Tag Archive for: Defence Spending

This is not the time for increasing Indonesia’s defence spending

Indonesia could do without an increase in military spending that the Ministry of Defence is proposing. The country has more pressing issues, including public welfare and human rights. Moreover, the transparency and accountability to justify such a plan is also questionable.

The ministry proposed in January that defence spending should rise gradually to 1.5 percent of GDP by some unstated target year. The ratio has been 0.6 to 0.7 percent of GDP for the past decade, lower than that of many Southeast Asian neighbours and Indo-Pacific countries, including Japan, South Korea and India.

An increase to 1.5 percent would be subject to parliamentary approval. It could indeed significantly enhance Indonesia’s defence capabilities—for example, by modernising equipment, lifting research and development and improving welfare for military personnel.

With the extra money, Indonesia could prioritise key acquisitions such as radars, early warning aircraft, fighter jets, submarines and rescue submarines. The government could give military personnel higher performance allowances—bonuses that apply across the state sector and constitute large portions of employees’ remuneration. The armed forces’ allowance of 70 percent is low. Increasing it would help address longstanding concerns about the adequacy of military compensation.

Furthermore, Indonesia must enhance its defence capabilities given its strategic position overseeing four choke points, and concerns over airspace intrusions and maritime law violations. The current unstable geopolitical situation, especially in the South China Sea and around Taiwan, demands stronger defence.

However, such an increase must be handled transparently, accountably and with meaningful public participation, especially with 306 trillion rupiah (roughly A$35 billion) in budget cuts in other sectors. Indonesia has the democratic tools for proper oversight, but in practice the government and parliament do not attend closely to how the armed forces spend their money.

Moreover, this is the wrong time economically for increasing defence spending. The country is close to deflation and the danger to economic growth that it would bring. Prabowo is meanwhile slashing budgets for essential government activities such as healthcare, elementary and higher education, public works and infrastructure projects. Those are better places to spend any extra money that could be allocated to defence.

It isn’t at all clear that more military funding would be well spent. Indonesia lacks clear direction in defence policy. The government has yet to present a concrete plan following the failure of the Minimum Essential Force program, which concluded in 2024 with only 65 percent of the target assessed as achieved. Prabowo’s replacement program is Optimum Essential Force, but no concrete details have been announced. The public is increasingly sceptical of the administration’s ability to define a coherent defence policy.

The Indonesian Defence White Paper is outdated, being last revised in 2015. The global and regional security environment has evolved dramatically, and neighbouring countries—such as Vietnam, Malaysia and Cambodia—have updated their defence policies in that time. Cambodia, for instance, released its National Defence Policy in 2022 and its first Defence Strategic Update at the end of 2024, outlining Cambodia’s priorities such as border security, international peacekeeping and long-term reforms for its armed forces. In contrast, Indonesia appears to be lagging in addressing evolving security threats.

Indonesians have even more reason to be sceptical of rises in the defence budget as controversial military policy initiatives spark concerns about potential threats to democracy and seem to impede advancement of security sector reforms and professionalisation of the military. These include deeper influence down to the level of villages, helping with what should be a purely civil program to provide free nutritious meals, and assigning high-ranking active military officers to civilian roles. Revisions to the law governing the armed forces have added the growing suspicion about the military’s increasing role in civilian governance.

Altogether, this does not look like a good time to plan for more than doubling the armed force’s share of the national economy.

It’s (past) time to get serious about funding Australia’s defence and security

In the week of Australia’s 3 May election, ASPI will release Agenda for Change 2025: preparedness and resilience in an uncertain world, a report promoting public debate and understanding on issues of strategic importance to Australia. This is an article from the report.

The National Defence Strategy (NDS), released in April 2024, gave urgent warning that Australia’s strategic circumstances were rapidly deteriorating. It noted that the 2023 Defence Strategic Review (DSR) had warned that ‘Australia faced its most challenging strategic environment since the Second World War’, and that events had worsened since the DSR’s release only 12 months before.

In the 12 months since the NDS hit the streets, the geostrategic environment—and the strategic risks that Australia faces—have not just continued that trajectory, but have exponentially deteriorated, to the point that Australia now faces a global and regional security environment that bears little relationship to the foundational assumptions that the NDS is based on: a rules-based global order and an open, stable and prosperous Indo-Pacific.

China’s growing assertiveness, malicious cyber targeting of political and military systems and civilian ICT networks  and adversarial mercantilism  have ratcheted up to new levels, demonstrated most vividly by the recent circumnavigation of Australia by PLA Navy Task Group 107  and the no-notice live-fire drills conducted in the Tasman Sea. Beijing has warned that more such visits will occur,  and Australian naval experts argue that the Royal Australian Navy is ill-equipped for such an eventuality, with only ‘16 battle-force vessels—its smallest and oldest in decades’.

Russia’s war on Ukraine continues to eat away at the longstanding verities of the international security framework that has underpinned global stability and security in the post–World War II environment. Russia’s continued flouting of the Geneva Conventions,  attacking critical infrastructure targets in Ukraine,  including nuclear energy plants,  kidnapping and forcing of Russian citizenship upon Ukrainian citizens,  threats of nuclear war  and increasing use of paid or politically motivated agents to undertake sabotage attacks  throughout Europe have resulted in an increasing realisation that European security architecture and military capability spending are no longer appropriate and that a more general war in Europe, and potentially globally, is becoming more likely.  Prime Minister Albanese has recently ‘opened the door to sending Australian troops to Ukraine’, but military experts suggest that ‘the current operational capability of the defence forces is looking pretty thin.’

