Defence spending – a question of capability

The Australian Government has repeatedly said that we’re facing “the most complex and challenging strategic environment since the Second World War”.  This is a diplomatic way to say that a war involving Australia is more likely than before. Though conflict is far from inevitable, we may soon need to ask more of the women and men of the Australian Defence Force to defend our values with force. This will cost money.

As we argue about how much it should be, our question can’t be “should defence spending be two or three per cent of gross domestic product (GDP)?” It’s “do the people defending Australia have everything they need to do it?”. Right now, the answer is no. This has to change.

The cost of doing business

Defence’s ability to respond quickly is often hindered. It faces structural issues, slow acquisition processes, outdated committee structures, reform inertia in the reserves – in this situation, inadequate spending only constrains it further.

That defence spending is at ‘record highs’ is a misconception. While true in theory, Defence spending isn’t at record highs relative to GDP. It’s not rich in military purchase power either.

Why? In periods of inflation, equipment prices rise faster than the rest. For instance, a 2006 RAND Corporation study found that the price of a surface combatant ship rose by 10 per cent annually between 1950 and 2000 – twice the overall inflation rate for that period. Though Australian defence spending has outpaced inflation, each dollar for equipment isn’t worth what it used to be.

“It’s clear then that defence spending isn’t at ‘record highs,’ even by peacetime standards.” 

For the financial year to June 2026, the government set aside $58.99 billion for defence. This covers the Department of Defence, the Australian Signals Directorate and the Australian Submarine Agency. Of this, virtually all ($56.1 billion) was allocated directly to Defence – its nominally the biggest ever single allocation of funding.

At this year’s budget, this is expected to be around 2.04 percent of GDP. The Treasurer stated in his budget night speech that the plan was to keep it growing, to 2.3 per cent by the early 2030s. While this is meaningful investment, it’s unlikely to be enough. With prices still rising, most of it will be spent on ships and submarines. Cash for anything else will have to come from the rest of Defence’s budget.

Although setting spending goals at a share of GDP is imperfect, it’s useful for historical analysis and international comparison. The expected figure for 2025–26 is 2.04 percent. This is lower than at any point in the Cold War, except for perhaps 1949-1950 where it was rounded to two per cent. In that period, Australia spent 2.7 per cent of GDP on defence on average. In the 1950s, when regional concerns the average was 3.37 per cent.

It’s clear then that defence spending isn’t at ‘record highs,’ even by peacetime standards. This sits uneasily next to bipartisan statements insisting on the gravity of our strategic situation.

Unresponsive to a changing world?

After the fall of the Soviet Union, defence spending fell significantly.

From 1990 to 2023, we spent 1.9 per cent of GDP on average. This dipped as low as 1.6 per cent in 2013–14. In 2016, spending reached 2.1 per cent of GDP, and the Turnbull government committed to annual increases of 5 to 5.5 per cent. But waves of inflation since have badly eroded these gains.

Despite the ‘record high’ mythology, Defence spending has only barely left the path laid down by the 2016 White Paper nearly a decade ago. This is despite the 2020 Defence Strategic Update, which abandoned the tactical presumption that our next conflict wouldn’t occur ‘within the decade.’ Since then, war has erupted in the Middle East, Europe has been gripped by tension, foreign policy has gone into flux in the United States, and we’ve been subject to further Chinese aggression.

According to the 2025–26 Defence budget, spending doesn’t meaningfully lift until 2027–28 where it is predicted to rise to $67.6 billion, approximately 2.14 percent of GDP.

In 2023, the Defence Strategic Review said the “ADF’s current force structure is not fit for purpose for our current strategic circumstances” and the 2024 National Defence Strategy repeated this. But without an increase in real purchasing power, the only way for Defence to fund new capabilities is to cut existing ones.

What Defence has to drop when they don’t have enough

In practice, that’s what the 2024 ‘re-prioritisation’ of the Integrated Investment Program was supposed to do. But it’s still unclear how much, or what, will change. Publicly disclosed cuts include cancelling a proposed Joint Support Ship (affecting replenishment and sealift) and the replacement mine detection vessels (leaving no dedicated mine warfare ship at a time when such threats are expanding). Defence also cut new infantry vehicles from its plans and deferred the purchase of a fourth squadron of F35 fighter aircraft.

While it’s wise to prioritise capabilities, it’s difficult to imagine a plan to defend Australia could include cutting maritime replenishment and mine-clearing capabilities.

Most likely, these capabilities weren’t cut for being low value. The budget was just too small to meet the threats outlined in the National Defence Strategy.

Meanwhile, other gaps remain – counter-drone capabilities, land-based ballistic missile defences, and guided weapons are under-resourced. Governments say these capabilities are essentials. But then they constrain Defence, and Australia has to defend itself without them.

Ultimately, any debate about the difference two or three per cent of GDP is a distraction from the real problem: falling purchase power. The government has to say which capabilities really are essential, then fund them, fast. Failing to seize this moment risks leaving our women and men in uniform without the tools they need when it matters most.

This article is co-published with ANU Policy Brief. A version first appeared here: https://www.jennifer-parker.com.au/post/defence-spending-a-question-of-capability