Corporeality XX – Canadian Defence Policy Part I

Corporeality XX – Canadian Defence Policy Part I

by

Howard Adelman

Defence policy is largely thought of in terms of military defence. If there is one thing that the Justin Trudeau Liberals have accomplished is the shift to thinking about defence policy within a much larger context than simply preparing the armed forces for service in defence of our country and its people, both immediate threats and threats stirring abroad where we had participated by sending expeditionary forces. (See National Defence and the Canadian Armed Forces. (2008) Canada First Defence Strategy.) The Liberal Party platform cast defence policy within a larger context of political diplomacy, humanitarian aid abroad and providing relief to other countries from the pressure of refugees by resettling some in Canada.

Though the numbers of discussion papers on policy are relatively few, there exist a number of valuable references, such as Canada’s International Security and Defence Policy (2015), the Working Group Report for the Centre for International Policy Studies (CIPS). Nevertheless, they do not compare to the long term in-depth studies of other states. Further, linking defence and international affairs is not the same as subsuming military defence policy within a much larger context of defence conceived much more broadly. However, before we look at that larger context, let’s examine Canadian military defence policy. As we shall see, it is more of a budget than a military policy. [See Douglas L. Bland and Brian MacDonald (2012), “Canada’s Defence and Security Policies after 2011: Mission, Means and Money,” in David S. McDonough (ed.) ,Canada’s National Security in the Post-911 World: Strategy, Interests and Threats.]

If you examine the Liberal Party platform on military defence policy, you will not learn much because it was boiled down to only three items, of which the first, as I will try to show, is the most important:

  • Maintaining current National Defence spending, including planned increases, at current levels
  • Ensure that actual expenditures match planned expenditures and that defence is not used as a contingency fund for other needs, thereby ensuring an erratic defence policy
  • Ensure that Canadian Forces are adequately funded and equipped both for the personnel  needed and the procurement of proper equipment
  • The Liberals promised to “reinvest in building a leaner, more agile, better-equipped military, including adequate support systems for military personnel and their families.”

This is not a military defence policy; it is a budgetary policy applied to the military. It is about procurement of equipment and maintaining force levels without attending to the fact that personnel relative to equipment costs have changed from 51% to 47% since 1995 as equipment costs increase far faster given the enhanced sophistication. Stephen Harper, when he was Prime Minister, rhetorically committed his government to recapitalizing and rearming the Canadian armed forces and promised to introduce an effective procurement policy to do so. Since he was elected in 2006, he moved towards that goal, but in 2012, in order to achieve another goal of his government, a balanced budget, he reversed gears and once again began a trend of reducing defence expenditures.

So why should the Liberal Party of Canada, now that it has formed the government, be believed when it uses identical promises? Further, if we know that a planned inadequacy is now built into the budget that will affect both our procurement policies as well as the number of armed troops in the armed forces, the results of this built-in deficiency will only get worse if all the government does is maintain expenditures at existing levels, including planned increases. Simply put, if we simply maintain current National Defence spending, including planned increases, at current levels, we will fall further behind in our defence deficiency.

Matching actual expenditures to planned expenditures is inadequate when facing both an accumulated and accumulating deficiencies. Except, of course, if the force structure is reduced in the name of a “leaner and more agile” force structure, a euphemism for a smaller military defence program. Further, given the signal sent by the shift in the military contributions Canada is making in Iraq from a partial attack jet program to one which is based on training the ground troops of others, the re-orientation towards ground troops at the expense of both the air force and the navy, could, theoretically witness a decline in the gap between needs and actual expenditures, but only at the cost of both a reduced capacity in terms of numbers and a reduced capacity in certain areas.

The problem is compounded when it is recognized that the air force and the navy account for an increasing percentage of the overall military defence budget as the costs of contemporary ships and aircraft, given their significantly enhanced sophistication, increase at a higher rate than the rate of inflation or even than the projected growth of the GDP. The reality: we cannot even manage the existing defence deficit. It will inevitably get worse until funds are supplied to counter the increasing gap between needs and expenditures.

Look at the Parliamentary review of the budget for the “Fiscal Sustainability of Canada’s National Defence Program.” (26 March 2015)  (http://www.pbo-dpb.gc.ca/web/default/files/files/files/Defence_Analysis_EN.pdf) That 18-page document is not a basis for a defence policy. In other countries – Australia for example – the country first determines in detail its defence policy and priorities, and then not only provides a budget to sustain that policy, but has institutionalized an accountability mechanism to assess the congruency or incongruency between the monies allocated and the ability of the Defence Department to meet its goals. Canada, in contrast, determines how much money it will spend, then asks the defence department to shoehorn its services to fit that budget without much recourse to a reference to any long term policy.

