For the government, they have no choice. If they cut defence spending, alot of local companies - starting with the big ones, e.g. ST Engineering will suffer.
Eisenhower warned of the dangers of the military industrial complex for America. The same problem exists in Singapore, except that the generals are not that crazy to fight wars with our neighbours.
And forget about multiplier effect of defence spending creating a Silicon Valley in Singapore. Many of those who are capable lack access to liquidity channels, most generally make the rational decision to remain as well compensated managers and engineers, and the most ambitious [read: scholars] will leave for the States. Instead, think of it as an exercise in moving money from left to right pocket, with the advantage of employing many Singaporeans along the way.