Australia’s nuclear-powered submarine fleet is going to be expensive. Not only will the initial production cost run into the tens of billions, but there will be significant ongoing outlays for platform sustainment, operational use and shore-based infrastructure. Australia’s share of the cost of the ‘SSN AUKUS’ program will be between $268 billion and $368 billion ^[1]—far exceeding the forecast expenditure of the cancelled Attack-class build.

Ahead of the May budget and with competing pressures from a range of other policy pledges, the Australian government should consider alternative financing options to pay for the program. One such possibility is establishing a nuclear-powered submarine ‘future fund’ to leverage the benefits of market growth and long-term compound interest while reducing the sovereignty risks associated with foreign debt.

The multi-decadal submarine program provides an opportunity to deviate from the traditional payment of defence capabilities out of consolidated revenue and to explore the viability of a military-oriented extra-budgetary fund.

State-owned investment funds are not a new concept in Australia. The government currently administers six separate accounts ^[2] to pay for recurrent future expenses associated with initiatives such as the National Disability Insurance Scheme, the Indigenous Land Corporation and natural disaster recovery. The largest of these funds, the $196 billion Future Fund, was established in 2006 with money from successive budget surpluses and the proceeds from the sale of the government holdings of Telstra.

More recently, the federal government has proposed legislation to create a $10 billion housing future fund ^[3] to pay for social and affordable housing projects, and the New South Wales premier has made an election pledge to establish a future fund for children. ^[4] With the October 2022 fiscal update ^[5] showing gross national debt at $894.9 billion, the multibillion-dollar long-term costs of the AUKUS submarine project will considerably increase the government’s cumulative liabilities and has the potential to inflate repayments to foreign creditors.

In the context of acquiring a sovereign nuclear-powered submarine capability, an increase in external debt would be incongruent with the strategic objective ^[6] of ‘freedom from coercive influence’ in a world where ‘foreign interference is more prevalent than ever’. The prospect of foreign liabilities being used to pay for the submarines is not a distant possibility. In 2020, during the Covid-19 pandemic, the government conducted a record-breaking bond sale ^[7] that led to Asian buyers (excluding Japan) obtaining more than 17% ^[8] of the $13 billion in treasuries issued.

Though mechanisms of financing have little relationship to the operational sovereignty of Australia’s new submarines, the broader theme of strategic autonomy cannot logically exclude the minimisation of overseas debt linked with the build.

An alternative to mitigate against the sovereign risk of external commercial obligations is to restrict overseas debt to the UK and US so that the SSN AUKUS program will be financially self-contained. Conceptually, the partnership would provide not only the technology and expertise, but also the capital to underwrite the associated costs.

Against the geopolitical backdrop of a more aggressive and assertive Chinese influence in the Indo-Pacific region, an investment in advanced undersea capabilities serves the broader strategic aims of both the UK and the US. This is because the AUKUS program will deter China from pursuing aggressive military options against Australia and will contribute to regional stability by helping to generate a balance of military power.

However, notwithstanding the benefits of such a proposal, both the US and the UK are encumbered by significant budgetary pressures and domestic political barriers that reduce the likelihood of their providing financial assistance.

The combination of a fiscally constrained international environment with the limited accessibility to AUKUS capital necessitates consideration of a submarine sovereign wealth fund. On the back of high commodity prices and a $70 billion budget windfall, the government has the financial slack to invest in such an endeavour. Though the long-term market outlook remains uncertain, Australia’s higher-than-average interest rate allows for a balanced investment mandate with appreciable returns.

Over a 10-year period, an initial contribution of $50 billion and annual deposits of $10 billion into the SSN fund would yield a cumulative value approaching $200 billion at maturity (based on an investment target of 4% above the consumer price index). Albeit short of the total price tag of the nuclear submarine program, this process could be replicated to align with both the Virginia-class and SSN AUKUS delivery timelines—which are conveniently spaced about a decade apart.

To be effective as an investment, and to avoid the risks associated with foreign asset diversification, strong governance and operating parameters need to be clearly defined in the appropriating legislation. Sovereignty, after all, is the guiding principle ^[6] of this once-in-a-generation acquisition.

The efficacy of the SSN fund is also predicated on an optimistic forecast of market growth. The recent volatility of equities markets (particularly in the technology and energy sectors) captures the danger of exposing Australia’s most important military procurement to an uncertain investment trajectory. However, good public policy is grounded in evidence, and over the past decade the Australian Future Fund has appreciated at an average of 9.1% per annum with an ‘acceptable but not excessive level of risk’. On balance, an SSN future fund has significant potential to overcome many of the challenges influencing the decision-making process.

Australia’s prioritisation of sovereignty in the AUKUS partnership fits with the idea of a submarine-specific sovereign wealth fund to achieve a level of consistency with policy ends and means. Now that the plan for Australia’s nuclear-powered submarines has been revealed, it’s time to ramp up the discussion about how Australia will pay for them.