Australian Defence Industry Account, experimental estimates methodology

Latest release
Reference period
2020-21 financial year
Released
30/09/2022
Next release Unknown
First release

The Australian Defence Industry Account (ADIA) is a satellite account that measures the direct economic contribution of the defence industry to the Australian economy. The account has been compiled, as far as possible, with standard satellite accounting principles, that are aligned with the concepts and structures of the System of National Accounts (SNA). The account presents estimates on Gross Value Added (GVA) of the Australian defence industry to the Australian economy disaggregated by state and industry division.

The following section outlines the broad concepts, sources, and methods for the ADIA.

Overarching methods

The following steps are a broad level description of how expenditure data from the Department of Defence (Defence) is used to derive the GVA associated with Defence expenditure: 

  1. Defence expenditure is mapped to ABS product and industry classifications. This enables integration with Australian Bureau of Statistics (ABS) data assets;
  2. Invoices not related to the Australian defence industry are removed;

  3. Product taxes and subsidies, and margins are removed for each invoiced expense. The residual represents the Basic Price amount, or the amount received by the supplier of the good or service;
  4. The Basic Price is then used to derive the GVA, and other inputs into production, at an invoice level;
  5. These values are aggregated based on contributing industry and state.

For a more detailed description of the methods please see the detailed methodology section. 

Concepts

The following sections capture the key concepts, standards, and classifications utilised in the compilation of the ADIA. 

Satellite accounts

Satellite accounts are linked to, but distinct from, the SNA. The national accounts are compiled for the whole economy and for all units belonging to the same industry. However, it is useful for economic analysis to identify and measure activities that occur across a range of the standard industries. Satellite accounts are a useful tool to do this.

Satellite accounts allow experimentation with new concepts and methodologies, with a wider degree of freedom than is possible within the central system. They provide a framework which enables attention to be focused on a certain aspect of economic and social life in a way that is coherent with the national accounts (SNA chapter 29). The ADIA captures defence activity, the industries that contribute to this activity, and the value add this activity makes to the economy.

Defence industry

The ADIA has been designed to estimate the first-round economic impacts that Defence spending contributes to the Australian economy. The Australian defence industry represents the production of goods and services invoiced to the Department of Defence. Therefore, the scope of the ADIA is limited to Australian organisations that have directly received payments from Defence and have produced the good and/or services that they deliver to Defence within Australia. Therefore, the ADIA GVA excludes:

  • Defence expenditure to overseas entities;
  • Defence expenditure to Australian entities that have imported the good and/or service represented on the invoice;
  • Transfers to other commonwealth government agencies; and
  • Wholesale and retail sales with no identified value add components (wholesale and retail margins are included).

Gross Value Added (GVA)

Gross Value Added (GVA) is defined as output (at basic prices) minus intermediate use (at purchaser prices); GVA can be broken down by industry and institutional sector. The sum of GVA over all industries or sectors plus taxes on products minus subsidies on products gives gross domestic product (GDP).

The GVA of the Australian defence industry is a measure of the direct contribution of Defence expenditure to the Australian economy.

Australian and New Zealand Standard Industrial Classification (ANZSIC)

ANZSIC provides a standard framework under which business units carrying out similar productive activities can be grouped together, with each resultant group referred to as an industry. An individual business entity is assigned to an industry based on its predominant activity (e.g., mining, manufacturing, retail trade). The ANZSIC underpins the standardised collection, analysis, and dissemination of economic data on an industry basis in Australia.

More information on ANZSIC can be found here: 1292.0 - Australian and New Zealand Standard Industrial Classification (ANZSIC), 2006 (Revision 2.0) (abs.gov.au)

 

The Australian System of National Accounts (ASNA)

National accounts are designed to provide a systematic summary of economic activity and have been developed to facilitate the practical application of economic theory. At their summary level, the accounts reflect key economic flows: production, income, consumption, investment and saving. At their more detailed level, they are designed to present a statistical picture of the structure of the economy and the detailed processes that make up domestic production and its distribution.

