Exclusive-New Zealand proposes 6.6% smaller defence budget amid personnel and equipment woes

By Lucy Craymer and Lewis Jackson

WELLINGTON (Reuters) - New Zealand’s proposed defence budget will be 6.6% smaller than the current year's, according to the defence minister's office, even as the armed forces struggle with ageing equipment, a shortage of manpower and ambitions for a greater regional role.

According to previously unreported data, provided to Reuters by the defence minister, the proposed defence budget will fall to NZ$4.95 billion ($3.03 billion) for the year that ends in June 2025. This year's defence budget was NZ$5.3 billion.

The new budget, to be presented on May 30, would put New Zealand’s defence spending at 0.9% of GDP, down from 1% in the current year, according to the defence force.

The drop in budgeted spending comes as recent government reports have warned about old equipment, and the military has struggled to hire and retain personnel. Alongside those challenges, the government wants to improve the state of the country's armed forces and take on more regional and global missions - as well as investigate a bid to join the AUKUS defence pact.

"I have been consistently clear that Defence will need more funding and am committed to supporting Defence," Defence Minister Judith Collins told Reuters in an email, adding that big decisions on capital spending would be made after the completion of a Defence Capability Plan in June.

The country's Finance Ministry presents the government budget, which parliament must approve. Finance Minister Nicola Willis said in an email that the government had announced NZ$571 million of new defence spending over the next four years.

The ministry said that it was not cutting existing spending, as the current defence budget was boosted by large capital expenditures on new aircraft, and that future capital investment decisions were "still under consideration".

Many of New Zealand's traditional partners, such as Australia and Japan, are ramping up spending in response to China’s growing military presence in the region.

Japan, which spent roughly 1% of GDP on defence as recently as 2022, will hit about 1.6% next year and aims to reach 2% by 2028. Australia will go from 2% to around 2.4% over the next decade.

New Zealand Prime Minister Christopher Luxon has worked hard to increase international engagement since taking office, including sending a maritime security team to the Red Sea. But falling revenue and rising debt have hamstrung the country's ability to boost defence spending even as it says it is concerned about China's growing presence in the Pacific and a worsening global security environment.

“The government has made it clear that it wants to spend more on defence and be seen to be doing more in the defence space, but decades of sustained underinvestment mean chickens are coming home to roost,” said David Capie, director of the Centre for Strategic Studies at Victoria University. “It’s not going to be fixed in one budget; it's going to take significant and sustained investment over a long period of time.” The government has said it wants to cut spending on average by 6.5% to 7.5% across all agencies.

Three of the Royal New Zealand Navy’s nine ships are already stuck in port for want of crew. The Air Force's Boeing 757-2K2s regularly break down, and in March, Luxon had to take a commercial jet to an ASEAN summit after his plane was grounded.

New Zealand also had to ask other countries for help with maritime surveillance and regional search rescue operations after retiring its P-3K2 Orions five months early because of staff shortages.

In February, outgoing Chief of Defence Air Marshal Kevin Short estimated that the country was just over NZ$5 billion behind in defence spending from where it was projected to be in the 2019 Defence Capability Plan.

He told a parliament committee this year that “readiness continues to be one of the New Zealand Defence Force’s greatest challenge”.

AUKUS UNLIKELY

New Zealand's lagging military spending and ability will damage its chances of joining a technology-focused part of the AUKUS defence pact, diplomatic sources say. The government is in the midst of discussions on what joining would entail.

Australia, Britain and the United States signed the pact in 2021. At its core is a plan to help Australia build nuclear-powered submarines, but a second stage to develop other military technology, such as hypersonic missiles, is open to more countries. Both South Korea and Japan have expressed interest.

Diplomatic sources say prospective joiners need to bring money, technology or industrial capacity to the table to justify the extra complexity that comes with adding members.

That puts New Zealand at a disadvantage, according to a source in New Zealand government.

"You need to show some money," said a diplomat from an AUKUS country based in Australia. Both sources declined to be named because of the sensitivity of the matter.

"You've got to show you're investing in the industrial base that would make you a useful ally, otherwise you're adding complexity without benefits," the source in Australia said.

($1 = 1.6329 New Zealand dollars)

(Reporting by Lucy Craymer in Wellington and Lewis Jackson in Sydney. Editing by Gerry Doyle)