And perhaps most consequentially, the new Trump administration has flagged a more selective approach towards traditional alliance relationships, demanding of its allies that they align with US policy and intents and invest in much higher levels of defence spending  in order to justify continued US engagement and support. Absent such demonstrations, it’s becoming clear that a stultifying effect will encompass the relationship.  In speaking of Australia, Elbridge Colby, the President’s nominee for Under Secretary of Defense for Policy, declared that ‘The main concern the United States should press with Australia, consistent with the President’s approach, is higher defense spending. Australia is currently well below the 3% level advocated for NATO by NATO Secretary General Rutte, and Canberra faces a far more powerful challenge in China.’

And as Mike Burgess AM, Director-General of the Australian Security Intelligence Organisation, noted in his 2025 threat assessment:

Australia has entered a period of strategic surprise and security fragility. Over the next five years, a complex, challenging and changing security environment will become more dynamic, more diverse and more degraded. Many of the foundations that have underpinned Australia’s security, prosperity and democracy are being tested: social cohesion is eroding, trust in institutions is declining, intolerance is growing, even truth itself is being undermined by conspiracy, mis- and disinformation … Australia is facing multifaceted, merging, intersecting, concurrent and cascading threats. Major geopolitical, economic, social and security challenges of the 1930s, 70s and 90s have converged.

In the DSR, Sir Angus Houston AK AFC and Stephen Smith highlighted that ‘Defence planning is about managing strategic risk. Defence spending must be a reflection of the strategic circumstances our nation faces.’  They recommended that:

Defence funding should be increased to meet our strategic circumstances. Lower-priority projects and programs should be stopped or suspended to free essential resources which can be allocated to projects and programs that align with the priorities in the Review. Funding should be released through the rebuild and reprioritisation of the Integrated Investment Program (IIP) and reinvested into priority Defence projects, programs and activities consistent with the Review.

Against the complex,  interconnected  and existential  threat environment Australia now faces, the next government must seriously consider whether the funding commitments, set out in the NDS and the Defence Portfolio Budget Statements meet the threshold test of the DSR that spending reflect the strategic circumstances Australia now faces. And, noting that the NDS quite clearly states that Australia no longer enjoys the benefit of a 10-year window of strategic warning time for conflict, and that the ADF is not fully fit for purpose, whether we have the appropriate balance between investing in the future (with initial operating capabilities for many of the current IIP projects coming due in the 2030s through 2050s) or preparing for the present (investing in the readiness and sustainability of current units and platforms, and undertaking rapid acquisition of improvements to the force-in-being).

In ASPI’s The cost of Defence: ASPI defence budget brief 2024–2025, we suggested that the answer to those two fundamental questions was ‘No’. Justin Bassi, ASPI’s Executive Director, categorically stated that:

Australia needs to spend more on defence—and it needs to do so immediately. The strategic imperative has been firmly established in the government’s own major defence documents. The Albanese government and the Coalition opposition agree that we are in the gravest geopolitical period in generations, and this is only going to intensify … the rhetorical urgency is not being matched by action in the form of defence investment … This year’s budget priorities are not directed towards strengthening the Australian Defence Force’s ability to fight in the next decade.

In the 2024–25 Budget, the government noted that Defence funding as a proportion of GDP would reach 2.3% by 2033–34.  The majority of that funding is backloaded to the period beyond the forward estimates (out to 2027–28). In essence, Defence is receiving no additional funding for the next three years, which, as The cost of Defence noted, is a holding pattern that leaves us critically exposed to events in the near term and results in preparedness and readiness levels well below any real ability to hold an adversary at risk for a meaningful period.  The RAN has mothballed major and minor combatants to meet urgent personnel and funding challenges in other parts of the fleet, including the two Supply-class fleet replenishment oilers being out of service for an extended period (the need for a supply ship was clearly demonstrated by the PLA Navy’s recent circumnavigation, which couldn’t be followed continuously by the RAN). Meanwhile, the Australian Army is downsizing its armoured combat vehicle aspirations, and RAAF flying hours have contracted.

Raising Defence spending to at least 3% of GDP is a strategic necessity.  Doing so will help to assuage US concerns regarding our continued commitment to the alliance and help meet the Trump administration’s priorities, as the previous Chief of the Defence Force and DSR author, Sir Angus Houston AK AFC, stated, ‘[President Trump] might say increase our GDP defence spend to 3.0 per cent, but I don’t think that is a bad thing.’  More importantly, it is necessary for Australian security to deliver the necessary cash injection and funding certainty for Defence (and defence industry) to focus on the preparedness of the force-in-being, as the previous Secretary of Defence, Dennis Richardson AC, noted: ‘we must raise to 3 per cent [of GDP defence spending] to do this, because the only other way to do this is to cannibalise our other Australian Defence Force capabilities.’

The NDS states that the new strategy of denial at the heart of Australia’s national defence focuses on ‘deterring a potential adversary from taking actions that would be inimical to Australia’s interests and regional stability’.  In the current geostrategic environment, no potential adversary is going to be deterred by a paper ADF that won’t exist until well into the 2040s and 2050s. Moreover, no potential adversary will be deterred by a ‘business hours’ ADF that does not maintain credible capability for 24/7 defence of its own territory and exclusive economic zones, including in the Southern Ocean and Antarctica. A substantial investment in the preparedness—readiness and sustainability—of the ADF is mandatory if we intend to deter the actions of aggressive nations, which can rehearse their kinetic and non-kinetic offences in Australia’s own backyard and in our ICT networks. The immediate security of Australia and the safety of our citizens, including those travelling in civilian airliners across the Tasman or into Asia, necessitate that we can undertake real-time surveillance and reconnaissance and, if necessary, active, defensive and offensive counterattack measures.