This is a gross exaggeration, a defender of the current Canadian system might protest. After all, Canada has a policy: a) the defence of Canada at home and abroad; b) the defence of North America in partnership with the U.S., and c) the contribution to expeditionary forces for security and peacekeeping abroad.

But that is not a policy; it is a taxonomy. When and how and why should expeditionary forces be used? What is our responsibility in the face of Canada protecting the Northwest Passage, the North Atlantic and the North Pacific? Frankly, when you read the Australian defence policy document, Canadian planning looks like so much empty blather – “defend Canadian sovereignty and interests” and ensure the security and safety of Canadians.

How, in detail, are our military forces supposed to perform to meet those objectives? How do any plans match such criteria for a military force being agile while having the ability to project power based on sufficient capacity? Within a much larger context of a troubled and confusing world, how should Canada respond to meet both the complexity and uncertainty of disorder emerging across the globe? Readiness! You have to be kidding. If the Canadian Defence Forces do not have the funds to acquire proper equipment, to train and retain proper professional staff, then Canadian forces may earn a reputation as highly skilled and dedicated, but there is no system in place to ensure or even measure whether the forces supposedly in readiness are adequate to meet anticipated needs and demands.

The military budget includes capital expenditures (including facilities) for both our armed forces and Canadian peacekeeping, both regular and paramilitary, though Canadians have been engaged in very little peacekeeping lately. Personnel expenditures include both the military and civilians in service to the military, support for retirees (but not veterans whose support is budgeted separately), as well as social services for those personnel and their families. Procurement expenditures budgeted on an accrual basis for so-called “tooth to tail” and equipment acquisition costs, fall into three categories: a) research and development; b) acquisition of new equipment – jets, helicopters, patrol ships, submarines, armoured personnel carriers, etc. and c) contributions of military equipment to other countries.

Simple enough, but the most superficial examination indicated decades of disaster as pointed out in the Report and independent examination by the Parliamentary budget officer which uses a parametric estimating technique to develop cost estimates based on previously observed and validated cost estimating relationships. Basically there is an enormous chasm between sustaining a status quo military and amounts actually budgeted, quite aside from any goal of matching the military to projected needs. So why did the Liberal Party run on a platform of simply maintaining the budgetary expenditures for the military at current levels, including planned increases?

Basically, at current funding levels, the current force structure is unsustainable. So you have two choices: increase funding OR create a leaner (and, perhaps, meaner) military force. Start with expenditures. The Liberal Party is committed to maintaining expenditures at current levels, that is, at 1.1% of GDP rather than the recommended 2% for members in NATO, a target to which Canada committed itself starting in 2011-2012 with plans for $490 billion over twenty years to allow the military to engage in long-term planning. The budget in 2015 was only $21.5 billion. Of that amount, half was spent on personnel, two-thirds on procurement and one-third on operations and infrastructure.

But matters are even much worse. For increases are budgeted to keep pace with inflation estimated to average 1.5% per year. But because of technological improvements and the rate of increase of other costs, especially with respect to sophisticated equipment costs, the military, just to maintain itself at current levels, requires an annual increase at a rate of 2.5%. So we maintain when we should be increasing budgets. Further, we do so at levels totally inadequate to any model of defence burden-sharing among Western democracies.

This is most evident in the scandals and fiascos that envelop the military over areas of procurement, whether subs, acquiring resupply ships and even one destroyer to replace our last no-longer seaworthy rust bucket, helicopters to replace the Sea Kings, jets to replace our aging CF-18s, our ship building programs – the list goes on and on. Even in what should have been the least complicated, the acquisition of 1,500 army trucks and related gear, the contract was let out three different times. And when one phones around and learns that there is evidently only one true sophisticated expert in military procurement in the whole Canadian defence establishment, and that the procurement staff, just when procurement requires much greater sophistication, has been reduced by 40% to only 1,800 since 1989, and, calculated in terms of a ratio to expenditures, much greater than that again, one has to be appalled. But, given the past record, this may be because such expertise was not needed since real procurement rarely took place anyway.

