Filling the void: estimating the defence industry’s impact on jobs and growth
29 Nov 2017|

Based on the volume of media coverage, the casual observer might be forgiven for thinking that Australia’s planned build-up of defence capital equipment has more to do with jobs and growth than national security. Yet, relative to the size of the investment, the amount of information available publicly on the economic impact of the proposed build-up is meagre. A number of stakeholders have recently attempted to fill a void in the availability of economic impact data, but with limited success—leaving reliable information on the industry ‘missing in action’.

Early this year, Minister for Defence Industry Christopher Pyne noted the defence industry’s contribution to Australia’s overall economic growth as measured in the National Accounts. From a 34% rise in the defence expenditure component of gross fixed capital formation (GFCF) in the December quarter 2016, the minister concluded that the industry had emerged as a ‘major reason’ for economic expansion across the economy as a whole measured by GDP.

Unfortunately, that assessment overlooks a number of important factors: the defence component of GFCF accounts for a small proportion of GDP; that component includes defence facility investment as well as the capital equipment investment normally associated with the definition of the defence (manufacturing) industry; the GFCF figure includes imported equipment; and quarterly figures are highly volatile, suggesting the appropriateness of trend data rather than the seasonally adjusted data that were used. The upshot is that the defence industry accounted for between less than 2% and 14% of the overall rise in GDP over the quarter—and the lower figure is a distinct possibility.

Defence’s naval shipbuilding plan then emerged to provide job estimates for the future submarine, future frigate, offshore patrol vessel and Pacific patrol boat projects. Covering nearly $95 billion of defence expenditure, the plan had the potential to plug a significant gap in the industry economic impact puzzle.

But the results are incomplete and inconsistent. While the economic benefits of the projects are noted, no mention is made of their potential economic costs—not even the costs associated with the government having to pay for the vessels by raising taxes, reducing expenditure elsewhere or borrowing more money. And job numbers for each project are calculated using different methodologies over different time frames, which effectively precludes them being combined to give a useful sectoral view. To what degree the results could, or should, comply with new government economic impact reporting requirements under the 2017 Commonwealth Procurement Rules is unclear.

An October report focusing on naval shipbuilding’s economic impact on South Australia added only marginally to the knowledge base. Here again the results are difficult to assess: no, more illuminating, national data are provided; economic benefits are included but economic costs are not; shipbuilding figures are combined with ship sustainment figures, making the individual contribution of building difficult to determine; and claims that shipbuilding and sustainment in South Australia will create new forms of economic activity equal to the state’s mining industry are proffered in the absence of important contextual information showing that mining accounts for only around 1% of statewide employment.

Outside the naval shipbuilding arena, an earlier economic impact report commissioned by Defence examined the effects of Australian industry’s participation in the Joint Strike Fighter global supply chain program. As the posterchild for the defence industry’s role in the development of advanced manufacturing in Australia, the program holds a position of special interest from a jobs and growth perspective.

To its credit, the study considers economic costs as well as economic benefits. However, as ASPI has already observed, the report’s estimates of economic impact are difficult to reconcile. The modelling appears to be underpinned by a somewhat unusual assumption: even after sales contracts for the JSF expire, the people those contracts help to employ can be retained, presumably as a result of the companies involved gaining enough additional capability through the JSF program to attract a completely new clientele.

State governments have over a number of years attempted to estimate what the defence industry might add to their economies. New South Wales, Victoria, South Australia and Western Australia have all generated relevant reports. Nonetheless, the scope of data in those documents varies enormously and not all states and territories appear to have attempted an industry profile. Moreover, the reports don’t provide all-important insights into Defence’s future procurement plans and appear to rely to at least some degree on Australian Bureau of Statistics data, which isn’t structured to reflect the special characteristics of defence manufacturing. Boeing recently commissioned an economic impact study of its activities around Australia. However, with a single-company focus, the study’s contribution to broader public policy is limited.

An outstanding feature of Defence investment in industry is that even the largest investment projects tend to have a small relative economic impact when measured on a national basis or even in terms of the economies of most states and territories. However, their effects at a regional level can be a lot more significant. Ironically, the attempts to measure economic impact noted above pay little, if any, attention to the regional dimension.