Federal spending statewide rose 8.1 percent to $12.2 billion heading into 2005 as the sector remained the second most important source of income for Hawai'i after tourism.

That was the highest growth rate in federal spending in Hawai'i since 1993. A portion of that gain came from a 6.5 percent, or $288 million, jump in defense spending to $4.8 billion in the year to Sept. 30, 2004, according to a report released yesterday by the U.S. Census Bureau. Nondefense spending rose 9.4 percent to $7.4 billion.

Growth in government and military spending coupled with a boom in tourism and construction have led to a period of prolonged economic growth for Hawai'i. A recent rise in defense spending comes in contrast to the 1990s when cutbacks took a toll on Hawai'i's military presence.

"At least temporarily we've experienced quite a renaissance of spending," said Bank of Hawaii economist Paul Brewbaker. "Defense is still just under 10 percent of overall gross product to the islands — and higher for O'ahu."

Military spending on wages, equipment and services creates thousands of indirect jobs as it multiplies through the economy. Every billion dollars the military brings in adds an estimated $1.8 billion to the state's economy, according to the state Department of Business, Economic Development and Tourism.

Higher defense spending is being driven in part by projects such as military housing renovation contracts. During the past five years defense spending has risen more than $1 billion statewide. Despite increased spending, Hawai'i slipped from second to third among states in terms of per capita defense spending. Military spending in Hawai'i translates into $3,779 per year for each resident, which ranked behind Virginia — home to the Pentagon and the Atlantic Fleet headquarters — and Alaska.

Overall spending gains came from increased spending on services, supplies, construction, and research and development. Total government payroll expenses rose $290 million to $3.2 billion.

After subtracting $8.4 billion in federal taxes paid by Hawai'i a net $3.8 billion in federal money flowed into the state in fiscal 2004, said Eugene Tian, research and statistics officer for DBEDT.

"That's net money from the federal government," he said. "It is very important because it's the No. 2 industry for Hawai'i."

Reach Sean Hao at shao@honoluluadvertiser.com.