One has to wonder how the Canadian military has managed to retain such a high reputation when it has been so poorly served by its political bosses, whether Liberal or Conservative. Look at Canada’s force structure, that is, the combat-readiness in terms of the skills of its personnel and the capabilities of its equipment as well as the non-combat dimensions in terms of research and infrastructure. If you are at all reasonably objective, and even if you are a pacifist, the support provided for the military, if you are going to have an adequate an effective military, is an embarrassment.

Our historical record shows, in part, why. When the most severe recession since the Great Depression hit Canada in 1989, we used the military budget as a contingency fund and drew defence spending down to below 1984 levels. Though Canada came out of that recession in 1994, it took another decade for any significant increases to be put in place. Though began by the Liberals, it was the Conservatives who increased the budget significantly every year – that is, until 2014, when, in accordance with 2012 planning, budgets were again cut to meet the government’s promise of a balanced budget before the 2015 election. Though we had largely escaped the worldwide Great Recession that began in 2008 and so badly afflicted our neighbour to the south, nevertheless, in 2014, the military budget was reduced to approximately 2009 levels.

Lesson 1: You cannot have a solid National Defence policy if military budgets are subject to being raided to bail out fiscal problems elsewhere. Is that the correct lesson? After all, were the reductions that began in 1989 not only a reaction to a need for a bailout of demands on the national budget to be extracted from the defence department, but a response to a belief in a new world order to follow the collapse of the Soviet Union. True, in part. But there were voices already that adumbrated increased instability with the end of a bipolar world. Further, if we did not understand that in 1989 when defence expenditures accounted for 1.7% of our budget, we certainly know that now when we face increased insecurity around the world when expenditures amount to 1.1% of our GDP.

So we have to start with the following:

  1. We need a defence policy paper to determine our priorities and extent of military defence expenditures to carry out that policy.
  2. We should not begin with the assumption of a status-quo military force when all indicators point to this as inadequate.
  3. Assuming a status-quo program allows the period of 2004-2014 to be represented as an “overinvestment period” when, in terms of the need to make up for both past neglect and increasing future needs, such a model is totally inadequate as a foundation for assessing future expenditures.
  4. The issuance of capital expenditures, which include associated costs of spares, of repairs, of replacements and a program of actively developing next generation equipment, must be accompanied by an educational program about accrual budgeting, otherwise the costs of procurement become a public relations disaster.
  5. It should be recalled that we have a population about 50% larger than in 1989 now at 36 million, but the size of our military has shrunk by about 20%.
  6. The public has developed capacity fatigue, that is, the endless and repeated tales of unaffordability with respect to military equipment related to procurement mismanagement.
  7. Instead of budgeting for defence expenditures to meet projected needs, instead of budgeting even to match historical rates of growth at 1.9%, instead of maintaining spending at the rate of growth in the GDP (i.e. at 1.1%), we budget for 0% growth by projecting increased expenditures only at the rate of increased inflation. In sum, instead of using the best model for allocating military expenditures, we use the worst one. [See David Perry (2014), “The Growing Gap Between Defence Ends and Means: The Disconnect between the Canada First Defence Strategy and the Defence Budget,” Conference of Defence Associations Institute.)

The 2008 Canada First Defence Strategy (CFDS) promised an annual increase of 2% in defence budget increases, already insufficient to make up for twenty-five years of capital reinvestment shortfalls, increasing personnel numbers for a country with a 50% population increase, and a need for major air and naval replacements given both their much higher unit costs and a record of procurement overruns. The result: instead of 3, we will only have 2 Queenston class auxiliary ships, and even these two will have reduced capabilities. The Conservatives in their 2012 Strategic Review Deficit Reduction Action did not protect the military budget but fell back on an older policy of disproportionately raiding it, freezing the defence budget and “deferring” $5 billion in capital funding. In effect the defence budget was reduced by 10% projected over the next two decades.

 

With the help of Alex Zisman

The Lapid Israeli Budget                                                                                        12.05.13 by Howard Adelman I have

The Lapid Israeli Budget                                                                                        12.05.13

 

by

 

Howard Adelman

 

I have so much to write about and just too little time. Major topics include: (1) Syria; (2) Tzipi Livni, John Kerry and the Peace Process, and (3) Lapid and the Budget. There are also a number of minor topics from Women at the Wall to Stephen Hawking. However, Yair Lapid tabled his budget this past week when I was otherwise preoccupied. The implications are important so I will write on the budget first.

