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5310.0.55.002 - Information Paper: Implementation of new international statistical standards in ABS National and International Accounts, September 2009  
Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 28/10/2009  First Issue
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CHAPTER 7 MILITARY EXPENDITURE

Warning: The estimates in this publication are indicative. They are presented to give an indication of the magnitude of the impacts of proposed change to Australia's macro-economic accounts. All estimates are subject to refinement and revision in the compilation of the annual Australian System of National Accounts to be published on 8 December 2009 and in the quarterly Australian National Accounts to be published on 16 December 2009.

INTRODUCTION

Defence Weapons Platforms (DWPs) are the structural systems from which destructive weapons such as missiles, bombs and torpedoes are launched or fired. They include submarines, warships, fighter planes and tanks. With the exception of military expenditure on assets that also have civilian use, defence expenditure is treated as Government Final Consumption Expenditure (GFCE) in the System of National Accounts 1993 (SNA93). The System of National Accounts 2008 (SNA08) recommends treatment of expenditure on DWPs as Gross Fixed Capital Formation (GFCF) thus recognising ongoing services provided by DWPs beyond the period in which they were purchased.


CONCEPTUAL TREATMENT

The SNA08 treatment will bring DWPs into line with other assets. Thus capitalisation of expenditure on DWPs requires:
  • estimates of GFCF, are expenditure to acquire new DWPs, including imports and domestic production (including own account production);
  • estimates of the services provided by the assets over time, are Consumption of Fixed Capital (COFC);
  • estimates of the value of DWPs for the balance sheet, are produced assets in the form of plant and equipment.

It should be noted that the recommendation to capitalise DWPs will not change the treatment of other defence expenditures under SNA08. Current expenditures, such as compensation of employees, will continue to be recorded as GFCE; capital expenditures on items that have civilian use will continue to be capitalised; expenditures on consumable military items, such as boots, bombs and bullets, will continue to be recorded as increases in inventories on acquisition and decreases in inventories on use or disposal.

SNA08 recommends that the contribution of capitalised DWPs be identified separately in the balance sheet, GFCF and COFC, because of the size of their contribution and the reliance on imputation methods for COFC and balance sheets in the absence of direct observations.


MEASUREMENT CHALLENGES AND IMPLEMENTATION

The main challenges in implementing the SNA08 treatment of DWPs will include measuring DWPs in GFCF, supply-use balancing and the details needed for their introduction into the capital stock system (such as asset lives), valuation (including depletion), deflation and capital services derived from DWPs.


Gross fixed capital formation

Information about expenditures on DWPs is provided to ABS by the Australian Government as part of Government Finance Statistics (GFS). The values reported will be classified as GFCF under SNA08, rather than GFCE. This will decrease non-market output of the defence industry (which is the measured by summing costs) as DWPs are removed from intermediate consumption.

The main supply of DWPs will be through imports, especially for large items such as fighter aircraft and combat ships.


Capital stock, asset lives and valuation

Estimates of the value of DWPs will be included in the national balance sheet. These estimates have proved to be challenging: observable market values are not available; similarly replacement cost values are not observable due to rapidly changing technology and caveats on weapons trading in secondary markets. Therefore ABS is relying on asset life assumptions to model balance sheet values.

The ABS has undertaken research on asset lives and retirement functions for each equipment type (Aircraft, Ships, Ground)and decided on using previous work undertaken by the United States Bureau of Economic Analysis.

Table 1 shows an average asset life for defence weapons platforms will be 21 years.

1 Average asset lives, DWPs

2005-06 weights
US asset lives (years)

Aircraft
55 %
20
Ships
7 %
28
Ground
38 %
20
Total
100 %
21



Simulations for asset lives of 5 years, 10 years and 20 years were undertaken and compared with the depreciation estimates published by the Department of Defence. Both sets of comparisons support the plausibility of an asset life around 20 years. However, the balance sheet estimates produced by the PIM will require further investigation. Although the values will be added to the national balance sheet, the values will not be separately identified until these investigations have been completed.


