Report
Description

In response to Australia’s increasing uncertain strategic outlook, pressure is mounting for annual expenditure by the Department of Defence (‘Defence’) to extend well beyond the current target of 2% of gross domestic product (GDP) for what’s assumed to be a steadily growing economy. Although the need for a rise is not shared by all, and why and where it should occur are keenly contested, a substantial increase in funding for the department has drawn support from a wide range of defence pundits of otherwise different persuasions

If an increase does emerge, much of it appears earmarked for investment in Defence infrastructure—including the capacity to store fuel and sustain weapons platforms around the nation—for stockpiling equipment spare parts and sophisticated munitions available mostly from overseas, and for military training. However, accompanying the move may be calls for additional expenditure on building new capital equipment, including advanced weapons systems, and for a good deal of that expenditure to be directed to Australian-based companies under a recently formulated policy for defence industrial sovereignty.

With so many competing demands on the public purse, taxpayer support for any significantly expanded Defence budget may depend in part on whether the purchase of more equipment, preferably from Australia rather than from abroad, will help or hinder the national economy. The sums involved could move the issue of increased funding beyond the confines of Defence planning into the realm of broader public policy where economic impact has an important role to play. If the case for a budget increase for equipment built in Australia is supported by evidence of both military-strategic advantage and economic gain its passage could be smoother. If an economic loss is likely, the situation becomes more complex.

Pivotal to the economic impact of allocating an expanded budget to Australian-produced equipment are two factors. One is the size of any price premium that might apply for preferring domestic over foreign sourcing—a form of economic cost. The other is whether equipment acquisitions attracting significant price premiums pay for themselves by generating new knowledge that ‘spills over’ to help improve productivity in other projects and other industries—a form of economic benefit.

In the absence of a comprehensive economic profile of Australian defence industry and a clear indication of the capital equipment a potentially expanded Defence budget might secure, this paper uses publicly available data on major current acquisitions of naval vessels and military vehicles—all with sovereign status—to illustrate the generic issues involved.Those issues have been well summarised in several studies, most notably by Andrew Davies, Henry Ergas and Mark Thomson in April 2012 and by Defence in May 2015. But additional context, including an update for recent project and policy developments, can help to better appreciate what’s involved.

The paper explores the factors affecting the future economic impact of these projects—including their prices, price premiums and spillovers—and whether these are consistent with improved outcomes from a national economic perspective. Beyond its scope is whether, if they were to emerge, higher prices and premiums are warranted for reasons of national security. The course of the projects examined may be set. However, given the projects’ size and longevity, that course could influence what any expanded Defence budget can accommodate. The lessons in public policy each project now provides may help to improve planning for equipment acquisitions of the future including those incorporating emerging technologies. Although vessels and vehicles might differ from things like drones and hypersonics, the economic principles governing the procurement of new and older equipment should be similar.

The paper cautions that the economic advantages of sourcing equipment domestically may be smaller than first impressions suggest. It also demonstrates the difficulty associated with gauging economic impact from publicly available data and the limited transparency that consequently surrounds some projects attracting substantial public funding.

A series of appendixes sets the scene. Appendix 1 compares government defence industry policies over the past decade, while Appendix 2 summarises public discussion on the outcomes of the current policy approach. Appendix 3 reviews recent official data on the defence industry’s contribution to ‘jobs and growth’.

Publication Details
Publication Year:
2019