 

In my blog on February 4th, I asked, “in a budget of NIS 350 billion largely locked into a third for interest payments on debt, another third for salaries and the other third with little room for flexibility, how can any finance minister come up with NIS 15 billion in cuts and additional revenues of about NIS 30 billion? I also wrote that Lapid’s stated priorities were to:

1. Reduce the cost of living by every means at its disposal (part of the coalition agreement);

2. Enhance free market competition and reduce the concentration of power;

3. Reduce economic disparities and launch a fight against poverty.

 

Finally, I also wrote that Israeli direct income taxes and indirect value added taxes now offer few incentives for any increase. Yet, as we shall see, these became the main sources for extra revenues. More importantly, there are more than sufficient revenues available by simply closing what in North America are called loopholes and in Israel are called incentives; very few of these were att. In preparing for this budget, I only managed to examine seven of twelve areas of the economy in order to understand the possibilities for the Israeli economy. The five areas still not covered include those with the largest expenditures: health, education, housing, defense and the support for the Haredi sector.

The total budget was NIS 296 billion for 2013 and in 2014 it will grow to about 304 billion shekels. Instead of the proposed cuts of NIS 15 billion and additional revenues of NIS 30 billion, the ratio of cuts to expenditures has been reversed. Planned cuts are NIS 30 billion (roughly 1/3rd for 2013 and 2/3rds for 2014. Planned new revenues are NIS 12-14 billion. Because the budgeted cuts run from July 2013 to the end of 2014, 18 months instead of 12 months, the cuts are only about 25% greater than anticipated. The real change is in the revenues which are much less than had been expected. Based on current committed expenditures projected forward, the deficit would have reached 5.5% of GDP by the end of 2014, up from 4.2%. Given the increases in revenues projected as well as the cuts in expenditures, the deficit will still actually increase as a percentage of GDP, up to 4.65 % this year and only reach the targeted 3% by the end of 2014.  

Last year, Israel spent $US15.5 for defense (NIS 55.5 billion), almost 7% of its GDP, but that budget excluded US$3.1 in US aid. The largest single cut was expected to come from the defense budget – NIS 4 billion, but this was, in fact, a smaller cut than expected and smaller than cuts elsewhere. A cut of NIS 4 billion from a budget of NIS 55.5 billion is a cut of 7.2%. Part of the spanner thrown into the defense budget was sequestration in the United States which has meant an automatic US$300 million cut or one-quarter of the Israeli cut. Excluding the US cut, the actual cut is only about NIS 3 billion. Further, the American portion of the cut could come from the Dome and Arrow defense missile system (total value $US 429 million) that seems to be increasingly necessary given the build up of rockets by Hamas and especially Hezbollah, but President Obama seems to have gone out of his way to earmark that part of the US$3.1 billion allocated to Israel. Today, Israel’s security cabinet will discuss those proposed cuts to defence. Given the visible threats from Syria, Hezbollah, Gaza and Iran, do not expect those cuts to stay firm.

As far as I have been able to make out, the cuts will be as follws – please offer corrections. Infrastructure and transportation support will be cut by NIS 2.75 billion in this year alone and 5 billion next year. There is no costs included for the additional number of accidents due to bad roads.  Education will be cut by NIS1 billion. The amount of the cuts from welfare and health was not known but is expected to be another NIS 2 billion. But a separate cut of a staggering NIS 3 billion shekels was scheduled to come from child allowances and support for day care programs. At the same time, child benefits will be cut from NIS 175 shekels per month to NIS 140 shekels per month, an enormous almost 17.5% cut. These cuts, if they hold, will be expected to total NIS 2.75 billion in 2013 and an additional NIS 3 billion in 2014. Cuts to settlers and haredim are expected to total NIS 2 billion. The wage freeze plus NIS 2 billion cut in public sector wages is on hold until Treasury negotiates a deal with Histradut.

Total Cuts                                           Year                NIS in billions

Defense                                               2013-14           3

Transportation and infrastructure       2013                2.75                                                                                                                 2014                5

Education                                            2013-2014       1

Child Welfare                                     2013                2.75

                                                            2014                3

Health                                                 2013-2014       3

Haredi and settler support                  2013-2014       2

Bureaucratic Fat                                  2013-2014       3.5

Technology Sector                              2013-2014         .6

Sundry            incl. wage cuts                                               3.4

 

Total                                                                            30

 

If NIS 2+ billion more came from cuts in a 12 month budget, NIS 10 billion less came from revenues, NIS 20 billion instead of NIS 30 billion. Since revenues were also calculated over 18 months instead of 12 months, though some come into effect only in 2014, the target is less than half of the amount anticipated. So the distribution between expenditure cuts and revenues is made much more even and the target for revenues is lowered effectively by one-third. The total anticipated increase in revenue by the end of 2014 is expected to be NIS 4 billion in 2013 and NIS 14 billion in 2014.

