Cost of war may lead to budget gap

THE federal budget is facing a funding gap of up to $10 billion over the next five years, with the Finance Department revealing that no money has been set aside for overseas troop commitments after this year.

In its detailed briefing paper to Finance Minister Penny Wong, released on Friday, the department says overseas troop commitments primarily to Afghanistan are now costing the budget $1.7 billion a year.

It says the budget does not set money aside for drought relief or overseas troop commitments in future years, so any spending has to be added to the budget every year.

On reasonable assumptions, continuation of Australia's commitment to Afghanistan, Iraq, East Timor and the Solomon Islands at current levels would cost $2 billion a year by 2012-13. In theory, that would wipe out half of the $3.8 billion surplus forecast for that year.

In practice, the budget allocates money into a contingency fund to finance spending on issues it can't foresee. In the election campaign, the Coalition proposed raiding the fund of $2.5 billion to pay back debt. Yet last week it also proposed to send another 350 troops to Afghanistan, with tanks.

The Finance Department's briefing singled out defence as a potential area for big spending cuts, which it warns the government could need to reach its goal of returning to surplus by 2012-13. It told Senator Wong that the scale of the fiscal task ahead, and the big rises in defence and national security spending under the Howard government, now present an opportunity for the government to "reassess the strategic posture and funding of defence".

The next paragraph was blacked out from the text made public. But Treasury has urged that military equipment be bought off the shelf overseas, rather than building submarines and ships in Australia.