Last week’s Budget was notable for one of the largest uplifts in capital spending on New Zealand’s defence capability in recent years.
Yet barely was the ink dry on those announcements when our Defence Minister, Chris Penk, heard from the US Secretary of Defence, Pete Hegseth, that New Zealand was “freeloading” with defence spending, targeting just 2% of gross domestic product (GDP), up from closer to 1% at present. The US-imposed “new normal” is more like 5% of GDP.
To be fair to Hegseth, he didn’t set out to finger-point at Penk. He was answering a headline-generating question from a Kiwi journalist who was covering the annual regional Shangri-La defence summit in Singapore, where Hegseth and Penk also met privately. Penk is reported to have argued that New Zealand brings more to its role in the Asia-Pacific than its limited military capability.
The increase in Ministry of Foreign Affairs funding for additional diplomatic capacity and aid programmes in our region was one of the few other areas to get an operational spending boost in the Budget.
Another area was the intelligence services, where a goodly lick of new operating expenses was green-lit. New Zealand remains a member of the Five Eyes intelligence-sharing network with the US, Australia, Canada, and the UK. These investments in defence capability, intelligence-gathering, and diplomatic “soft power” are all part of New Zealand’s recognition that the globalisation-led era of relative geopolitical stability has ended.
This comes at a cost.
Located far from most potential sources of conflict, New Zealand has been happy to let its isolation and the bulwark of a better-armed Australia do much of the heavy lifting on national security in the last 40 years. That is no longer enough. New Zealand’s globally integrated economy means we are dependent on our sea lines of communication and those can be disrupted. Bluntly put, we haven’t kept the insurance up to date and now people with matches are turning up in the neighbourhood.
The Iran war has shown how closing a single yet critical shipping strait can impact the global economy and our fuel security. In our region, the South China Sea could face similar disruption when (rather than if) China decides that the time has come to force Taiwan’s reunification with the mainland. Those shipping lanes are vital to our export-led economy. Our capacity to contribute to them remaining open cannot be regarded as an optional extra.
The Royal New Zealand Navy and the Royal New Zealand Air Force already irritate both China and North Korea by patrolling in the South China Sea as part of joint force operations. The Royal New Zealand Army recently participated in exercises in the Philippines, South Korea, Malaysia and Singapore.
Likewise, New Zealand’s enormous oceanic exclusive economic zone, close relations with most of the South Pacific island states and its critical role in Antarctica, all face new pressures as the contest for geopolitical influence intensifies.
So it was something of a relief to see the Budget allocate $700 million in new capital funding for the Defence Capability Plan priority projects, alongside a $1.58 billion overall maritime security boost. The new spending supports the modernisation of New Zealand’s naval fleet and critical assets, while boosting operational funding to increase personnel readiness. The funding also reflects the changing face of modern defence.
By far the largest portion of those funds will go to upgrading our two Anzac frigates and multi role vessel, which need another decade of life while replacements are procured. These old-style defence assets are still necessary given our enormous maritime domain and reliance on sea lines of communication, but they are expensive and upgrades are required in an age where low-cost drones are weaponising asymmetry, and where even a heavily armed traditional opponent can be outgunned by low-cost attack systems.
The announcement of investments in long-range naval drones, long-delayed army field communications equipment, and a $25m boost to military training may cost less than the frigate upgrades, but they are the future. These essential down payments on the way that defence and war-fighting are changing should lead to New Zealand projecting capability into our areas of interest at a far lower cost than in the past.
Much cultural and doctrinal change is ahead for our defence force leaders.
For New Zealand businesses, there is an emerging opportunity in the “re-shoring” phenomenon, where previous reliance on long global supply chains for critical industries is regarded as a national security weakness. Where possible, local capability to design, produce, and procure military systems and equipment is a new imperative. This represents perhaps the most significant commercial opportunity in defence procurement for New Zealand industry since the Anzac frigates construction programme, which saw big chunks of work let to New Zealand based companies.
It is in Australia’s interest for New Zealand to have such capability for its own defence. We can add strategic and industrial depth not only to Australia but other like-minded countries, such as Singapore.
More to the point, New Zealand has drone, space, and sensing technology sectors that are as good as anywhere in the world. Their contribution to an upgraded defence capability is allied with the fact that they are fast-growing, high-value, and knowledge-intensive businesses. Our aerospace industry has grown 53% over five years to hit $2.68b, and it’s booming because we are good at it – as a nation we need to exploit that. We know we need more defence capable businesses. We appear to be capable of building and sustaining those businesses but they need the work.
There are still institutional impediments to overcome. The defence sector’s procurement processes remain too slow. This Budget made provision for communications systems upgrades that have been under consideration for a decade or so. Why has it taken so long?
We have a need for speed and agile procurement. The Technology Accelerator, identified as a key plank of the recent Defence Capability Plan, received a $17.5m capital and operating boost in the Budget. This appears to be no more than start-up funding. Industry has hoped for more.
The $30m investment in better pay and defence base housing are vital. However, the salary boost looks barely enough to raise defence force pay to slightly below market rates, especially when it needs to recruit to restore force strength.
The New Zealand Defence Force has lost too many servicemen and women to Australia, private sector skilled trades, and distaste at having to guard people in MIQ hotels during the covid era. An urgent rebuild of our human capital has started, the loss of personnel has been admirably addressed but more must be done.
Like every very important part of a functioning state, the defence budget is easily capable of being a bottomless pit of need to rival spending on, say, health, education, justice, public infrastructure, or welfare and pensions. In a country running structural Budget deficits and wanting to keep an AAA sovereign credit rating, capital allocation will always be hard-fought and defence has done well in this Budget. But that will need to continue.
Irritating as it may be to be advised at all by Pete Hegseth, the world is re-arming. We need to reverse decades of underinvestment in defence and the defence sector and, at last resort, be able to impose a cost on those that threaten. How New Zealand meets that challenge will depend on how smartly we use the money to protect our national security and economic interests while effectively advocating a preference for peace within a rules-based international order.
Gerard Dale is a partner in Dentons New Zealand’s corporate and commercial team.