Moreover, we must have not just the ability to ‘change a potential adversary’s risk assessment and therefore decision-making calculus’  by imposing cost on that adversary, but also the ability to absorb the costs of successful adversary actions aimed at Australia, whether they be economic, psychological, political or military. National preparedness—a strategic and systematic process to plan, coordinate and integrate resources and efforts across all sectors of government, the economy and society to ensure that the nation is ready to manage potential disasters, emergencies or national-security threats—does not yet exist in Australia. While the NDS makes a strong argument for the need for ‘a coordinated, whole-of-government and whole-of-nation approach [that] harnesses all arms of Australia’s national power to establish a holistic, integrated and focused approach to protect our security and advance our interests’,  the Budget doesn’t allocate any resources to make Australia’s national preparedness and resilience real.

It’s long been axiomatic in Defence rhetoric, but not in Defence’s reality, that Defence must ‘structure for war and adapt for peace’.  A decade ago, David Peever and his First Principles Review team flagged that Defence was not fit for purpose and proposed an ambitious agenda to reform Defence’s decision-making and processes to deliver on the outcomes required of it.  All of the 76 recommendations of the review were ticked off by Defence, and yet, a decade later, the DSR again found that Defence was not fit for purpose. The NDS devotes a chapter to the ‘reform agenda’,  and yet strategic and acquisition reform still eludes Defence. If Defence’s spending does rise to 3% of GDP, it will be essential that we have a Defence Department that’s able to spend that money efficiently and create substantially more combat power per dollar invested than the current organisation can deliver. Recent Senate Estimates testimony,  recruitment woes  and acquisition challenges  highlight that there’s much work still to be done to structure Defence for the uncertainties of our present, let alone the potential wars of our future.

We recommend to the next government that it undertakes four immediate actions following the next federal election.

—In the 2025–26 Budget, commit to increased funding of the defence budget to bring Australian defence funding to 3% of GDP by no later than 2026–27 and sustain that level over the next decade.

—Direct Defence to review the planned update to the NDS and the IIP, scheduled for release in 2026, with the aim of prioritising the readiness and sustainability of the current force-in-being, necessary for the 24/7 defence of the Australian theatre and our region.

—In the 2025–26 Budget, commit to funding national preparedness and national resilience measures across government, the economy and society that will ensure Australia is ready to manage potential national-security crises.

—Deliver, within three months of the election, with full implementation over the following 12 months, a public reform plan, as laid out in the DSR, to streamline procurement processes, enhance project management, reduce redundant spending and strengthen domestic defence manufacturing.

3 percent of GDP for defence is no stretch. We did 2.9 percent in the Cold War

Australia has plenty of room to spend more on defence. History shows that 2.9 percent of GDP is no great burden in ordinary times, so pushing spending to 3.0 percent in dangerous times is very achievable.

Budget watchers are quick to cite difficulties amid current pressures on revenue and expenditure. But historical data is more revealing than a nearsighted view down in the weeds of fiscal policy.

Australia just isn’t trying. For all the talk of deteriorating strategic circumstances, the defence share of GDP has been flat for half a decade, wandering between 1.9 and 2.0 percent.

The issues holding Australia back from spending more on its defence are largely political rather than economic.

The 2020 Strategic Defence Update identified an increase in geopolitical risks in our region and noted the possibility of Australia becoming involved in a major conflict without the formerly assumed 10-year warning time. As a result, successive Australian governments have made announcements about lifting defence spending through initiatives such as equipping the army with long-range missiles, expansion of the navy’s surface fleet and, most dramatically, AUKUS.

However, in terms of GDP, the proportion of total economic output that goes into current defence spending per year has not increased in recent years. It continues to hover around 1.9–2.0 percent of GDP. As shown in the chart below, Australia’s average defence spending as proportion of GDP since the Cold War ended has been 1.9 percent.

On 5 March, Elbridge Colby, head of policy at the US Department of Defense, called for Australia to spend 3.0 percent of GDP on defence. Various Australian defence and security figures, including former chief of the Australian Defence Force Angus Houston and former secretary of home affairs Mike Pezzullo have similarly called for defence spending to be lifted to 3.0 percent of GDP.

Economics writer David Uren recently explained that to lift defence spending to 3.0 percent, Australia would have to either take on additional debt, increase taxes or reallocate money from elsewhere in the government budget. All three of these options would be politically difficult.

While this is a point well made, the details of fiscal policy that usually absorb us become less useful for assessing the defence budget as we move into more unstable and dangerous times. History shows us that sustaining 3.0 percent of GDP spending over a period of time is quite achievable for Australia. The most recent example of this is the Cold War, particularly up until the 1970s.

Sources: SIPRI Military Expenditure Index and Australian government projections

As the chart shows, Australia could sustain average defence spending of 2.9 percent of GDP through the Cold War over 40 years from 1950 to 1991. (The Stockholm International Peace Research Institute dataset which the chart is based on only goes back as far as 1950, not quite the beginning of the Cold War.) This is very close to the 3.0 percent currently being advocated for. During the Cold War, Australia responded to the threat of communism expanding into South-East Asia by maintaining significant forces and often deploying these into various conflicts across our region.

This contrasts with the post-Cold War period from 1992 until now, where defence spending has averaged 1.9 percent of GDP. After the collapse of the Soviet Union, the United States and its Western allies quickly reduced military spending, enjoying a peace dividend due to reduced global geopolitical tensions. From 1986 to 1996, Australian defence spending dropped 0.6 of a percentage point from 2.5 percent to 1.9 percent of GDP. Over the next few years, defence spending remained consistently below 2.0 percent, even during the years of Australia’s involvement in the global war on terror and peacekeeping operations in our region. In 2013, defence spending reached its lowest share of GDP since 1938, just 1.6 percent of GDP.

