Australian Defence Industry Account, experimental estimates methodology

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.

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) 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 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.

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)

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)

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.

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.

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.

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.

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.

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.

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.

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.

• 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.

• 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.

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. 

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. 

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. 

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.

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.

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.

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.

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).

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).

• 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.

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