How will Australia pay for its $386 billion nuclear sub deal?

Will the AUKUS nuclear subs consume the Australian budget? It's a good question. The expenditure is huge in Australian terms.

The total deal is currently worth $386 billion (US$260 billion) and will be spread out over 30 years. So, on average, it will cost $12 billion a year. This is about one-third of the annual defence budget, which is $38 billion.

The submarine acquisition will be the single largest piece of defence procurement ever, in absolute and percentage terms.

There is no way that this can be contained within the existing budget without cutting vital defence infrastructure and services, and restricting purchases of other necessary defence items.

So, the defence budget will need to grow.

These are some very rough figures that assume payments are made evenly over the life of the submarines. This is not a realistic scenario and costs will be understated at some stage and overstated at others.

It is illustrative, but there will be plenty of wiggle room for the federal treasurer along the way as to how he juggles the budget.

If you assume that the original contract with the French for diesel subs of $90 billion is more or less contained in the existing defence budget (because they were replacing the Collins-class subs which are already in service) then the additional annual cost of the AUKUS deal is somewhere in the vicinity of $10 billion per year, an increase in the defence budget of one-third.

Australia has a GDP of around $2.2 trillion and currently spends 1.8 percent of that on defence, just shy of the 2 percent that former Prime Minister Tony Abbott originally promised when the Coalition won in 2012.

The additional expenditure would make it 2.2 percent, which is the world average for military expenditure.

It is probable this is only the first instalment on increased defence expenditure.

A growing economy the best way to ensure our freedom

With increasing CCP belligerence in the South Pacific, and with Australia stepping into a role as a friendly and trusted counterweight, its military forces need to be reconfigured so it can project power, as well as better defend its borders. That will require a lot of retooling.