The years since have seen great increase in geopolitical tensions, both in our region and globally. Yet defence spending as a proportion of GDP has increased only moderately and slowly since 2013, sitting at 2.0 percent in 2025. Under the government’s projections, spending will continue to slowly increase to 2.3 percent by 2033–34.

This is too little, too late. Under current budget restrictions, new defence announcements largely rely on cannibalising existing funding from sources declared to be of lesser priority, rather than on new funding. A recent example of this is the Redback Infantry Fighting Vehicle, which was cut from 450 vehicles to 129 vehicles, at a much higher per-unit cost.

The proportion of GDP should only be used as a rough guide towards spending on defence. What the money is spent on is important. However, the risk to Australian national security was no greater in the Cold War than it is now, and was arguably much lower. The fact that Australia for several decades maintained defence spending at higher levels than now shows that the country is capable of doing the same again.

Australia’s international spending reveals uneven ambition

How Australia funds development and defence was front of mind before Tuesday’s federal budget. US President Donald Trump’s demands for a dramatic lift in allied military spending and brutal cuts to US foreign assistance meant that a discussion was unavoidable. The difficult politics of increasing defence spending in Europe continues, and the British government has cut aid to pay for a rise in its defence budget.

This is an important discussion, but we ought to be considering investment in Australia’s strategic posture as a whole.

One way to measure that is the overall level of international spending. Taken together, defence, foreign affairs and trade, aid, the intelligence community and international policing total $72.05 billion for 2025–26, which is about 9 percent of total federal spending.

This share of spending has been steady at a little less than 10 percent since 1999. Attention has understandably focused on a potential lift in the defence budget. But we should think more broadly: there is a strong case that the overall level of spending on tools of ‘statecraft’ needs to rise above its steady level.

Within that $72.05 billion, defence dominates at $58.99 billion. There has been some reprofiling across the forward estimates, but this is consistent with the existing trajectory.

Time will tell whether the Trump administration decides to make an issue of this level of spending, which still hovers around 2 percent of GDP. Time will also tell whether Defence’s ambitious acquisitions program is achievable without further increases.

The official development assistance budget is $5.10 billion. This is about the same as the 2024–25 budget, adjusted for inflation. From a global perspective, with aid spending in retreat in many countries, this is welcome.

We should all recognise the particularities of Australia’s strategic circumstances. One such feature is a neighbourhood of low-income and middle-income countries. Development assistance in this context is not altruism but a strategic necessity. It helps offset risks that are born of underdevelopment, and that directly threaten Australian interests.

Moreover, experts across Southeast Asia have been clear on how Australia should respond to US aid cuts: ensuring stability in existing programs is the top priority.

The foreign affairs and trade budget is $3.91 billion. Within this, the diplomatic or foreign policy operating budget is $1.76 billion. This is a narrower measure, constructed by James Wise and originally published by ASPI. It strips out administered spending and other costs, such as IT and infrastructure, to provide a reasonable measure of Australia’s spending on diplomacy.

As Development Intelligence Lab research has previously noted, of Australia’s relevant budgets over the past 25 years, investment in diplomacy has been the most inconsistent. Although there has been no dramatic cut, projected inflation-adjusted declines in both the overall foreign affairs and narrower diplomatic budgets out to 2028 are concerning.

Australia’s intelligence community will receive a modest real budget rise to $2.05 billion year-to-year (this number excludes the Australian Signals Directorate, which is budgeted under Defence). This tallies with the recently released Smith-Maude Review, which recommends continued investment in Australia’s intelligence agencies, with focus areas including the Office of National Intelligence’s capability as a coordinating agency.

Finally, the Australian Federal Police budget (excluding domestic policing functions) is $2.00 billion, a small real decline compared to the 2024–25 budget. With the federal police now central to high-profile components of Australia’s engagement in Southeast Asia and the Pacific, such as the Pacific Policing Initiative, we can expect the federal police’s international spending to remain significant.

In short, defence spending has been bumped but its trajectory remains essentially the same. Aid, diplomacy, the intelligence community and federal policing are all at about a steady state, with modest inflation adjusted declines across the forward estimates.

The good news is that Australia has not decided to rob Peter to pay Paul. Nonetheless, the big questions remain: in 2025, do we really think that these tools should receive the same share of federal budget they received in 1999?

Things weren’t simple in 1999, and they’ve only become more complex since then. The crisis surrounding East Timor’s independence and then the 9/11 attacks in 2001 marked the beginning of complicated decades for Australian defence and foreign policy.

But Australia is now grappling with how to respond to a fraught position between China and the United States, while also trying to find a durable place among a crowd of ambitious partner nations across Southeast Asia and the Pacific. We need to properly invest in a broad range of tools to navigate this.

Defence budget doesn’t match the threat Australia faces

When Australian Treasurer Jim Chalmers stood at the dispatch box this evening to announce the 2025–26 Budget, he confirmed our worst fears about the government’s commitment to resourcing the Defence budget commensurate with the dangers Australia now faces.

A day earlier, Deputy Prime Minister and Defence Minister Richard Marles had advised that the government’s sole Defence initiative for the 2025–26 budget cycle would be to bring forward a paltry $1 billion from the 2028–29 financial year, shared across 2026–27 and 2027–28.  So, the much vaunted ‘generational investment in Australia’s Defence’ has been put off for a few more years, at least.

This marginal reprofiling of funds ($900 million additional in 2026-27 and $237 million additional in 2027-28 – so, in fact a little more than $1 billion) has been applied to submarine and missile capabilities, which continue to take up an expanded amount of defence capital expenditure

Consolidated funding for Defence, the Australian Signals Directorate and the Australian Submarine Agency in 2025–26 is estimated to be $58,988.7 million. It’s a nominal increase of $2,380.5 million (4.2 percent) over expected 2024–25 spending. Adjusting for expected inflation, as expressed by the 1.0 percent GDP deflator, the real increase will be 3.2 percent.

