• The report argues that the economic advantages of domestic defence industry are lower than we may think.
    The report argues that the economic advantages of domestic defence industry are lower than we may think. Defence

It’s been a busy week over at ASPI. Rob Bourke, a former economic advisor to DMO, followed an earlier report into the security of northern Australia with a critical examination of what the national economy will gain from the government’s much-vaunted investment in Defence and industry.

The answer? Not much. Bourke argues that the single-customer nature of defence industry means it must outperform other national industries in order to deliver an overall benefit to the economy. This is because government investment is a zero-sum game – what goes into Defence must come from somewhere else.

“Equipment builds must be paid for through higher taxes, reduced government expenditure elsewhere or increased government borrowing—all of which can detract from activity in areas of the economy they affect,” Bourke argues. “And building the equipment can absorb land, labour and capital that’s in short supply and that other areas of the economy might use to create economic benefits of their own.

“Consequently, equipment projects undertaken in Australia and extending over a substantial period tend to deliver a net benefit only if they can generate themselves, or help to support in others, higher levels of productivity than most other areas of the economy.”

According to Bourke, there are a number of conditions that must be met if domestic build programs are to make a return on investment, including export potential; but even then, meeting those conditions does not necessarily make defence industry a smarter investment.

“Domestic builds tend to be economically advantageous if characterised by high Australian content, significant spill-overs, a workforce drawn from the ranks of the long term unemployed, opportunities for unassisted exports and, where applicable, low price premiums,” Bourke says.

“Here, an investment by Defence should deliver considerably more to the Australian economy than the nominal value of the investment itself, although not necessarily more than any alternative uses to which the funds for any premiums and the resources for domestic production might be put.”

Bourke also makes the point that greater transparency is needed in Defence’s procurement decisions to understand their economic effects. He recommends referring procurement to the Productivity Commission.

“Defence has been unable or unwilling to explain the economic effects of its procurement decisions—a situation that extends to the defence industry’s broader influence on ‘jobs and growth’,” Bourke argues. “From publicly available data, it’s extraordinarily difficult to assess the impact of any existing vessel or vehicle assembly project in relation to economic benefits.

“Perhaps the only way to rectify the problem is to refer Defence procurement to the Productivity Commission for review. It’s been 25 years since the last dedicated Commission inquiry.”

Overall, Bourke is ambivalent at best about the economic benefits of investing in defence industry.

“The economic advantages of sourcing equipment domestically may be smaller than first impressions suggest,” he writes.

“More money for national defence has become the new catch cry. [Yet] publicly available evidence casts doubt on whether increasing domestic investment in capital equipment attracting significant price premiums—as part of any extension of the Defence budget beyond 2 per cent of GDP—can be readily supported.”

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