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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.



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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21 thoughts on “How much bang do we get for our defence policy buck?

  1. Jaybuoy

    China has nukes and we are a conventional force who “relies” on and acts for Uncle Sam all we are doing is setting ourselves up for a surgical strike as a warning to the sheriff.. An actual attack on the USA would release the hounds but we are collateral to the “exceptional” citizens of the new Rome..Yanks by proxy is a very dangerous position to be occupying in the ongoing game of Pivot being played out in our region..We want to be careful we don’t get more bang for our buck than we bargained for..

  2. Robert Barwick

    Manufacturing produces wealth, whereas services compete for the wealth already produced. The transition with which we’ve supposedly “coped well” saddled us with a very high foreign debt, because we stopped paying our way.

  3. Vernon Brabazon

    In all the planned defence spending and talk of whether we can manufacture here or buy it in, I am amazed that we are not looking to develop and build our own drones. The sort of technology required is readily available and it would appear that we do have the skills in Australia. A fleet of drones would likely be a cost effective defence option and setting up to develop and manufacture our own would likely give us very good bang for our defence buck.

  4. Hunt Ian

    If you suppose that Australia will not actually fight a war in the future, or that it will not lose a significant part of its weaponry in any war fought, then the rational thing is to buy your subs and planes off the shelf, without worrying about your capacity at home to produce weapons. In the case of submarines, this plan seems risky to say the least. What a home build covers is the possibility of a future war. If we don’t assume that a war can occur, then why build up defence at all?
    Other countries who have bought off the shelf, presumably have done so on the assumption that they will deal with a local war with an enemy that lacks the capacity to go on fighting for long.
    I think the government’s proposal is a sensible bit of insurance against a major but non nuclear war, possible stemming from the rather contradictory position of China on the south China sea, where it acts as though there is no dispute over territory and seems on the one hand to brook no compromise, treating the South china sea as its own local waters.
    Perhaps China’s position will become more consistent in the direction of a peaceful settlement of claims that it recognises, rather than trying to settle the issue by fait accompli.
    We could perhaps look at what Sweden has done over defence, as a neutral country in contested circumstances. It has spent a lot indeed to ensure that it does not easily suffer Finland’s fate before the start of WWII.
    Our military needs are different from Sweden’s but still, in the event of war, we will difficulty in keeping our defence forces going without skills and weapon building capacity at home. An alternative might be too revive the Brisbane line. Are there any takers for that?

  5. John Newton

    Could someone with the relevant knowledge please explain why we need 12 submarines, and what purpose will they fulfil?

  6. David Hand

    It’s possible that Australia will be poor enough in the future to be competitive in manufacturing but I hope not.

  7. klewso

    Nice “conning tower” vision of politicians with uniforms?

  8. mike westerman

    I think the point that we would be better to spend on infrastructure than expensive photo ops or brag rights for politicians is a good one: if Australia was either attacked or drawn into a regional conflict, logistics and infrastructure will surely be limiting factors. To have more logistics support would also be handy in natural disasters, more of which in the region can be expected with climate change. In that regard, a proper FTTP NBN would have been the best “defense” spending we could have imagined. Who was it that destroyed that as not having a positive benefit to cost?

  9. Jaybuoy

    We’ll be gonski if the pivot backfires so we might as well spend it on education..

  10. zut alors

    I’m with John Newton at post #4, it’s mystifying.

    What is the practical & cogent case for submarines?

  11. Iskandar

    This issue of replacing the submarine fleet came up a year ago. For what it’s worth I re-post unchanged the comment I posted at the time:

    Posted Tuesday, 10 February 2015 at 4:32 pm | Permalink

    What about engaging in a bit of lateral thinking and ask, do we even need subs? Has any submarine, ever, truly engaged in any action which defended this country? Or have they all been expensive holes in the water where our money goes, or at best playthings for lads who like to share sweaty, confined spaces with other lads, with no defensive capabilities whatever?

    Australia is an island continent with a vast coastline whose defensive needs would best be met by a coast guard. Kim Beasley floated this a long time ago but it went nowhere. Perhaps it’s time to revisit this, and put ASC to building a fleet of small, fast coastal defence vessels instead.

    Bob Hawke had the guts to not replace the aircraft carrier “Melbourne” after it was scrapped, realising that aircraft carriers were obsolete to the country’s defensive needs. Can we have that kind of political courage again, please.
    The same argument applies to that ridiculous Joint Strike Fighter, but that is another issue.

  12. Peter Darco

    “RAND Corp estimated that building the new submarine fleet locally would cost 30-40% more than purchasing them offshore.”

    To quote Rice-Davies, they would say that wouldn’t they.

    So let us imagine we are foolish enough to purchase offshore, what would be the means for controlling long term maintenance? Over a barrel?

    And what if there were a war – which is why they are bought?

    Would it be safe to send our submarines across the Pacific for their maintenance – assuming that a damaged submarine could get that far?


  13. Marion Wilson

    War stimulates the economy – all that defence spending on guns, submarines and to fully equip 15 year old cadets all primed up to kill and die and have their names recorded on the wall of the War Memorial. War perpetuates war and politicians love the opportunity of brushing away the occasional tear that runs down their cheek when the coffins come off the planes.

  14. Duncan Gilbey

    $30billion on tick? Seems that the claims of a budget emergency were somewhat exaggerated.

    These idiots will do and say anything to get re-elected.

  15. old greybearded one

    Bernard, you have lost the plot here. We tried the overseas build in WW2 at great cost. Couldn’t get the stuff when we needed it. Apparently everyone would prefer to export jobs. The latest CSIRO debacle is the example. People who made what no one else could and earned money (with more brains from the government it could have been much more) were laid off while CSIRO and the government trumpet the achievement.

  16. Gavin Moodie

    Ah, the old canard that producing physical goods is production while producing services is consumption, as if teaching people skills so they can be more productive, keeping them healthy and even enabling their financial transactions didn’t contribute to the economy as well as to social well being.

  17. Hugh Lozang

    To me this is the Military/Industrial Complex Dwight Eisenhower alluded to in his leaving speech. And quoted from Wikipedia…”A similar thesis was originally expressed by Daniel Guérin, in his 1936 book Fascism and Big Business, about the fascist government support to heavy industry. It can be defined as, “an informal and changing coalition of groups with vested psychological, moral, and material interests in the continuous development and maintenance of high levels of weaponry, in preservation of colonial markets and in military-strategic conceptions of internal affairs.”[7] An exhibit of the trend was made in Franz Leopold Neumann’s book Behemoth: The Structure and Practice of National Socialism in 1942, a study of how Nazism came into a position of power in a democratic state.”
    I am worried and a little bit scared. Am I right or wrong?

  18. bushby jane

    As Kate McClymont pointed out on The Drum, how are we going to pay for all this if we don’t have the revenue? Apparently this argument doesn’t apply the same way as it applies to services like health and education.
    What is the point of all this defence spending if our country is being sold both physically as in housing, ports and agricultural land and with the TPP ISDS provisions and other inclusions doing away with sovereign control of our country?

  19. sang froid

    For heavens sake. The government has simply released a White Paper. White Papers come & go, and rarely implemented. Its what the government would like to do if it had the funds. No big deal. It won’t happen.

  20. sang froid

    The 12 subs would be phased in over 20 something years. Given maintenance needs, crewing issues and other imponderables, we would be lucky to see one off the east coast and one off the west coast (or points north) at any one time – i.e. 2 operational at any time. Hardly worth the effort.

  21. Kevin Herbert

    Hugh Lozang:

    Be scared…be very scared….


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