The 2021/22 mid-year economic and fiscal outlook papers said the decision to get rid of the $90 billion French contract was a new risk to the budget bottom line.

"The costs associated with the acquisition of a nuclear-powered submarine capability will be assessed as part of this process and are not fully reflected in the budget estimates for defence," the budget update said.

Australia had already spent $2.4 billion on the French submarines before the decision was made to get the nuclear vessels as part of the AUKUS security pact with the United Kingdom and the United States.

The budget papers said the costs of consultation with the US and UK during the next 18 months on the best way to acquire the new submarines will be met from the existing defence budget.

Finance Minister Simon Birmingham said the submarine deal was to make sure defence needs were funded over a long-term period.

"The details around finalising the exit of that contract and the Lockheed Martin (contract) are being finalised through negotiations," Senator Birmingham told reporters in Canberra.

"Provisions are made for all of the elements in the defence budget in terms of making sure that funds are available to meet any and all of the likely consequences of that."

Senator Birmingham said funding pressures for national security was one of the elements that needed to be prioritised in the budget.

The decision to scrap the previous submarine contract led to anger from the French government and its president Emmanuel Macron.

It sparked major diplomatic tensions between the two nations, with the French ambassador being recalled temporarily to Paris as a result.

Mr Macron said in a television interview on Wednesday the Australian government behaved badly when it pulled out of the contact.

He told TV stations TF1 and LCI France had retaliated against the Australian move, and that its response would continue to make itself felt for a long time.

with Reuters

Australian Associated Press