You can’t protect Australia with an economy running like a Holden FX engine

Our defence posture is being overhauled and that requires prosperity and citizen assent. But the economic engine it currently depends on isn’t firing on all cylinders.

Defence Minister Richard Marles onboard the USS Asheville, a Los Angeles-class nuclear-powered fast attack submarine, at HMAS Stirling, WA this week. Picture: Supplied

Australia’s prospective acquisition of nuclear-powered submarines is driven by dread rather than desire, a yearning for security not conquest. But fear of attack must be kept in abeyance, so freedom and opportunity can find their way into voters’ hearts and minds.

To sell the colossal expense to taxpayers – the initial guesstimate of $368bn over three decades casts quite an early morning shadow – Anthony Albanese and co have conjured an economic transformation. The AUKUS subs would be a force multiplier, so to speak – an enabling platform to supercharge shifts to a country “that makes things” and is not to be messed with.

On a dock at Naval Base Point Loma in San Diego, California, the Prime Minister spoke about “record investments in skills, jobs and infrastructure”, “sovereign capability” and a “whole-of-nation” effort, with security built by engineers, programmers and tradies, not just defence personnel.

“The scale, complexity and economic significance of this investment is akin to the creation of the Australian automotive industry in the post-war period,” Albanese said.

“And, just as the vision of Curtin and Chifley in creating our automotive industry lifted our entire manufacturing sector, this investment will be a catalyst for innovation and research breakthroughs that will reverberate throughout the Australian economy and across every state and territory.

“Not just in one design element, not just in one field, but right across our advanced manufacturing and technology sectors. Creating jobs and growing businesses right around Australia.”

The cabinet fanned out across the country, with Jim Chalmers in Perth describing the deal as “a transformational moment for our national security, for our national economy and for this state of WA”.

By Thursday, the Treasurer was home in Brisbane, extolling “a game-changing plan to broaden and deepen our industrial base”.

The pay-off is “support” for 20,000 jobs in industry, Australian Defence Force and the Australian Public Service, including trades workers, operators, technicians, engineers, scientists, submariners and project managers.

On a crude calculation, if they were all in place today, that’s an ­average salary at the PM’s base rate for 30 years. Given the form of the Anglosphere’s defence procurement, you can bet the cost shadow will get longer as the AUKUS evening approaches.

“That’s a lot of money for each job,” said a Canberra official. “Obviously there are cheaper ways to create employment, so this isn’t about jobs. AUKUS is driven by ­national security, and that’s fine. The world has changed.”

Defence Minister Richard Marles said the extra cost of the nuclear subs was not insignificant over the journey but would average a mere 0.15 per cent of gross domestic product a year (or $3.6bn in today’s dollars), with the $9bn cost in this four-year budget period absorbed within the current allocation for defence.

Jim Chalmers described AUKUS as ‘a transformational moment for our national security’.

Sounding like a Newcastle stevedore, our man in Washington Arthur Sinodinos said there would be “spillover benefits” from AUKUS. You hope not just for the lobbying industrial complexes of K Street in DC and Canberra.

Those benefits may be “incalculable”, as comrade ambassador maintains – integration of our manufacturing, information sharing and technology exchange – but they’ll accrue to the few and the costs will be paid by taxpayers, consumers and non-AUKUS workers. That’s how these things work. “There’s no free lunch,” says the Canberra source.

When you expand one part of the economy, you steal resources from another. There will be a loss of economic efficiency. So which sectors will take a haircut? That’s for politics and, just as messily, for markets to determine in our mixed (up) system.

Labor is picking winners, overtly and covertly, with subsidies, tax breaks and regulation, trying to hit moving targets on security, clean energy, manufacturing, infrastructure and housing; even in a fiscally constrained era, the community’s appetite for more spending must be sated, invariably off-budget in many cases.

Will AUKUS get us to the global frontiers of technology and innovation that its champions promise, or simply raise our dependence on the US? Will the program stifle private risk-taking with increases in taxing to fund a more sophisticated and enlarged defence industry?

What will the drive for “sovereignty” mean for our wealth, already high by world standards thanks to foreign capital, trade, our natural endowments and China’s rise, now all under threat at a time of polycrisis.

Treasury secretary Steven Kennedy called out the risks for Australia in this wild world and at home during the AUKUS era. In testimony to the Senate last month, Kennedy said “intensifying strategic competition could also become a drag on global growth if it leads to further economic fragmentation and a fraying of trade and investment links”.

He was referencing research from the International Monetary Fund, “which has raised concerns that policy-driven fragmentation risks reversing the efficiency gains generated by trade, investment and people flows, potentially exacerbating inflationary and supply chain pressures”.

We’ll all be worse off because of pandemic and populist deglobalisation: a retreat into blocs, “making things” at home, and giving in to the base politics (in several senses) that is reshaping America. How else do you see the rise of Donald Trump and the slide to protectionism by Joe Biden in his many forays, most starkly in the Inflation Reduction Act of blockbuster green energy subsidies.

In a “severe scenario”, the IMF estimates trade fragmentation could reduce long-term global output by up to 7 per cent, which is roughly equivalent to the combined GDP of Germany and Japan. Staff at the multilateral lender calculated if “technological decoupling” is added to the mix, some countries could suffer losses of up to 12 per cent of GDP.

IMF managing director Kristalina Georgieva argues the full ­impact could be even larger. Restrictions on cross-border migration, reduced capital flows and a sharp decline in international co-operation “would leave us unable to address the challenges of a more shock-prone world”, she told the Davos forum in January.

In rich nations, Georgieva continued, low-income households would lose access to cheaper imported goods. Small, open-market nations would be hard-hit, while most of Asia would suffer due to its heavy reliance on open trade.

“And emerging and developing economies would no longer benefit from technology spillovers that have boosted productivity growth and living standards,” the IMF boss said. “Instead of catching up to ­advanced-economy income levels, the developing world would fall further behind.”

Kennedy told Senate estimates the risk of such fragmentation is especially relevant for a medium-size trading nation such as Australia, “which has benefited significantly from integration with the global economy”. “Expertly managing this risk while responding to the more difficult geostrategic environment will be a defining feature of the coming decade,” he said.

Labor’s revamped and engorged industry policy – a mystery bag of baby boomer nostalgia, ­national iconography and union power plays – is part of the global zeitgeist of assertive sovereignty due to the pandemic’s multi-disruptions and a deteriorating geostrategic climate.

Make no mistake: the energy transition, reforming government services, repairing the budget, revitalising our economy and militarising Australia will be a grind for every government that seriously faces the omni-challenges.

That’s the pitiless backdrop to the five-year review of productivity by the Productivity Commission published on Friday. We desperately need more flexibility, dynamism and engagement with the world to solve our problems.

But we’re going backwards on several fronts, including workplace regulation, aversion to least-cost decarbonisation and a sub-optimal tax system. Our defence posture is being overhauled and that requires prosperity and citizen assent. But the economic engine it currently depends on appears to be about as zippy as Chif’s Holden FX.