More information on the ASNA can be found here: Australian System of National Accounts: Concepts, Sources and Methods, 2020-21 financial year | Australian Bureau of Statistics (abs.gov.au)

 

Supply Use Industry Classification (SUIC)

SUIC classifies industries within the economy when compiling Supply Use and Input Output tables within the national accounts. SUIC is based on ANZSIC, however groups some of the industries together to allow comparability across time.

Supply Use Product Classification (SUPC)

SUPC classifies products utilised within the economy, organised according to the industry to which each product is primary. The Australia National Accounts Supply Use tables are compiled at this level of product classification.

Data sources

Data sources utilised in the compilation of the ADIA are captured below. 

Defence Finance Group (DFG) dataset

Invoice-level data for all the expenditure made by the Department of Defence. The dataset contains the dollar amount of each invoice paid by the Department of Defence. It includes descriptions of the expenditure, the Australian Business Number (ABN) of the organisations receiving the expenditure and other related metadata. 

Frequency: Near real time for each financial year.  

Geography: Variable, dependent on invoice records.

Key data used:

  • Sets output at Purchaser Price (PP) estimates for the Australian defence industry.
  • Provides key location information for organisations in the Australian defence industry.
  • Provides metadata used to code defence contracts to ABS product and industry classifications.

Australian National Accounts: Supply Use Tables

Supply Use tables are an integral and essential element of the ABS national accounts. They are the building blocks for the Australian System of National Accounts as they are used to ensure GDP is balanced for all three approaches (production, expenditure, and income) and provide the annual benchmarks (levels) from which the quarterly estimates are compiled. They provide detailed information about the supply and use of products in the Australian economy, and the structure of and interrelationships between Australian industries.

Frequency: Annual; financial year.

Geography: National.

Key data used:

  • Model the conversion of Defence invoices from Purchases Prices (PP) to Basic Prices (BP).
  • Model margin output of Defence invoices.
  • Create Total Intermediate Use (TIU) to output and primary input to output ratios to inform the GVA of Defence invoices.

Economic Activity Survey (EAS)

The Economic Activity Survey (EAS) produces estimates of the economic and financial performance of Australian industry. The estimates are derived using a combination of data directly collected by the Australian Bureau of Statistics (ABS), and Business Activity Statement (BAS) data provided by businesses to the Australian Taxation Office (ATO).

The EAS collection provides key measures of the performance of Australian industries. The EAS provides data which feeds into the National Accounts Supply Use and Input Output tables.

Frequency: Annual, financial year.

Geography: National.

Key data used:

  • To roll forward ratios derived from the supply use tables.

ABS Business Register

The ABS Business Register is a list of organisations which undertake economic activity in Australia. The data on the ABS Business Register is primarily sourced from the Australian Business Register (ABR), the Australian Tax Office (ATO) and via ABS profiling of large, and/or complex businesses. The ABS uses an Economic Units Model on the ABS Business Register to describe the characteristics of businesses, and the structural relationships between related businesses.

Frequency: Quarterly updates.

Geography: Main state of operation, postal address information.

Key data used:

  • Classification of units in scope of the ADIA to their Australian and New Zealand Standard Industrial Classification (ANZSIC).
  • Provides additional location information on units in the scope of the ADIA.

Detailed methodology

The general methods used to compile GVA estimates in the ADIA are relatively straightforward. The invoice level DFG datasets act as the main input for the account with the National Accounts Supply Use Tables used to model key economic variables related to the expenditure. These steps are captured in more detail below.

Product and industry coding method

High quality product and industry coding is critical for the compilation of the ADIA. The coding allows for integration between the DFG dataset and ABS economic datasets, including the National Accounts Supply Use Tables. The coding aligns the goods and services descriptions of each invoice in the DFG dataset to a SUPC.

SUPC coding approach:

  • Manual coding: Invoice descriptions are used to code high value invoices to the appropriate SUPC.
  • Automated coding: For lower value invoices, description-based rules are used to code to SUPC. This includes initial training of the ABS’ Intelligent Coder (a tool that uses machine learning to improve the accuracy and efficiency of statistical coding).  
  • For all units that are not covered by the above unit level information, the supplying business's ANZSIC was used to infer the most likely SUPC.

