Australian Defence Industry Account, experimental estimates methodology

The Australian Defence Industry Account (ADIA) 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, 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 expenditure 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 sections for GVA, business counts and employment.

The following sections capture the key concepts, standards, and classifications used 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
• wholesale and retail sales with no identified value add components (wholesale and retail margins are included).

Gross value added (GVA)

GVA is defined as output (at basic prices) minus intermediate use (at purchasers' 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 the employment associated with Defence expenditure, not employment created by Defence expenditure.

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)

Statistical Units

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. The ABS Business Register has two populations. 

The majority of businesses on the ABS Business Register are in the non-profiled population as they have simple structures. For these businesses, the ABS is able to use the Australian Business Number (ABN) as the basis of the statistical unit. 

For a small number of businesses, the ABN unit is not suitable for ABS economic statistics purposes and the ABS maintains its own unit structures through direct contact with businesses. The ABS profiles large, complex and economically significant organisations and structures them to accord with the Economic Units Model. These groups are known as the profiled population. The main statistical unit used in the profiled population is the Type of Activity Unit (TAU). The TAU is a producing unit comprised of one or more legal entities, sub-entities or branches of a legal entity that can report productive and employment activities via a minimum set of data items. TAUs are classified according to the industry of the main activity.

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 the ANZSIC can be found here: Australian and New Zealand Standard Industrial Classification (ANZSIC), 2006 (Revision 2.0) | Australian Bureau of Statistics (abs.gov.au)

Supply Use Industry Classification (SUIC)

SUIC classifies industries within the economy when compiling supply use 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 used 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 used 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 purchasers' 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 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.

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.
• Provides employee headcount estimate for each ABN.
• Used to allocate ABN level data to type of activity units (TAU) to inform GVA and business counts.

Business Activity Statements

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.

The invoice level DFG datasets act as the main input with the National Accounts Supply-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 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 most appropriate TAU on the ABS Business Register.

• The ABS economic units model on occasion has multiple TAU’s linked to a single ABN. These TAUs are considered separate businesses and can have different industry allocations. In order to allocate invoices at the ABN level to the most likely TAU, product details were linked to primary supplying industries.
  • Where product information does not link to a type of activity unit (TAU) under a specific business unit, then the highest contributing ANZSIC of that unit is used.
  • In situations where there are multiple TAUs with the same ANZSIC class, it is assumed that expenditure is directed only towards one unit. This may result in an underrepresentation of business counts in some situations. However, it will not affect the estimates of industry-level GVA and employment.

Each invoice is also allocated a SUIC based on the primary producing industry for the product supplied.

Conversion of defence contract from Purchasers' 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.

As the Supply-Use tables are only available up to one year behind the ADIA reference period, information from the latest tables are used for the current reference period.

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 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.

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.

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 used. 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).

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 (invoices) 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 industry employment.

4. Calculate aggregate Defence employment

• sum direct employment estimates for all ABNs to calculate aggregate direct defence industry employment.

Counts of businesses that have provided goods and services to Defence have been derived by counting:

• ABNs in the non-profiled population that received a payment from Defence.
• TAUs in the profiled population that received a payment from Defence. 

Total business counts are provided for Australia. Where a business provides goods and services to Defence in multiple states these activities are also captured in the state totals. The sum of the state totals will therefore not add to the Australia total.

Gross Value Added

• The production ratio method assumes that defence products have the same inputs into production as other products produced within the allocated SUIC. For instance, if business that supplies goods and services to Defence 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 GVA.
• Basic price to purchasers' 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.
• GVA associated with imports remains uncaptured within the ADIA. For example, where Defence purchases a vehicle internationally and it is shipped to Australia, there is often construction and refit activity that occurs domestically. A transaction classified as an import will not be captured within the ADIA. However, the wholesale margins associated with products are captured.

Employment

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

State and territory estimates

Where the address is available for the delivery of the good or service, the productive activity is allocated to the corresponding state or territory. In cases where such information is unavailable, the activity is allocated to the primary address of the business providing the good or service. The exception is for external territories which are allocated to the nearest physical state.

Revisions are a necessary and expected part of account compilation as data sources are updated and improved over time. This publication includes revisions due to changes in the reported data and process improvements, including enhancements to product and industry coding.