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 using standard satellite accounting principles, which are aligned with the concepts and structures of the System of National Accounts (SNA).

The account presents estimates of Gross Value Added (GVA) from the defence industry at national, state, industry, sector and type of legal organisation (TOLO) levels and defence industry related employment at national, state and industry levels.

GVA is calculated using data provided to the ABS by the Defence Finance Group (DFG) which includes detailed information about the goods and services provided to the Department of Defence. Employment estimates are calculated by combining DFG expenditure data with turnover and employment data from the Australian Taxation Office (ATO). 

For a more detailed description of the methods, see the GVA, business counts and employment sections.

Thematic (or satellite) accounts are linked to but are distinct from the SNA. The National Accounts are compiled for the economy as a whole and for all units within individual industries. However, for some analyses, it can be useful to identify and measure activities that span multiple industries and thematic accounts provide a means to do this.

Thematic 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-related activity, the industries that support it, and the resulting value added and employment generated by this activity.

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 for goods and services delivered 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).

GVA is defined as output (at basic prices) minus intermediate use (at purchasers' prices). The GVA of the Australian defence industry is a measure of the direct contribution of Defence expenditure to the Australian economy.

The sum of GVA over all industries or sectors, plus taxes on products, minus subsidies on products, gives gross domestic product (GDP).

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 which 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.

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, Edition 8 | Australian Bureau of Statistics (abs.gov.au)

The ABS uses an Economic Units Model in the ABS Business Register to describe the characteristics of businesses, and the structural relationships between related businesses. 

The ABS Business Register has two populations - one for businesses with simple structures and one for businesses with complex structures. The majority of businesses in the ABS Business Register have simple structures and are held in a non-profiled population. For these businesses, the ABS is able to use the Australian Business Number (ABN) as the basis of the statistical unit. For the relatively small number of larger and more-complex 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 these 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.

The ANZSIC is a joint framework used by the ABS and Stats NZ to classify businesses by their primary industrial activity, e.g., mining, manufacturing, retail trade etc. 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)

SUIC is the industry classification used when compiling supply use tables within the national accounts. SUIC is based on ANZSIC, with some industries combined to allow comparability over time.

SUPC classifies products used within the economy, organised according to the industry to which each product is primary. The Australian national accounts supply use tables are compiled using the SUPC.

The DFG 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: Annual.  

Geography: Variable, dependent on invoice records.

Key data used:

• payments to businesses for the Australian defence industry.
• location of activity undertaken for Australian defence industry.
• metadata to code defence contracts to ABS product and industry classifications.

Supply-Use tables are an integral and essential element of the ABS national accounts. They provide detailed information about the supply and use of products in the Australian economy, and the structure of and interrelationships between Australian industries. 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.

Frequency: Annual; financial year.

Geography: National.

Key data used:

• ratios to model the conversion of Defence invoices from purchasers' prices (PP) to basic prices (BP).
• ratios to model margin output of Defence invoices.
• Create total intermediate use (TIU) to output and primary input to output ratios that are used to derive GVA attributed to Defence spending.

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

Frequency: Quarterly updates.

Geography: Main state of operation, postal address information.

Key data used:

• Industry classification of units in scope of the ADIA using Australian and New Zealand Standard Industrial Classification (ANZSIC).
• Location information of units in scope of the ADIA.
• Employee headcount estimate for each ABN.
• Used to allocate ABN level data to type of activity units (TAU) to inform GVA and business counts.

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 are the main input with National Accounts Supply-Use tables used to model key economic variables related to defence expenditure.

Accurate coding of product and industry is required for compiling the ADIA. The coding aligns the goods and services descriptions of each invoice in the DFG dataset to a SUPC and gives each reporting unit a SUIC and an ANZSIC. This enables the integration of the DFG dataset with national accounts supply use tables.

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 other units the ANZSIC of the (supplying) business is used to derive the SUPC.

Industry coding approach

The ABN of each Defence invoice is coded to ANZSIC industry (using the most appropriate type of activity unit (TAU) on the ABS Business Register), and to a SUIC (using the primary producing industry for the product that has been supplied).

The ABS economic units model includes instances where multiple TAUs are linked to a single legal entity (ABN). These TAUs are considered to be separate businesses and can have different industry allocations. In order to allocate invoices at the ABN level to the most likely TAU, product details are linked to primary supplying industries. Where product information does not link to a TAU under a specific business unit the highest contributing ANZSIC of that unit is used. In situations where there are multiple TAUs with the same ANZSIC class the expenditure is assigned to a single unit. Although this may result in an under-estimate of business counts it will not affect the estimates of industry-level GVA and employment.

The DFG dataset provides data on the value of each invoice paid by the Department of Defence at PP, however, output at BP is required to derive GVA estimates. Values at BP are derived using data from the National Accounts Supply-Use tables to split values at PP into values at BP, margins, taxes, and subsidies at the SUPC level.

It should be noted that at the time an ADIA is produced supply‑use data are only available for the previous year and these are used in the first instance. When the subsequent ADIA is compiled, the estimates for the previous year are revised using the now-available supply‑use data for that year. This results in annual updates, or revisions, to the estimates that were produced in the previous ADIA.

Each invoice from the DFG data set is allocated a SUIC. The SUIC is based on the main supplying industry of the SUPC the individual invoice was coded to. Using 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.

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.

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 financial year:

1. Obtain input data

• total employment data is sourced from the ABS Business Register.
• turnover data is sourced from ATO Business Activity Statement (BAS) data.
• Defence turnover (invoices) is sourced from the DFG dataset.

2. Calculate the employment ratio for either GST groups (if they are available) or ABN (otherwise)

• the employment ratio is derived as the ratio of employees to total turnover.

GST groups have been introduced into the employment calculation in the 2024-25 release. Prior to this, only the ABN was used in this calculation. This has resulted in revisions to the employment series (see Revisions section below). 

3. Estimate defence employment 

• Estimated defence employment is calculated by multiplying employment ratio and defence turnover using either GST group data or ABN data.
• if the GST group or ABN employment or tax data is not considered to be of acceptable quality alternative ratios will be used, e.g., division average employment ratio.

4. Calculate aggregate Defence employment

• sum all employment estimates to calculate aggregate direct defence industry employment at state and industry levels.

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. This means that the sum of the state totals will, in most instances, be greater than the Australian 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 a business that supplies goods and services to Defence has a higher reliance on contractors, relative to the rest of the units in the SUIC, 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 may not be captured 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 turnover ratio method assumes there is a relationship between Defence invoices, total turnover at a GST group or ABN level and the number of staff employed on defence work.

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 an expected part of account compilation as data sources are updated and improved over time. This publication includes revisions due to the availability of supply use data for the previous reporting period, changes in the reported data and the use of an enhanced employment estimation method.

A new method for producing employment estimates using GST group data has been introduced with the release of this account. The new method involves the use of GST group level inputs, if they are available, in place of estimates produced using Australian Business Number (ABN) level inputs. This method has been implemented to improve the accuracy of employment data for larger businesses as employment and turnover data do not always align at the ABN level for these entities. Without this approach, inaccuracies in derived employment‑to‑turnover ratios flow through to the ADIA employment estimates, which are based on these ratios and DFG expenditure data. The introduction of this change has resulted in revisions to the full employment time series.