Among all the claims made about Australia’s plans to acquire nuclear-powered submarines (SSNs) under the AUKUS partnership, one of the most misleading is the suggestion from its supporters that it will generate economic growth. This is fundamentally incorrect. Defence spending does not generate economic growth at the national level. I say that as somebody who has argued for many years in favour of increased defence spending and for a robust Australian defence industry.
The benefit of defence spending to an economy is indirect; it helps to preserve peace, and peace costs a lot less than war.
To do this, defence spending takes productive resources out of the broader economy. Defence spending can be compared to a tractor factory that produces magnificent tractors, but rather than selling the tractors to farmers who grow food or fibres that are sold to customers, in this micro economy the tractors drive laps of the carpark until they are eventually blown up or retired. The designers, builders, drivers and maintainers of those tractors may be very skilled and dedicated, but the tractor factory consumes resources that could actually generate economic growth and meet people’s needs for essential goods.
People point to busy shipyards as evidence of economic growth, but activity is not the same as growth—that shipyard is simply an illustration of resources being taken out of the broader the economy and pumped into one small part of it. Economic impact statements produced by large consultancy firms that look at defence projects trumpet the benefits to particular regions, but the net impact on the national economy is negative as public funds and productive resources such as skilled people are sucked out of the rest of the economy and used for non-productive purposes. That’s before we consider that many defence-related industrial activities are significantly less efficient than the norm – naval shipbuilding compared to commercial shipbuilding for example.
Politicians normally understand this very well. That’s why in times of low strategic threat they reap a ‘peace dividend’ by reducing defence spending. If defence spending created economic growth, why wouldn’t they increase it even in peacetime? Instead, they have to be cajoled (by people like me) into increasing it even when the threat environment is growing. If building nuclear submarines created economic growth, why have the United States’ and United Kingdom’s naval nuclear enterprises been so chronically underfunded? But with AUKUS that understanding has evaporated.
While the Albanese government has received criticism for its Future Made In Australia program on the grounds that it is a subsidy, in the monopsony world of defence all projects are effectively 100% subsidised—the defence force, using the public purse, is the only customer. At least solar panels or quantum computers have some prospect of finding customers paying with their own money.
The supporters of SSNs claim there will be spinoffs from building submarines as technologies flow into the broader manufacturing sector. Such claims are weak. There is little empirical evidence to support them and even if there were, the SSN enterprise is a poor candidate to generate this effect. Building foreign submarine designs using largely foreign components is unlikely to generate new technologies and intellectual property for Australia.
Moreover, the key technologies in SSNs have little relevance to the broader economy. And the key nuclear and weapon technologies are highly classified and controlled within a top secret bubble. If they ever leaked from this military program into the broader economy, people would go to jail.
Even in the defence sector there are much better bets for economic spin-offs to other sectors, such as local small and medium enterprises generating innovative new dual-use defence and civilian technologies.
Another element of claim of economic growth is the recirculation effect; the salaries paid to workers in the SSN enterprise will be spent at the supermarket and that money will in turn be spent again. But this is no different from simple government benefits programs such as unemployment benefits or the old age pension. There, again, governments have to be dragged kicking and screaming to increase those benefits. But if recirculation generated economic growth, why not double or triple the spending on those programs, or pay people to paint rocks? Rather, as we are seeing now with the National Disability Insurance Scheme, the government and opposition are keen to cap such expenditure.
It’s salient that the Government has not produced any economic impact analysis on the SSN enterprise, preferring unsubstantiated claims about the number of jobs it will ‘generate’ (noting again that these are wholly publicly subsidised jobs). Should such analysis be produced, it needs to identify the net national impact rather than regurgitating the obvious fact that a small number of people will be getting paid to build submarines in Adelaide, which may be good for them and Adelaide—although even there one could argue that those people could generate economic growth for South Australia by contributing to the state’s world-leading transition to renewables, for example.
The real economic case for SSNs is fundamentally about whether they will help preserve peace in our region and deter destructive conflict. I’m agnostic on that, largely because the Government has not yet made a convincing case for it. If it can do that, the program may be worth the money. But using spurious claims about economic benefits to get a wavering public over the line is poor public policy.
Moreover, the money still must be spent well. Considering megaprojects’ poor record of delivering as promised, this particular ‘gigaproject’ needs to be established on firm foundations. Claiming that the expenditure of $268-368 billion in public funds will generate economic growth ‘just because’ does not help to create a culture of discipline and fiscal responsibility.