And to our considerable frustration, a detailed reading of the defence budget highlights that the government continues to pay only lip service to the readiness and sustainability of the current force-in-being, with the largest spending increases on capability sustainment tied to the F-35 Lightning force ($190 million) and Collins-class submarines ($235 million). While $133 million is allocated to sustainment of a new Defence Logistics program, there is little to no change overall to sustainment funding, usage and workforce from last year’s budget.

As we noted in The cost of Defence: ASPI Defence budget brief 2024–2025, the urgency of our current security environment (eloquently expressed in the independent Defence Strategic Review in 2023, confirmed by this government in the National Defence Strategy (NDS) in 2024, and made manifest by the inability to properly track the Chinese naval flotilla’s circumnavigation of Australia just weeks ago) is not being matched by resources from the public coffers.

There are four possible reasons why the government continues to stint on resources that match the threat Australia faces.

Firstly, it may not really believe that the threat is as great as it spelt itself out in the NDS. The rhetoric of Australia ‘facing the most challenging strategic environment since the Second World War’ may conceivably have been used solely as a means of mobilising some action within the government but without any real concern that Australia was becoming increasingly vulnerable.

This would certainly be backed up by this government’s actions: a focus on military capability spending almost entirely as additions to the order of battle well into the 2030s and in the 2040s, while continuing to underspend on the readiness and sustainability of current forces.

A second possible explanation is that the government may not yet trust the Department of Defence’s ability to spend more. Marles has certainly been critical of Defence, claiming that it lacked the culture of excellence necessary to deliver on the government’s agenda.

The NDS speaks to the need for both strategic and enterprise reform of the Defence organisation, and for the organisation to become fit-for-purpose if it is to gain access to the resources needed to build the force set out in the 2024 Integrated Investment Program, the long-term spending plan. This would not be the first government to hold back on funding defence until it actually sees reform resulting in a more effective and efficient delivery of Defence’s outputs.

Thirdly, the government perhaps does not want to be seen responding to the Trump administration’s call for allies to increase defence spending. There has certainly been a huge spike in anti-US, anti-AUKUS commentary since the Trump administration came to office in January.

Fourthly, the government may not believe that the politics of additional funding to Defence make sense less than two months before the election due by May. At a time when average Australians are struggling with cost-of-living challenges, and this pre-election budget seeks to allay concerns within the electorate that the Albanese government has not done enough to meet its previous election commitments to making Australians better off, funding Defence may not be seen as an election winning strategy. A February Ipsos poll shows defence being quite far down the list of concerns that face Australians.

The 2025–26 budget is, sadly, an opportunity lost. In failing to adequately fund defence, the government has lost the opportunity for at least one year to convince our interlocutors in the US that Australia is doing enough to build up its forces. As defence funding will reach only 2.33 percent of GDP in 2033–34, we are still a far from the expectation of the nominated under secretary of defence for policy, Elbridge Colby: that we will spend at least 3 percent of GDP on defence.

The budget is also a lost opportunity for Australian industry, which is becoming increasingly frustrated at slow defence procurement. More and more companies are abandoning the defence market due to the risk averse, overly bureaucratic and delayed or abandoned project cycles they are forced to deal with.  Without market signals that Defence is seriously investing in Australian industry and is committed to building the Australian national support and industrial base it needs to deliver capability, we stand to lose considerable expertise, workforce and sovereign industrial capability, that can never be replaced.

And finally, the budget is a lost opportunity for Australia’s defence and security.  Since the 2020 Defence Update, successive Australian governments have warned that the security environment facing Australia is worsening exponentially. Recent events have demonstrated just how fragile peace and stability is and highlighted the need for Australia to have a force-in-being that is prepared and ready to defend Australia. The ministerial foreword to the NDS started with the axiom that there was no ‘greater responsibility for the Government than defending Australia’.

The failure of this year’s budget to meet that responsibility will make all Australians less secure.

Awful optics: political fighting in Taiwan stalls part of defence budget rise

Political fighting in Taiwan is delaying some of an increase in defence spending and creating an appearance of lack of national resolve that can only damage the island’s relationship with the Trump administration.

The main opposition parties support the policy of President Lai Ching-te to lift spending from roughly 2.45 percent of GDP to more than 3 percent, but recently they’ve been unable to resist playing politics with the defence budget in the legislature.

Since Donald Trump has demanded that the United States’ European allies lift defence spending to 5 percent of GDP, and since Taiwan would be the frontline state in a war with China, the US is unlikely to find 3 percent at all sufficient.

Elbridge Colby, Trump’s nominee to become under secretary of defense for policy, said at his Senate confirmation hearing on 4 March that Taiwan should be spending 10 percent of its GDP ‘or at least something in that ballpark.’

The upper echelons of Taiwan’s ruling Democratic Progressive Party say they’ve understood the signal from Trump and are happy to spend cash on more weaponry. ‘We got that message and we’ll be more than happy to talk about strengthening our defence capability,’ former Taiwanese president Tsai Ing-wen told The Times.

The problem is that Taiwan’s legislature usually needs to approve major US weaponry purchases and government plans for indigenous defence capability development. But the legislature is dominated by parties that are soft on China.

Lai Ching-te was elected last year with around 40 percent of the vote, giving him control of the executive branch of government. But in concurrent legislative elections his independence-minded DPP narrowly lost its majority in the 113-seat parliament to the Kuomintang and its smaller ally, the Taiwan People’s Party.

The government and legislature have since been at loggerheads. Lai has done little to reach out and compromise, while the KMT and TPP have frequently been obstructive. Without providing evidence, the DPP says Beijing is behind their obstructions, while opposition lawmakers say Lai is too dictatorial.

