The federal government insists the purchase of a fleet of nuclear subs over the next 30 years is needed to combat growing threats from Australia’s largest trading partner, China.

But at a ‘guesstimated’ cost of up to $368 billion, the price tag attached to this historic lift in defence capability is eye-watering and will, in the view of leading experts, require some incredibly tough budget decisions.

Grattan Institute chief Danielle Wood said Australia was already facing a $50 billion-a-year budget hole over the medium term, with services and now defence spending set to grow rapidly over the next 30-plus years.

“The bottom line is the difficult choices we already faced as a nation just got harder,” Ms Wood told The New Daily. 

“I can’t see any answer that doesn’t involve higher taxes as a share of the economy … there will [also] be very strong pressures to constrain spending.”

Political ructions around spending began before the ink was dry on the subs deal, with Opposition Leader Peter Dutton raising the prospect of NDIS cuts to pay for it all.

“[AUKUS] is an incredibly important program, but it needs to be sustainable,” Mr Dutton told the ABC.

“And if the cost trajectory of that is going to result in it falling over, I think the government itself has pointed out that’s not sustainable.”

Meanwhile, Greens Senator David Shoebridge said the crossbench will oppose any attempt to cut spending on services that would fund AUKUS projects.

“This is a $368 billion nuclear-powered raid on public education, health, housing and First Nations justice that will starve core services for decades to come,” Senator Shoebridge said on Tuesday.

Subs cost a ‘guesstimate’

These duelling perspectives point to an ongoing debate about how Australia will pay for its new fleet of subs, a question that Deputy Prime Minister Richard Marles evaded on Tuesday.

Mr Marles did say the AUKUS deal will lift Australia’s defence spending by an estimated 0.15 per cent of GDP by 2050, up from 2 per cent now.

But he also admitted “something of a guesstimate” in those figures, with broad assumptions about future inflation and submarine project costs built in.

“For that 0.15 per cent we transform the potency of our defence force, which is why we must do this,” Mr Marles said.

Short-term Treasury analysis suggests the AUKUS deal will cost $9 billion over the next four years and $50 to $58 billion by 2033.

About $30 billion will be saved from dumping the French diesel subs deal.

The $9 billion price tag includes $2.5 billion in payments to the US for an upgrade of its domestic docks, while $500 million will be paid to the UK.

Ms Wood said initial estimates of the cost of nuclear subs “might prove optimistic”, saying “Australia has a long history of cost over-runs on defence and, indeed, across all major infrastructure projects”.

Independent economist Nicki Hutley agreed: “This will not come in at what the estimates are. You’re talking about new technology. We can’t estimate everything.”

Budget hole grows

Whatever the final cost, leading experts agree the price of nuclear subs will coincide with tough decisions about social services spending and our tax bills.

Leading federal budget expert and economist Chris Richardson said the subs deal will add to the urgency of debate about a $50 billion ongoing annual deficit forecast in the budget.

Australia is currently set to post underlying deficits of $181 billion in the four years to 2025-26, according to estimates published in October.

Mr Richardson said higher spending on social services like aged care and the NDIS are still the biggest projected cost pressures, but that the picture for defence spending is now more clear.

“A more dangerous world is a more expensive world,” he told TND.

Ms Wood said she was concerned by the “huge cost” of the subs, with defence spending already growing at 5.8 per cent on average each year through to 2033 before the new deal.

“In a world where the structural budget deficit is already conservatively 2 per cent of GDP … this will add significantly to the structural budget problem over time,” Ms Wood said.

“This inevitably means it’s harder for governments to deliver where there is most need, such as an increase to JobSeeker, higher pay for childcare workers and investment in green transition.”

Eyes on Stage 3 tax cuts

Mr Richardson said Australia will inevitably need to look at NDIS spending and “a bunch of other taxes” to cover the growing burden of defence and social services on the budget ahead of 2050.

But, pointing to the intense debate after the Albanese government unveiled $2 billion in annual savings from superannuation tax breaks just weeks ago, Mr Richardson said it will be difficult.

“We’ve got a large budget hole, but politics leaves us with a small spade,” he said.

Ms Hutley agreed the politics of budget sustainability will prove difficult, but said there are chances on the horizon for the government to cut spending without doing too much.

“If you look at the $250 billion over a decade for Stage 3 tax cuts, you don’t have to actually do anything, you just have to not do something,” she said.

“Sooner or later someone has to have the intelligent, adult conversation about the budget.”