Australian Defence Industry Account, experimental estimates methodology

Latest release
Reference period
2021-22 financial year

Summary of methods

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 of Gross Value Added (GVA) for the Australian defence industry to the Australian economy disaggregated by state, industry division, sector, and type of legal organisation (TOLO). GVA is calculated from information provided to the ABS by the Defence Finance Group (DFG) which includes detailed information about the goods and services invoiced to the Department of Defence.

Employment estimates are calculated using turnover data provided to the ABS by the DFG and turnover and employment data from Australian Taxation Office (ATO). Employment estimates are disaggregated by state and industry division.

For a more detailed description of the methods see the detailed methodology for GVA and detailed methodology for employment sections.

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 associated value add and employment.

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 (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.

ADIA direct employment

ADIA direct employment is defined as the number of paid employees that are associated with the defence industry and is estimated as the proportion of the employee headcount funded by direct payments from Defence.

The number of paid employees includes all part-time and full-time employees and means that some employees may be counted more than once if they work for more than one business.

The ADIA estimates employment that is associated with Defence expenditure, not employment created by Defence expenditure.

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 Supply Use tables in the Australian National Accounts 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

The dataset contains the dollar amount of each invoice paid by the Department of Defence, a description of the expenditure, the Australian Business Number (ABN) of the organisation receiving the payment and other metadata. 

Frequency: Near real time for each financial year

Geography: Variable, dependent on invoice records

Key use of data:

  • Provides the dollar amount of each invoice paid by the Department of Defence.
  • Provides key location information for organisations contributing to the Australian defence industry.
  • Provides metadata used to code invoices 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 within the Australian economy and the interrelationships between Australian industries.

Frequency: Annual; financial year

Geography: National

Key use of data:

  • Model the conversion of Defence invoices from Purchasers’ 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 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 use of data:

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

ABS Business Register

The ABS Business Register is a list of organisations that undertake economic activity in Australia. The data on the ABS Business Register is primarily sourced from the Australian Business Register (ABR), the 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:

  • Provides information to classify units in the scope of the ADIA to their ANZSIC.
  • Provides additional location information on units in the scope of the ADIA.
  • Provides employee headcount estimate for each ABN.

Business Activity Statement (BAS)

The ATO collects Business Activity Statement (BAS) data for the purpose of administering the GST and it provides this data to the ABS for statistical purposes. The annualised BAS Benchmarks turnover data are used in the ADIA.

Frequency: Quarterly

Geography: National

Key data used:

  • Total business turnover.

Methodology for GVA

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

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 and 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 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 Purchaser Price (PP) to Basic Price (BP)

The DFG dataset contains the dollar amount of each invoice paid by the Department of Defence at PP. However, output at BP is required to derive GVA estimates. To do this:

  • Relationships in the National Accounts Supply Use Tables are used to split PP into output (ratios) at BP, margins, taxes, and subsidies at the SUPC level.
  • These ratios are applied to the Defence invoices (PP) based on the specific SUPC they are coded to. 

Inputs to production of GVA

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 Total Intermediate Use (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 BP for each SUIC and the components that make up this output. This includes 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 is publishing the 2020-21 and 2021-22 estimates before the supply use tables for these years are available. To address this data gap, the supply use ratios for financial year 2020-21 are modelled. This involves using Economic Activity Survey (EAS) data (from 2019-20 to 2020-21) to project forward the ratio for 2020-21. This same ratio is maintained for 2021-22.

This was 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.
  • The 2020-21 ratios are held constant for 2021-22. 

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 re-exports 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

Methodology for deriving employment headcount estimates

Turnover Method for deriving employment estimates

To derive the direct employment headcount estimates for the ADIA, the following steps are applied for each ABN, for each financial year:

1. Source input data

  • the total employment estimate for each ABN is sourced from the ABS Business Register.
  • the total turnover for each ABN is sourced from the ATO (Business Activity Statement) data.
  • Defence turnover for each ABN is sourced from the DFG dataset.

2. Calculate the turnover ratio for each ABN

  • the turnover ratio is an ABN’s Defence turnover to its total turnover.

3. Estimate Defence employment for each ABN

  • the total employment estimate from the ABS Business Register is multiplied by the turnover ratio to estimate the direct employment associated with Defence payments received by that ABN.  
  • where employment or tax data was insufficient, a divisional ratio is used to calculate Defence employment.

4. Calculate aggregate Defence employment

  • sum all ABNs to calculate aggregate Defence employment.
Example for deriving employment estimates
 Year2021-22
AABN unit level employee headcount from ABS Business Register1000
BABN unit level turnover from tax data$50,000,000
CABN unit level payments from Defence$35,000000
DRatio (C/B)0.7
EADIA direct employment estimate700

 

Final aggregation

Industry

The ABS Business Register is used to code ABNs to an ANZSIC. The invoice derived estimates are then aggregated by ANZSIC division to produce industry GVA and employment estimates.

State

To aggregate GVA and employment estimates to state and territory, a combination of data assets and analyses were 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.

Type of Legal Organisation (TOLO)

The Type of Legal Organisation (TOLO) classification is used to classify institutional units according to the type of legal organisation that best describes their structure.

The TOLO classifications referenced in this publication are listed below:

  • Private sector entities
    • Companies
    • Sole proprietors
    • Partnerships
    • Trusts
    • Other
  • Public Sector Entities

The Public Sector includes state and local government departments. Payments to Commonwealth Government Departments are excluded.

TOLO is sourced from the ABS Business Register. For more information, please see the Standard Economic Sector Classifications of Australia (SESCA).

Sector

The Standard Institutional Sector Classification of Australia (SISCA) provides a framework for dividing the Australian economy into institutional sectors. These sectors group institutional units which have similar economic functions and structural characteristics. SISCA is the classification used to distinguish between market and non-market producers.

There are six sectors referenced in this publication:

  • Non-Financial Corporations
  • Financial Corporations
  • General Government
  • Households
  • Non-Profit Institutions Serving Households
  • Rest of the World


SISCA is sourced from the ABS Business Register. For more information, please see the Standard Economic Sector Classifications of Australia (SESCA).

Notable assumptions and data caveats

Gross Value Added

  • The inputs into the production ratio method assume 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 underestimate of inputs and an overestimate of direct GVA. 
  • Basic Price to Purchaser Price relationships assume products supplied to Defence have a consistent relationship between margins, taxes, and subsidies with product groupings in the wider economy represented in the SUPC.
  • GVA 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 refitting activity that occurs domestically. If the purchase is classified as an import, it will not be captured within the account. The wholesale margins associated with products, however, are captured.

Employment

  • The ABN turnover ratio method assumes there is a relationship between defence invoices and total turnover at a business level and the number of staff employed on defence work for that business.

State Estimates

State estimates may reflect head office location where information was not available to allocate invoices to the state of production or delivery.

Revisions

Revisions are a necessary and expected part of account compilation as data sources are updated and improved over time. This publication includes revisions to GVA aggregates in 2019-20 and 2020-21 due to changes in data reported and process improvements. 

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
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
SISCAStandard Institutional Sector Classification of Australia
TIUTotal Intermediate Use
TOLOType of Legal Organisation

 

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.

Employee Headcount

The number of paid employees working for a business and includes all part-time and full-time employees. In Australia, the Employee Headcount is implemented as the normal level headcount annualised through the year to create a representative timeseries.

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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