24 March 2025 | Jennifer Parker
The Australian government has said, and frequently reiterated that we are facing our most ‘complex and challenging strategic environment since World War II—diplomatic language for a region where conflict is increasingly likely, though not inevitable. That means Australia could soon need the women and men in its Defence Force to defend our vital interests.
The real question isn’t whether defence spending is 2 or 3 per cent of GDP but whether our personnel have the capabilities they need. Right now, the answer is no—and we must act accordingly.
Many challenges hinder Defence’s ability to respond quickly—from structural issues to slow acquisition processes, committee structures designed for another time and absence of reserve reform. However, inadequate spending remains a significant constraint.
It's a common misconception in Australia that defence spending is at record highs. While that may be true in nominal terms, it isn’t when measured relative to GDP, or when you consider the amount of military equipment it can purchase. The cost of military equipment is known to inflate at a higher rate than the broader economy. A 2006 RAND Corporation study found that the cost of surface combatant ship costs rose by 10% annually between 1950 and 2000—twice the average inflation rate in the broader economy. Though Australian Defence spending has outpaced broader inflation, it can no longer buy as much military equipment for the same funds as it once did.
For the financial year to June 2025, the government has planned to spend $55.7 billion on Defence, covering the Department of Defence, the Australian Signals Directorate and the Australian Submarine Agency. Of that total, $52.6 billion was allocated directly to Defence—nominally the largest allocation in our history. When the 2024–25 budget was announced, the government said it expected the money would represent around 2 percent of GDP. The plan was for this to grow to 2.4 percent by 2033–34. If this occurs, it will be a significant investment, but it is unlikely to be enough as most of it will be spent on ships and submarines, leaving little room for anything else.
Although assessing defence spending as a share of GDP is imperfect, it remains useful for historical analysis and international comparison. The exact figure for Australia in 2024–25 is 2.01 percent—lower than at any point in the Cold War era except maybe 1949–50, when the ratio rounded to 2.0 percent. On average, during the Cold War, Australia spent 2.7 percent of GDP on defence. In the 1950s, when regional concerns were high, the average was 3.37 percent. It’s clear that in relative terms Australia isn’t spending at record levels even by Cold War standards on Defence—a reality that sits uneasily with bipartisan statements on the gravity of our strategic situation.
After the Cold War, Australia took a peace dividend, dropping defence spending significantly. From 1990 to 2023, it averaged 1.9 percent of GDP and dipped as low as 1.6 percent in 2013–14. In 2016, when spending reached 2.1 percent of GDP, the government committed to annual increases of 5.0 to 5.5 percent, but inflation has been high since 2021, strongly eroding these gains.
Despite perceptions of record-high spending, Defence remains largely on the path set by the 2016 White Paper nearly a decade ago. This is despite the 2020 Defence Strategic Update dropping the rolling presumption that conflict would not occur within 10 years, despite the eruption of conflicts in Europe and the Middle East, and despite rising Chinese aggression. According to the 2024–25 Defence budget, the spending trajectory won’t materially change until 2027–28. Although the budget added $5.7 billion for the period 2024–25 to 2027–28, $3.8 billion of that won’t arrive until 2027–28 under the current plan.
The 2023 Defence Strategic Review said the ‘ADF’s current force structure is not fit for purpose for our current strategic circumstances’, a point with which the government agreed in its National Defence Strategy statement. Because there’s been no increase in the Defence budget’s purchasing power of military equipment, the only way to improve the immediate force structure has been to cut some capabilities to fund others.
The full extent of the 2024 ‘re-prioritisation’ of the Integrated Investment Program remains unclear. Yet publicly disclosed cuts include cancelling the formerly proposed Joint Support Ship (affecting replenishment and sealift), axing replacement mine warfare vessels (leaving no dedicated mine warfare ship at a time when such threats are expanding), reducing the number of planned infantry fighting vehicles and deferring plans to buy a fourth squadron of F35 fighter aircraft. While it’s wise to ensure the defence capability budget is properly prioritised, it’s difficult to imagine a maritime concept of operations to defend Australia’s vital interests that doesn’t include enhanced replenishment and coastal mine-clearing capabilities.
Both examples show these capabilities weren’t cut for having little value but because the budget hadn’t grown to meet the threat outlined in the National Defence Strategy. Meanwhile, other gaps remain across the portfolio—from insufficient counter-drone capabilities and a lack of land-based ballistic missile defence to inadequate guided weapons stocks. This underlines how a constrained budget has left Australia without many defence essentials.
While Defence spending is increasing, it isn’t at a historic high when measured in relative terms or the amount of military equipment it can buy, and it certainly isn’t calibrated to our most serious circumstances since World War II. Any debate about whether to spend 2 or 3 per cent of GDP is a distraction; we need to define the capabilities required to safeguard our vital interests, then secure the funding—fast. If we don’t seize this moment, we risk leaving our women and men in uniform without the tools they need when it matters most.
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