 

The Value Added Tax (VAT) is increased from 17 to 18% expected to yield about NIS 20 billion over 18 months. Additional VAT income is expected to come from a number of exclusions, especially in the tourist industry that will significantly affect the incentives for going to Eilat. Israel already enjoys a single-rate VAT with very few exemptions and this step will reduce them further. Another source of revenue is to come from tax increases set to come into effect in January 2014, an increase of 1.5% for those earning NIS 5000 shekels a month. That means not only that that everyone with a gross income of more than US$15,000 per annum will be paying an  increased tax of 1.5% but that the greatest percentage increase, from 14% to 15.5%, will fall on middle income earners paying taxes. Their increased tax burden goes up by 7%. Since half of Israelis earn under NIS 5,812 a month and half of those earn less than NIS 3,451 per month. On the other hand, health taxes will only be increased for those in the highest income bracket, over NIS 40,000 a month, or an upper middle income tax bracket. The increase will be .5%. Increased revenues will also come from pleasure taxes, namely tobacco and alcohol. Further, a new 25% land betterment tax, or speculative residential property tax will be levied on those who own second apartments with a minimum monthly revenue. The tax will be 25% of the profits, and profits are not discounted for inflation. There will also be a tax of 35% on pension income of over 15,000 shekels per month.    

 

The distribution of those cuts is even more interesting. Consider the technology sector first, the growth engine for a start-up nation and a knowledge economy. Netanyahu cut the technology sector support budget 10 years ago and Lapid cut it again. As a result of the ten year old cuts, the hi-tech sector stagnated, employment in the hi-tech sector also stagnated both in the sense of failing to grow at or above the rate of the Israeli economy in general. Further, the enrolment in hi-tech university programs has also not increased. In 2001, the hi-tech budget was NIS2.3 billion. In 2007 it was NIS 1.4 billion. Last year it was up again to NIS1.57 billion but Lapid cut the hi-tech budget by just over a third to only NIS1 billion.

 

Revenue could have been obtained by increasing the corporate tax rate by more than 1% but this would have run counter to the shelved plans to reduce corporate tax rates from 24% to 18%. Similarly, plans to reduce the top rate of income tax from 45% to 39% have also been shelved (the Trajtenberg Commission). The surcharge on incomes over NIS 1 million has been retained but not increased. It is not clear how efforts to enhance Arab women and Haredi participation in the work force are calculated in the budget in terms of enhanced revenues as well as reduced expenditures. I also do not know how the increased taxes on second apartments are factored into the budget.

 

Israel has also been unique in having a two year budget cycle since 2009 instead of a one year budget presumably allowing better planning but accomplished only through greater rigidities and less flexibility. This 18 month budget may create more benefits and put less emphasis on rigidities, but we will have to see. However, I consider this a disastrous budget for the poor and almost as bad for the lower middle classes totally contradicting the goal of reducing economic disparities and launching a fight against poverty. VAT increasingly weighs heaviest against the lower income groups in society; it is a regressive tax. The next target is the lowest tax bracket of earners. These are the income earners who will suffer most. When one adds the significant tax cuts planned to child benefits and to support for day care, as well as other cuts not so much in the public eye, such as cuts to paying for dental treatment, then it is clear who is hit worst. In contrast, corporations only have to bear an additional 1% in corporate taxes and the option of closing the vast majority of loopholes has been lost.

 

Note, unlike Canada, this is a proposed budget – other Ministers will jockey for changes. Expect changes before a final proposal goes for debate before the Knesset. My own suspicion is that the 18 month cycle is meant to make it harder to calculate comparisons rather than for either planning or flexibility considerations. Nevertheless, whatever changes are made, there is no indication that the budget will reduce the cost of living, enhance free market competition or reduce economic disparities in the fight against poverty.

Tomorrow morning I will be in the hospital to have a stent put in a coronary artery so my next blog may have to wait until Tuesday.