There have been many brawls in the legislative chamber (real brawls, with punching, pushing and shoving) and protests in the streets. The executive branch has rejected bills passed by the legislature and sent them back to parliament for reconsideration. Taiwan’s constitutional court, an important democratic institution, had the sole power of legislative review and could act as an arbitrator. But because of one bill rammed through parliament by the opposition, the court has been temporarily paralysed.

The most worrying development came at the end of January when, hours after Trump’s inauguration. lawmakers voted to slash and freeze parts of Taiwan’s defence spending for 2025. Lawmakers cut 60 percent of the defence ministry’s publicity budget, crucial for recruitment. They also froze half the submarine program budget, 30 percent of military operations expenditure and funding for a drone industrial park.

Alexander Huang, director of the KMT’s International Affairs Department, says opposition lawmakers have cut about 1.3 percent of Lai’s proposed defence budget of NT$647 billion (AU$30.8 billion), which was originally 6.6 percent bigger than last year’s. After the cut, the rise is 5.2 percent, amid 2025 inflation expected to be about 2.0 percent. Huang notes that the frozen funds will be released once relevant government agencies give reports to the legislature, and parliamentarians are satisfied that defence projects are efficient and progressing.

Still, as far as optics go, the damage has been done. At Colby’s hearing, two US senators criticised the Taiwanese legislature’s efforts to cut defence spending. Republican senator Dan Sullivan accused the KMT of ‘playing a dangerous game’ while Colby himself found it profoundly disturbing.

For at least the past two decades, many US policymakers have pushed Taiwan to spend 3 percent of its GDP on defence, but it never reached this target. When Tsai Ing-wen took office in 2016, defence spending was just 1.82 percent of GDP, though she raised it to 2.17 percent in 2023. For many years, the budget was also not used as effectively as it could have been. For instance, until last year, conscription was only four months long, and the training was widely criticised for not being serious, looking more like a summer camp.

Lai this year plans to pass an additional special budget to push defence spending from 2.45 percent to more than 3 percent of GDP. The additional budget, which will likely be spent on US weaponry to demonstrate Taiwan’s resolve to Trump, will still need legislative approval. While mainstream KMT and TPP officials support increased defence spending, some in the opposition who are more pro-Beijing will probably object.

The blow-up between Trump and Ukrainian leader Volodymyr Zelenskyy is driving anti-Americanism in some quarters in Taiwan, especially with pro-China KMT politicians. Fu Kun-chi, the KMT’s legislative caucus whip, who has close ties with Beijing officials, pointed to the way Trump publicly scolded Zelenskyy and said Lai could be next in line.

‘Do we really have to spend 10 percent of Taiwan’s GDP or NT$2.86 trillion, on the military? Can the Taiwanese people shoulder this?” he said, according to the Chinese-language United Daily News.

Political scientists also predict it will be nearly impossible to push Taiwan’s defence budget to 8 percent or even 5 percent in the short term.

The KMT’s Huang, who is also a respected military analyst, noted that Taiwan’s overall government budget spending normally stands at about 12 percent to 13 percent of its GDP, meaning that 8 percent of GDP would amount to about two-thirds of Taiwan’s current government spending.

Huang added that it will be difficult for politicians across Taiwan’s political spectrum, including those in the DPP, to win votes if they propose higher spending and higher taxes.

Andrew Yang, a former KMT deputy defence minister, described a defence spending goal of 5 percent of GDP as ‘mission impossible.’

Well-connected Yang said some influential people in Washington were concerned about Taiwan’s political divisions. Yang said it was most important for Taiwan to convince Washington that the two sides had reached a consensus on defence so that the executive branch and legislative branch could focus on allocating resources. But while Taiwan mostly has the resolve to defend itself, all the squabbling will make this difficult.

China’s military spending rises should prompt regional budget responses

China’s defence budget is rising heftily yet again. The 2025 rise will be 7.2 percent, the same as in 2024, the government said on 5 March. But the allocation, officially US$245 billion, is just the public disclosure of what is likely far greater spending within China’s opaque system.

What we do know is that China has the second-biggest military expenditure in the world, behind the United States’. This year’s budget is another demonstration of the high goals that Beijing has set out for itself in military and geopolitical terms.

This should push others in the region to spend more on their militaries. Too many nations fear an arms race in the Indo-Pacific and beyond, whereas in fact it is just what’s needed. Beijing will keep building up its offensive power regardless of what the rest of us do. By holding down defence spending, we only put ourselves at risk.

The 7.2 percent rises in China’s defence budget for 2024 and 2025 imply a rising share of the economy going to the military. In 2024 GDP officially grew 5.0 percent (after adjustment for inflation) and is supposed to do so again this year.  Since China’s inflation rate was just 0.2 percent last year and is forecast by the Organization for Economic Cooperation and Development at 0.6 percent this year, the real rises in Beijing’s defence spending are not much below the nominal (unadjusted) budget increases. And they’re faster than GDP growth.

With conflict and tension across Europe, Middle East and the Indo-Pacific, the Stockholm International Peace Research Institute (SIPRI) estimates global military spending rose a spectacular 6.8 percent in real (inflation-adjusted) terms from 2022 to 2023, reaching US$2.44 trillion in 2023. It was the largest annual rise since 2009—though measuring defence spending is notoriously difficult, partly because the budgets of some countries, particularly China, are opaque.

In its latest China Military Power report, the US Department of Defense said China was spending somewhere between 40 and 90 percent more on defence than the public budget figure. That implies 2024 spending of US$330 billion to US$450 billion. According to the International Institute for Strategic Studies, China’s 2024 defence budget rose 7.4 percent, far outstripping the regional average of 3.9 percent.

