Friday, 5 October 2012


What costs more, a Light House or a Frigate? It all depends on how you calculate it.

The Canadian Armed Forces are going to take a hit. The 2012 Federal budget is going to give them a lot less money to try to spend then they have had in the recent past. In the U.S. the so called sequestration which promises to cut their defence spending by almost eleven per cent has created a great deal of debate. The same or perhaps even greater cuts in Canadian spending have had far less public impact.

One of the problems the Forces are going to have is figuring out what to cut that will actually impact their budget. Currently they use an accounting method that calculates total program costs. While this method has its merits it can introduce distortions.

Think of it in more common terms, the example being the purchase of a car. It costs $15,000 to buy. You figure it’s going to cost about $5,000 a year for insurance and about $5,000 a year for gas and maintenance. Now you might think this means that you are going to have to come up with $15,000 dollars to buy a car and that you’re going to have to figure if your budget can stretch to cover the rest over the course of the year.

Or, you could decide that if you plan to keep the car for twenty years then the total, program cost is $215,000. Now that’s a lot of money. Sticker shock is beginning to set in (just ask anyone trying to justify the cost of the F-35 program), but it’s not completely unreasonable. That is the amount you are forgoing over the next twenty years that you could be spending on something else.

A program cost of $215,000 over twenty years works out to $10,750 per year. Which means, according to the accountants, if you decide not to buy a car this year you are not saving $15,000 plus another $10,000 in expenses, you’re only saving $10,750.  This is the same problem faced by the Department of National Defence when they try to cut the budget.

So what does cost more, a ten year old frigate or a one hundred and fifty year old light house? Cutting which one will save the government the most money?  If we figure the total program costs for the light house we might actually discover it costs more then the frigate and that getting rid of it will save more money then getting rid of the frigate. The trouble with this theory is that it’s not true. The frigate costs us much more, year to year, then the light house.

Knowing what to cut (and as David Perry’s report shows there will be cuts) and how to do it is going to call for more then just accountants and common sense. The response of the Armed Forces so far has been to hold on to as much capability as possible and squeeze the operations budget in an attempt to get through what they hope will be a relatively short period of austerity. There is no way of telling whether they are right or wrong. You have to have a certain amount of sympathy for the Generals. What they need is informed public debate as well as political direction to determine what our defence priorities are. In the absence of that they are really just making it up as they go along.