CONSUMPTION OF FIXED CAPITAL FOR DEFENCE ASSETS

Consumption of fixed capital will be calculated by using a hyperbolic age-efficiency function for the defence asset using the asset lives from table 1. For more information on the ABS method for the derivation of CoFC see the Australian National Accounts: Concepts, Sources and Methods (cat. no. 5216.0). The COFC estimates produced by the PIM will require further investigation. Although the values will be added to the national balance sheet, the values will not be separately identified until these investigations have been completed.

The balance sheet values of DWP stock and COFC generated in the PIM will differ from historic cost cost accounting values recorded by the Department of Defence.


CHOICE OF DEFLATORS

There is limited published information on the composition of DWPs. Representative deflators to derive volume measures of DWP GFCF and COFC were chosen appropriate to the aircraft, ships and ground vehicle asset classes.


KEY AGGREGATES

As part of implementing the revised SNA standards, the new treatment of military expenditure will impact the processing, compilation and dissemination of estimates in the Balance of Payments (cat. no. 5302.0 and cat. no. 5368.0), National Accounts (cat. no. 5204.0 and cat. no. 5206.0) and Government Finance Statistics (cat. no. 5519.0.55.001) and Government Financial Estimates (cat.no. 5501.0.55.001) publications.

Table 2 shows the extent that changes to the treatment of defence expenditure will have in the accounts.

2 Changes to key aggregates due to treatment of military expenditure

Aggregate Change

GDP (E) Increases due to GFCF offset by identical decrease in GFCE. Increase due to CoFC.
Public Administration and Safety output Increase due to treatment of CoFC, decrease due to removal of DWP
Net Saving Increase to gross savings, increase to general government savings
National Balance Sheet Increase due to new series on DWP



DWPs will be about $3,300 million (about 1%) of GFCE in 2007-08. This will be recorded as GFCF, which means there will be cascading impacts through a number of aggregates. The figure below shows the new GFCF aggregates including DWPs. The estimates for DWP will show volatile characteristics expected of capital expenditure as seen in Figure 1.

3 DWPs impact on GFCF, current prices - 1994-95 to 2007-08

1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08

Total GFCF, current prices, SNA93
125 351
128 588
135 192
148 927
158 287
171 829
164 677
183 550
210 344
230 677
250 970
282 520
307 796
346 452
DWPs, current prices
1 595
1 728
1 773
1 901
2 350
2 348
2 783
2 557
2 696
2 194
3 154
3 196
2 480
3 303
Percentage increase to GFCF level
1
1
1
1
1
1
2
1
1
1
1
1
1
1

Figure 1 - Defence weapons platforms, current prices - 1994-95 to 2007-08
Graph: Figure 1 - Defence weapons platforms, current prices—1994–95 to 2007–08



OTHER IMPLEMENTATION ISSUES

Alignment with Government Finance Statistics

In GFS, expenditures on DWPs will be reclassified as GFCF, rather than GFCE, in line with the SNA08 treatment and the treatment in Commonwealth Government accounts. This will affect the Commonwealth general government operating statement and cash flow statement in GFS.

Balance sheet values and depreciation are subject to the investigations mentioned above. Expenditure on 'consumable' military equipment such as bullets will continue to be recorded as inventories.


ALIGNMENT WITH BALANCE OF PAYMENTS

Implementation of BPM6 standards for defence expenditure will have minimal impacts. DWPs and single use items for defence are currently classified to other merchandise goods.

Defence related imports of goods will be classified according to the following method:
  • large transactions (over $3m) will be examined and classified as DWP or capital goods n.e.s. as appropriate; and,
  • small transactions ($3m or less) will be classified as other merchandise goods.

These treatments will reclassify goods within the Balance of Payments goods category and, there will be no impact on the main aggregates.


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