Industry coding approach

  • The ABN of each Defence invoice is coded to ANZSIC industry using the ABS Business Register.
  • Each invoice is also allocated a SUIC based on the primary producing industry for the product supplied.

Method for deriving GVA estimates

Conversion of defence contract from Basic Price (BP) to Purchaser Price (PP)

The DFG dataset informs the output of the Australian defence industry at PP. However, output at BP is required to derive GVA estimates. To do this conversion ratios of BP to PP from the National Accounts Supply Use Tables are applied as follows:

  • The National Accounts Supply Use Tables split total output at PP by output at BP, Margins, Taxes, and Subsidies.
  • The percentage contribution of each variable to output at PP is calculated at the SUPC level.
  • These ratios are applied to the Defence invoices based on the specific SUPC they are coded to. 
  • This informs output at BP for all Defence invoices, as well as the margins, taxes and subsidies associated with the invoice.

Inputs to production

Each Defence invoice is allocated a SUIC. The SUIC is based on the main supplying industry of the SUPC the individual invoice was coded to. Utilising the SUIC associated with the SUPC ensures that the inputs into production are captured as accurately as possible. The primary input and TIU ratios of the SUIC are then used to model the primary inputs for each invoice. The steps are captured below:

  • The use table provides output at Basic Prices for each SUIC and the components that make up this output. This includes Total Intermediate Use (TIU) for each industry and the primary inputs to production, including Compensation of employees, Gross operating surplus and Taxes on production less subsidies on production.
  • Proportions of TIU and the primary inputs to the total output at BP are calculated for each SUIC.
  • These proportions are multiplied by output at BP for each in scope invoice.
  • The derived TIU estimates are then subtracted from the Output at BP, to derive the GVA value for each individual invoice. 

Rolling forward supply use tables

The ADIA publishes the 2020-21 estimates before the 2020-21 Supply Use tables are available. To model the inputs to production for 2020-21, the 2020-21 Economic Activity Survey data is used to estimate changes in the inputs to production ratios from 2019-20 to 2020-21. This is done using the following approach:

  • For the 2019-20 and 2020-21 reference periods TIU to output ratios by SUIC is derived from the EAS dataset.
  • The percentage change of these ratios is calculated.
  • This percentage change is applied to the 2019-20 TIU to output ratios obtained from the Supply Use tables, to inform a 2020-21 ratio.
  • The remaining inputs to production ratios are then recalculated to ensure the sum of all primary input and TIU equal to output at BP.

Margin output allocation

The value of margins for each invoice is removed from the output at BP for the supplying unit. The margin estimates are then reallocated to the main supplying SUIC for the specific margin. The tables below illustrate the industry each margin output is allocated to.

Margin to Supply Use Industry Classification (SUIC) concordance
MarginIndustry allocation (SUIC)
Electricity marginElectricity supply Industry
Gas marginGas supply Industry 
Wholesale reexports marginWholesale trade Industry
Wholesale other marginWholesale trade Industry 
Food Beverage marginFood and beverage services Industry 
Road Transport marginRoad transport Industry 
Transport marginRail transport Industry 
Rail Transport marginWater, pipeline and other transport Industry 
Pipeline Transport marginWater, pipeline and other transport Industry 
Water Transport marginAir and space transport Industry 
Air Transport marginTransport support, warehousing and storage services Industry 
Stevedoring other marginTransport support, warehousing and storage services Industry 
Marine Insurance marginInsurance and superannuation funds Industry 
  

 

Final aggregation

Industry aggregation

The ABS Business Register is used to code the ABNs for the supplying organisations to an ANZSIC. The invoices derived GVA component is then aggregated by ANZSIC division to display industry GVA estimates.     

