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

India spends 2.4 percent of GDP on defence and South Korea 2.8 percent. So, let's project 2.5 percent of GDP as a likely percentage required to rebuild and maintain. That increases defence spend by 41 percent to $54 billion a year, an increase of $16 billion.

This compounds the government's budget problems. It is projected to run cumulative deficits of $238.85 billion over the three-year forward estimates for the current budget period. This defence commitment would add another $64 billion.

Much of the anticipated blowout is driven by social security, most significantly the NDIS (National Disability Insurance Scheme), a hard area to cut, even though it is the largest single area of expenditure.

What is to be done? Ultimately, the best defence policy is a strongly growing economy, but the temptation will be to raise taxes.

This will have the opposite effect because raising taxes in this case will redirect resources to areas of lower productivity, yet it is high productivity that is at the base of all increases in wealth in a modern capitalist economy.

Military expenditure doesn't add to productivity, it's a net drag that we are happy to bear to ward off the rare, but occasionally potential catastrophic event of invasion or dominance by a hostile foreign power.

It's an insurance policy and doubling what you pay on your insurance policy will have no effect on your productivity, unless you have a catastrophic event. Even then, if you have paid more than you need to, it can further destroy productivity as you can overpay for the outcome.

So, the government needs to be looking to grow the economy so that the absolute cost actually shrinks as a percentage of GDP, while our defence preparedness is maintained.

Other Costs to Look At

One area they should look at is other areas of capital expenditure.

It is difficult to know exactly how much is being spent on the "energy transition" as there is so much that is indirect and almost impossible to quantify, like consumers paying higher power prices.

It is also an area of low productivity, with the latest national accounts showing electricity, gas, water, and waste services making the largest negative contribution to productivity of any sector.

Despite claims of being cheap and green, everywhere that renewable energy has become a significant part of the network, costs have escalated, and productivity has declined.