Despite Asia’s relatively strong economic growth, the region’s share of global military spending fell from 25.9 percent in 2021 to 21.7 percent in 2024, because of wars and associated spending increases in Europe and Middle East. Additions to China’s spending as well as North Korean developments will likely drive up Asia’s share of defence spending, however. According to SIPRI, China in 2023 allocated US$296 billion to defence, 6.0 percent more than in 2022.

China’s relentless build-up has prompted its neighbours to increase their own military spending. An assessment by a few well-known China specialists last year suggested that China’s 2024 was actually US$471 billion (though their accounting methods also assessed US 2024 defence spending at US$1.3 trillion instead of the official US$825 billion).

Even if China’s neighbours accept its implausible claim to be spending less than 1.5 percent of GDP on defence, they can hardly be reassured as the capability of the Chinese armed forces grows and as that military and supposedly civilian agencies act with aggression in the region. Anyway, 1.5 percent of so large an economy would still be alarming.

As China’s economic growth slows, we should expect the defence share of GDP to continue to rise.

China likes to mention that the 2025 defence budget is the 10th in a row to show single-digit percentage growth. Yet these growth rates are still large by international standards and build on the much larger expansions of earlier years. In 2014, China had a 12.2 percent increase in defence spending, declining to 10.1 percent in 2015 and to 7.6 percent in 2016.

The opaqueness of China’s military spending is a particular cause for concern.

China usually attributes the increase in spending to the various military exercises it is engaged in as well as maintenance and upkeep of its military forces. The implication is that the increments are mostly going to salaries and pensions. It is true Chinese military personnel numbers are very large, but its equipment is improving dramatically. Just this last year, China demonstrated two new stealth fighters; a stealth bomber is in the works. And China is building a nuclear-powered aircraft carrier that will rival the latest US carriers in size.

The government’s Xinhua News Agency justifies China’s defence budget as paying for a ‘national defense policy that is defensive in nature, with its military spending mainly focusing on protecting its sovereignty, security and development interests … and the country will never seek hegemony or engage in expansionism no matter what stage of development it reaches.’

But China’s actions do not suggest a purely defensive motivation. Such claims should be no more truthful than Vladimir Putin’s claims that Russia’s military build-ups on the Russian border with Ukraine in 2021 and 2022 were only exercises.

When China sends its naval forces to intimidate neighbours and engages in military exercises that suddenly force rerouting of commercial flights, more regional countries should speak up. And the type of language that Beijing understands is an increase in our own defence spending.

It’s been done before: pay for more defence spending with debt

Australia, Britain and European countries should loosen budget rules to allow borrowing to fund higher defence spending, a new study by the Kiel Institute suggests.

Currently, budget debt rules are forcing governments to finance increases in defence spending with savings elsewhere or with taxes. But the study, examining military build-ups across 22 countries over the past 150 years, shows that defence spending increases have almost never been funded by spending cuts and that tax increases generally come later.

The larger the military build-up, the more governments rely on deficit and debt financing. These findings are consistent with economic theory, which suggests a mix of deficit and tax financing, with deficit financing playing a dominant role in large, short-term build-ups.

Australia has been under pressure to increase defence spending ever since 2010–11, when cuts reduced the defence share of GDP to just 1.6 percent, the lowest since 1938.

Earlier Kiel Institute research shows defence spending across the G7 advanced nations has been at a record low. The Trump administration has pushed allies to raise defence spending above 3 percent of GDP and has challenged their assumption that the US military would always be there as a backstop to their national security.

Last week, Germany’s incoming chancellor, Friedrich Merz of the Christian Democratic Union, won agreement from the Social Democrats and the Greens to exempt defence spending from the country’s strict limit on debt, enabling a defence build-up.

The European Union has also proposed bending its fiscal rules to allow member states to lift defence spending by up to 1.5 percent of GDP over a four-year period.

In contrast, Britain’s Keir Starmer is sticking to rules demanding a return to a balanced budget by 2029. The Labour prime minister said reaching a defence target of 3 percent of GDP would have to be funded by tax increases and spending cuts, starting with a cut to foreign aid from 0.5 percent of GDP to 0.3 percent.

In Australia, the fiscal strategy of the Labor government of Prime Minister Anthony Albanese requires that spending growth be limited until government debt is ‘on a downward trajectory’ and that most of any improvement in tax revenue should be used to lower debt.

The rule is not ironclad and allows for exceptions. But in practice, the increased defence outlays recommended in the Defence Strategic Review have been funded largely by cuts to existing defence programs until 2027–28, when Treasury predicts gross debt will start falling.

The Kiel Institute says Britain showed the folly of putting budget rules ahead of national security in the 1930s.

Despite massive external threats, it maintained a balanced budget and reduced its debt to GDP ratio until the late 1930s. It thus places concerns of debt sustainability and currency stability above the growing concerns of war.

Britain’s Treasury regularly rejected requests for increased defence spending during the 1930s and, the Kiel Institute argues, contributed to the British policy of appeasement. Britain’s defence spending was below 3 percent of GDP until 1937. In contrast, German military outlays had been more than 10 percent of GDP since 1935. While the British budget was balanced, Germany ran large deficits, funding its military with debt.

The defence spending increase being envisaged across the advanced world is much smaller than would be needed to prepare for war. During World War II, combatants devoted between 40 and 70 percent of their resources to the war effort. In Australia, spending rose to 40 percent of GDP in the early 1940s.

The Kiel Institute research, which excluded both world wars, identified 113 examples of military build-ups where spending rose rapidly over at least two years.

On average, military build-up raised defence spending by about 1.5 percent of GDP and occurred over a five-year period.

The central finding was that health and education spending grew at similar rates during periods of military build-up and when defence spending was level or declining. Total non-military spending rose more rapidly (about 0.75 percent of GDP a year) during periods of military build-up than when military outlays were level or falling.