State aggregation

To aggregate GVA estimates to state and territory a combination of data assets and analysis are utilised. The following represent the priority with which state codes are applied:

  • Specific intelligence on a unit’s location;
  • DFG metadata indicating the good or service delivery postcode;
  • Main state of operation address sourced from the ABS Business Register;
  • DFG metadata indicating vendor postcode or address;
  • Postcode address sourced from the ABS Business Register.

Notable assumptions and data caveats

  • The inputs into production ratio method implies that defence products have the same inputs into production as other products produced within the allocated SUIC. If for instance, a defence business has a higher reliance on contractors relative to the rest of the units in the SUIC, then this might result in an under estimate of inputs and an over estimate of GVA.  

  • Basic Price to Purchaser Price relationships imply products supplied to Defence have a consistent relationship between margins, taxes, and subsidies with product groupings in the wider economy represented in the SUPC.

  • Gross Value Added associated with imports remains uncaptured within the ADIA. For example, where a defence vehicle is purchased internationally and shipped to Australia there is often construction and refit activity that occurs domestically. If this classified as an import, it would not be captured within the account. The wholesale margins associated with products, however, are captured.

  • State-based estimates rely on variable data fields to overcome patchy reporting. In addition, it is difficult to determine the main state of operation for units operating across multiple  jurisdictions.

Abbreviations

 
AcronymMeaning
ABNAustralian Business Number
ABSAustralian Bureau of Statistics
ADIAAustralian Defence Industry Account
ANZSICAustralian New Zealand Standard Industrial Classification
ASNAAustralian System of National Accounts
BPBasic Price
BRUBusiness Register Unit
DFGDefence Finance Group
EASEconomic Activity Survey
GDPGross Domestic Product
GVAGross Value Added
PPPurchaser Price
SNASystem of National Accounts
SUICSupply Use Industry Classification
SUPCSupply Use Product Classification
TIUTotal Intermediate Use

 

Glossary

Australian defence industry

The Australian defence industry represents the production of goods and services invoiced to the Department of Defence. For example, if a vehicle manufacturer supplies vehicles both to Defence and more broadly, only the activity associated with the vehicles supplied to Defence is captured. 

Basic Price

The amount receivable by the producer from the purchaser for a unit of a good or service produced as output, minus any tax payable plus any subsidy receivable, on that unit as a consequence of its production or sale; it excludes any transport charges invoiced separately by the producer.

Current Price

Estimates are valued at the prices of the period to which the observation relates. For example, estimates for this financial year are valued using this financial year’s prices. This contrasts to chain volume measures where the prices used in valuation refer to the prices of the previous year.

Gross Domestic Product

The total market value of goods and services produced in Australia within a given period after deducting the cost of goods and services used up in the process of production but before deducting allowances for the consumption of fixed capital. Thus gross domestic product, as here defined, is 'at market prices'. It is equivalent to gross national expenditure plus exports of goods and services less imports of goods and services.

Gross Value Added

The value of output at basic prices minus the value of intermediate consumption at purchasers' prices. The term is used to describe gross product by industry and by sector. Basic prices valuation of output removes the distortion caused by variations in the incidence of commodity taxes and subsidies across the output of individual industries.

Imports

The value of goods imported and amounts payable to non-residents for the provision of services to residents.

Intermediate Use

Intermediate use consists of the value of the goods and services consumed as inputs by a process of production, excluding the consumption of fixed capital.

Margins

If the transactions are valued at basic prices, the margins are recorded as intermediate consumption (e.g. transport, wholesale trade) of the intermediate users or final buyers. If transactions are valued at purchasers’ prices the value of margins in included, along with taxes less subsidies on products with the purchasers’ price of the good to which the margin relates.

Primary Inputs

Primary inputs include compensation of employees, gross operating surplus and gross mixed income, taxes less subsidies on products, other taxes less subsidies on production and imports.

Purchaser Price

The amount paid by the purchaser, excluding any deductible tax, in order to take delivery of a unit of a good or service at the time and place required by the purchaser. The purchaser’s price of a good includes any transport charges paid separately by the purchaser to take delivery at the required time and place.

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