast for deficit spending for the next 10 years. That’s not a good situation for the DSR leads. They’re tasked with delivering new military acquisitions faster in the next decade, but the existing acquisition plan is probably already unaffordable (without increased spending), with many entirely new capabilities or expensive replacement projects. And with nuclear-powered submarines and frigates on the untouchable list, the challenge of delivering more sooner gets even harder, as those two programs will consume tens of billions of dollars over the coming decade even before they deliver their first vessels. Moreover, inflation is rapidly eroding Defence’s buying power by billions of dollars every year. By the end of the forward estimates, Defence may have lost around $18 billion in buying power even if inflation rapidly returns to the Reserve Bank of Australia’s target rate. That’s the budget papers’ predictions, but those predictions haven’t been very accurate in recent years. This year, despite nominal growth of over 7% in defence spending, real growth is under 1% once inflation is taken into account (although, with inflation difficult to predict, it’s also difficult to reliably quantify real growth). It’s hard to see Defence affording its ambitious acquisition program with a budget that’s essentially static in real terms. Inflation is also driving nominal GDP growth at a predicted 8% this year. That means that defence spending is falling as a percentage of GDP for the second year in a row despite the government delivering the funding set out in the 2016 Defence White Paper and 2020 Defence Strategic Update. Predicted defence spending has also fallen significantly just since the March budget, from 2.11% to 1.96%, despite the funding line remaining fundamentally unchanged. In summary, there is no pot of gold available to cover increased defence spending. That doesn’t mean the government can’t or won’t increase defence spending, but any increase will require either higher taxes (which appears unlikely, since the government is proceeding with its predecessor’s planned tax cuts), greater borrowing (accelerating the vicious cycle of debts and deficits), or cuts to other priorities that have constituencies of their own. When we look at Defence’s big three areas of spending—capital acquisitions, people and sustainment—there have been no significant changes since the March budget. With the Australian dollar at a 20-year low against the US dollar, the Defence budget has received a large automatic top-up to maintain its purchasing, but there’s no adjustment to compensate for inflation. There are a few changes to spending, but they’re broadly consistent with what we would see in a mid-year budget update. For those who follow capability, the top 30 acquisition projects and sustainment products hold some interesting information, but the lists are quite consistent with previous plans. We’ll have to wait for the outcomes of the DSR to see anything new. Similarly there’s been no adjustment to Defence’s personnel allocation since March. But that still means the ADF needs to find roughly 13,000 more people this decade to operate the capabilities on its shopping list, even though it’s only managed to grow by an average of 300 per year since the 2016 White Paper. Smith and Houston may need to consider whether it makes sense to acquire capabilities that the ADF can’t crew, or at least how the ADF can maximise its combat power without many additional people. Of course, another HR strategy is one based on ‘if you build it, they will come.’ The situation is also difficult with Defence’s civilian and external workforce. To deliver its ambitious capability program, Defence has relied on growing numbers of contractors. They’ve helped Defence spend record amounts in its acquisition programs in recent years, despite the impact of Covid-19; however, they come at a cost. That growth may be over; in the October budget, the government is seeking $144.6 million in ‘savings from external labour and savings from advertising, travel and legal expenses’. That’s not a large percentage of Defence’s total budget but, if it means the organisation can’t hire the people it needs to manage the acquisition program, it’s hard to see how Defence will deliver more capability sooner. Overall, while there were no surprises, the October budget hasn’t made the job any easier for Smith and Houston.
Topic:
National Security, Budget, Economy, Industry, and Defense Spending
Political Geography:
Australia and Australia/Pacific