Subs set to sail past $100 billion as defence call on budget grows

The federal government is preparing for the cost of its planned fleet of nuclear-powered submarines to easily surpass $100 billion, putting pressure on a budget already reeling from the fallout from the coronavirus pandemic.

As Commonwealth gross debt reached a record high of $845.9 billion, senior ministers were turning their minds to how to pay for a defence project that will surpass the cost of the now-abandoned $90 billion submarine deal with France’s Naval Group.

A US Virginia-class attack submarine under construction in 2012. Australia could face spending more than $100 billion on nuclear-powered boats.Credit:US Navy

Australia has already sunk $2.4 billion into the Naval Group agreement to supply 12 conventionally powered submarines. On top of the construction cost, the boats were expected to cost $145 billion for maintenance over their life cycle.

It would have been Australia’s largest military acquisition, but the move to nuclear-powered submarines will be even more expensive.

Prime Minister Scott Morrison would not be drawn on how much compensation Australia would pay Naval Group for the broken contract, confirming only that the final amount would eventually be made public.

Pressed on the cost of the nuclear-powered submarines, he could not offer a number.

“No, I can’t. Not at this stage,” he told ABC radio on Friday. “We’re going through an 18-month period with our partners to finalise what the best way forward is. What I do know is that Australia’s defence spending, as a share of GDP, will continue to increase because it’s not just about submarines. This is about a whole range of other capabilities.”

But inside the government, senior officials expect the construction bill to go well beyond $100 billion.

Defence Minister Peter Dutton on Sunday would not be drawn on the eventual cost, adding that protecting Australia’s interests were paramount.

“It’s not going to be a cheap project, but maintaining peace is not something that comes for free,” he said.

Finance Minister Simon Birmingham said leasing submarines ahead of purchase was possible.

“Doing that wouldn’t necessarily increase or wouldn’t increase the number of submarines and the capability across all of the partner nations. But doing so may provide opportunities for us to train our sailors, provide the skills and knowledge in terms of how we operate,” he told ABC television.

Finance Minister Simon Birmingham said leasing submarines ahead of purchase was possible.Credit:Alex Ellinghausen

Australia’s spending on defence was already on track to be one of the fastest-growing parts of the budget before this week’s announcement.

The Parliamentary Budget Office, in its latest medium-term fiscal outlook report, estimates spending on defence will climb by more than 68 per cent between this financial year and 2030-31 to reach $75.7 billion early next decade.

Spending in just two other areas, aged care and public hospitals, was forecast to grow by more than defence, which by 2030-31 will account for $9 of every $100 of budget spending, from less than $8 now.

The same research shows the budget remaining in deficit into the 2030s, without any unplanned expenditure. The coronavirus pandemic had already upended the budget’s long-term position. An expected surplus in 2030-31 has been turned into a projected deficit of $51.5 billion and net government debt of more than $1 trillion.

The US Congressional Budget Office, which provides independent analysis to the US Congress, earlier this year put the cost of building a Virginia-class submarine at $US3.4 billion ($4.7 billion) a boat in 2021 dollars.

That is the cost of construction alone in the US. It does not include development or planning expenditure or manning, operational and maintenance costs. It also does not take into account general increases in cost due to inflation and assumes work done solely in US shipyards. While the first one or two new Australian submarines could be built in the US or Britain, the rest are expected to be assembled in Adelaide.

A next-generation future submarine being developed for the US is estimated by the US Navy at $US5.8 billion a boat. The budget office believes they will cost $US6.2 billion each.

The cost of Britain’s Astute-class nuclear submarines has been estimated at between £1.6 billion ($3 billion) and £2 billion a boat. That also does not include development or planning costs and excludes manning, operational and maintenance expenditure.

While Australia’s existing Collins-class submarines require a crew of 50, the Astute needs almost 100 and a Virginia-class almost 140.

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