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Federal

Feb 26, 2016

How much bang do we get for our defence policy buck?

Defence spending is an expensive form of industry policy. And we're massively increasing it with borrowed money.

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Veterans Affairs Minister Dan Tehan, Defence Minister Marise Payne and PM Malcolm Turnbull launch the Defence White Paper

It’s an old story for anyone with a passing knowledge of the way the Australian economy has changed in recent decades. At some point in mid-2014, the proportion of Australians employed in manufacturing fell below 8% of the workforce. At the end of 2015, manufacturing accounted for just 7.4% of the workforce, or around 860,000 Australians. Remember, this is an industry that as recently as the Hawke years employed well over 16% of all Australian workers.

We’ve coped well with this transition, which is partly what’s been happening in all Western economies and partly the result of the Hawke-Keating government’s remarkable bravery in taking on its own industrial base and slashing protection. Our services sector has massively increased in that period, as has the health sector, which overtook manufacturing as an employer in 2006. The largest of the ABS’ services categories, “professional, scientific & technical”, overtook manufacturing in the August quarter of 2014. Education overtook it last year. Another sector with a strong service component, accommodation and food, will probably overtake it this year.

But manufacturing retains an allure for politicians. Normally, for Labor politicians, because manufacturing is crucial to two important unions, the AWU and the AMWU, from the right and the left, as well as a number of others. These days, it’s important for the Liberals, too, because manufacturing is centred in Victoria and South Australia and they’re scared of losing seats there.

Thus, the party that chased General Motors and Ford out of the country in 2013 — in a rare display of spine by Australian politicians to those multinational parasites — is now throwing money at manufacturing. A lot of it — $29.9 billion over the next 10 years, on top of the tens of billions we’re already spending.

If Labor had announced such a massive amount to prop up local manufacturing, it would — correctly — have been savaged for such quasi-protectionism and economic vandalism. But the spending announced yesterday is defence spending, which is like a policy cloaking device that negates a lot of scrutiny and analysis.

Like all the automotive manufacturing subsidies taxpayer provided over the decades, much of this funding will benefit multinationals — US defence companies, mostly. In 2012, Crikey calculated that nearly a third of our major defence procurement spending flowed wholly offshore, a key reason why the Americans were unhappy that the Gillard government’s restrained growth in defence spending. But a considerable chunk of the rest flows to local arms of the big US defence manufacturers (Raytheon, in particular, has a long-established and successful local arm that Lockheed recently decided to mimic). These companies don’t merely sell missiles and boats and planes to Defence but sell software, management consulting services, IT, communications equipment and gardening services to government departments as well.

But how effective an industry policy is defence spending? Local construction costs taxpayers an extraordinary premium: RAND Corp estimated that building the new submarine fleet locally would cost 30-40% more than purchasing them offshore. ASPI’s Mark Thomson looked at modelling used by local defence industry advocates in 2014. Thomson is no economist, but he correctly noted that the modelling by defence industry advocates of local procurement shows relatively small benefits in terms of growth and jobs, and at an exorbitant cost. The $5.6 billion Anzac frigate program was calculated to yield between $3 and $7.5 billion in higher GDP — and those were the figures of local build spruikers. And it would have produced 57,000 jobs — at a cost of around $100,000 a job, a far higher cost than in the automotive sector, where, according to the Productivity Commission, taxpayers were subsidising workers’ jobs at just $18,000.

That is, building navy vessels here costs around five times more per job as a form of industry support than building cars here. And that of course is the point where advocates begin talking about strategic industries, and the need for military self-sufficiency and the need to retain vital skills.

Inevitably, the white paper doesn’t explore how effective this massive figure — within five years we’ll be spending over $40 billion a year in defence — will be, or should be, to justify the investment. Nearly all of it is borrowed — as the Greens have already shown, the commitment to ramp up spending regardless of economic circumstances will reduce future surpluses and push the budget back into deficit earlier.

In terms of economic benefits, it’s likely such a massive amount of money would be far better directed towards high-priority infrastructure projects rather than propping up manufacturing jobs and protecting Liberal MPs. The premium taxpayers are paying for local procurement is a political one as much as a financial one.

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