Months before Australians were rocked by a deadly bombing in Bali, the Howard government was facing tough funding decisions as it ramped up its "war on terror".
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With the Australian Defence Force preparing for a possible war, then-defence minister Robert Hill had an accounting challenge on his hands, cabinet documents from 2002 released on Sunday reveal.
In February 2002, five short months after the September 11 attacks, Mr Hill pushed cabinet to give Australia's military an extra billion over two years to cover a rapidly increasing "operational tempo".
Defence's white paper, released two years earlier and which focused on self-reliance from the US and increasing capability without extra funding, had quickly become redundant with politicians committing to overseas military operations in the Middle East.
Among the additional pressures, Mr Hill noted, were Defence's "intensive" operations to intercept people-smuggling boats, Australia's involvement in the US-led war against terrorism in the Middle East and Persian Gulf along with counter-terrorism support for the upcoming Commonwealth Heads of Government meeting in March.
The "war-like" response also meant deployed personnel were receiving attractive bonuses amounting to an extra $125 to $200 a day.
The beefed-up domestic security arrangements and commitment to deploying some 1500 Australian troops to Afghanistan and nearby areas would come at a "substantial cost", the submission warned.
Defence's total cost for the war on terror measures for 2001-02 would come to $1.8 billion with it reaching nearly $2 billion the next.
Around a quarter of it could be absorbed in the department and military's already large budget with some careful accounting and cost-cutting but without a further boost, the country's national security and defence priorities would suffer, Mr Hill's cabinet submission said.
"The planned levels of preparedness and their costs set out in the 2001-02 DFMP [Defence Financial Management Plan] do not, however, reflect what is necessary to support a major international deployment of the ADF," Mr Hill said.
"Further, at even the highest level of preparedness, they do not form the base for more than a small number of concurrent operations - remaining capability in some areas is therefore lower than necessary to meet any other contingencies which might emerge."
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That final bill came to $450 million for 2001-02 and a further $522 million the following year.
It was ultimately agreed to by cabinet but not without a bureaucratic dog fight.
Defence's budgeting shortfall its own doing, top bureaucrats warned
While then-prime minister John Howard joined then-treasurer Peter Costello and finance minister Nick Minchin in agreeing on the cash injection for Defence, the ministers' top bureaucrats slammed the proposal.
Included in Mr Hill's plea to open up the government's coffers was an admission that Defence had failed to raise $330 million in selling IT and property assets, claiming it was "beyond Defence's control".
The desktop computers and network equipment, bought as part of Y2K investments, were marked for sale as part of a "one-time" opportunity to lower IT costs and reinvest in major acquisitions.
But the submission noted the IT assets were now aged and Defence no longer believed it would a "feasible return" would be possible.
In its revised asset sales plan, it believed it could now only raise a total of $68 million from property sales, resulting in a $262 million budget shortfall.
The blowback from the federal government's central agencies was significant.
The Department of Finance and Administration was most scathing and suggested senior ministers pay closer attention to what exactly Defence had done.
"Finance notes that the inability to achieve $352 million receipts from asset sales in 2001-02 has significantly worsened the budget position and affected the government's fiscal strategy," Finance's response to the submission said.
"This only became apparent in the last fortnight.
"Accordingly, Finance considers that options for improved senior ministerial oversight of Defence asset sales be considered by ERC [Expenditure Review Committee] when the Defence PBS [portfolio budget statement] is considered."
Piling on to the disappointment, Treasury noted Defence hadn't given accurate financial information to the central agencies, nor the senior ministers, about the budgetary pressures and the value of offsets within Defence's portfolio.
It said it pointed to "ongoing deficiencies" within the department's internal financial management systems and proposed it be put under the microscope after the 2002-03 budget process.
Prime Minister and Cabinet added Defence's increased budget pressures were substantially as a result of its "failure" to sell the assets agreed to by cabinet.
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