During military build-ups, budget deficits grew by an annual average of almost 0.5 percent of GDP but declined on average in normal times. This shows the dependence on debt. Tax revenues rose by about 0.75 percent of GDP a year during military build-ups, compared with about 0.5 percent in normal times.

The paper said governments should rely on borrowing to fund increased defence, at least in the short term.

To manage the resulting debt burden in the medium term, governments could raise taxes, reduce tax avoidance and exemptions, and temporarily freeze the growth of consumptive government spending, such as social transfers and subsidies.

Australia can’t easily lift defence spending to a Trump-satisfying level

US President Donald Trump has called on NATO members to lift their defence spending from the current target of 2 percent of GDP to 5 percent.

‘They could all afford it,’ he said, warning that the United States would withdraw its guarantees of protection to Europe unless they paid up.

Trump has not opined on Australia’s defence spending, but, when he gets to consider AUKUS, he is unlikely to be satisfied. And there’s no easy way for Australia to lift its spending to a level that would satisfy him.

Australian defence spending was $53.3 billion in 2023–24, which was 2 percent of GDP. The Treasury expects it will reach 2.4 percent of GDP in 2027–28.

Russia, Ukraine, Israel and some Middle Eastern states are the only nations currently spending at least 5 percent of GDP on defence. (China’s data is too opaque to know.) In Europe, Poland comes closest, spending 4.7 percent of GDP this year. US defence spending is 3.4 percent of its GDP.

Trump’s 5 percent figure may be an ambit claim—a Financial Times report suggested he would settle for 3.5 percent. NATO will debate raising its target at its June summit.

For Australia, 3.5 percent of GDP would be $97 billion, about 75 percent more than was actually provided for defence in the budget.

Any increase in defence spending can be funded in three ways: increased taxation, reallocating money from other uses, or debt.

To get an additional $40 billion a year from taxation looks politically painful. To meet that target would require either a 12 percent increase in personal tax collections, a lift in the GST rate from 10 percent to 14 percent, or raising the company tax rate from 30 percent to 40 percent.

The federal government has in fact received an income boost of these dimensions, with total tax collections averaging 23.2 percent of GDP over the past five years, up from 21.6 percent in the previous five. However, this mostly flowed from the extraordinary profitability of resource companies, which will not be repeated.

It is more likely that company tax payments will fall short of treasury forecasts over the next few years as China’s appetite for iron ore and coal fades.

Australia is a low-taxing country—the US, Switzerland and Ireland are the only advanced nations taxing less—so an increase in taxation would not be ruinous to the economy.

It has been suggested Europe impose a defence tax to pay for military preparedness. Denmark scrapped a public holiday to help finance a higher defence budget. Without the immediate threat of Russia at war with a near neighbour, it would be hard to build the political support for such moves in Australia.

Reallocating existing spending looks just as difficult. Cutting social programs carries a high political cost, as the Abbott government learned with its ill-fated 2014–15 budget.

Most of the budget is locked in. There are 412 administered programs with payments governed by indexation. Many programs are driven by legislated entitlements, such as unemployment benefits, Medicare and the National Disability Insurance Scheme (NDIS).

The NDIS is an interesting example: it elbowed its way into a constrained budget on the false assumption costs would be held to $13 billion a year. Instead, it is at $46 billion this year—1.7 percent of GDP—and is forecast to rise to $93 billion, or 2.1 percent of GDP, by 2033–34.

Strong company tax revenue helped fund the NDIS without resorting to debt until this year. Deficits will increase as resource prices soften and the cost of the NDIS continues to rise three times faster than inflation.

Australia is a low-debt country. Its net debt of 29 percent of GDP compares with an advanced country average of 91 percent, so it could afford to borrow more. Poland has funded its expanded military with debt: its deficit is expected to reach a perilous 12.5 percent of GDP this year. There is pressure to ease the European Union’s debt rules to help lift defence spending.

There is an argument for borrowing to purchase assets, including defence equipment, the benefits of which will be derived long into the future. In extreme circumstances, debt forms part of the national security equation through the issue of war bonds.

But with the IMF warning that global government debt is becoming a financial powder keg, surpassing US$100 trillion this year, this may be the wrong time to seek the indulgence of financial markets.

The sorry conclusion is that there is no easy way to achieve the sort of increase in the defence budget that President Trump has in mind for US allies, including Australia.

Defence’s acquisition plan risks leaving ADF with stranded assets

In my previous article, I looked at the transition that’s underway in Australia’s electricity sector, driven by technological innovation. The electrical grid is moving from one based on a small number of large, inflexible generators to one consisting of a large number of small (and, in the case of rooftop solar, very small), responsive, disaggregated generators.

It’s a textbook case of disruptive innovation. The incumbents didn’t see it coming. Now they’ve been left with stranded assets and are scrambling to adjust. They can’t sell them because nobody wants to put their own money into a losing economic proposition. If it made economic sense to sink a lot of money into new power stations fired by fossil fuels such as gas, the private sector would be lining up to do it.

The traditional generators are taking a range of measure to save themselves. They are writing assets down, essentially accepting that they’re uneconomic. They are bringing closures of coal-fired power plants forward; AGL, for example, recently announced that it was moving the closure of the Yallourn brown coal plant in Victoria forward from 2032 to 2028. It’s a measure of how far the transition has come that nobody other than federal government ministers and some news commentators expressed any concern that this would lead to shortages and price increases. Industry and investors were uniformly confident that renewables would easily fill the gap.

Traditional generators are also entering the renewables market, either buying up renewable generators, building their own renewable arrays on greenfield sites, or seeking to re-role existing locations, for example into sites for big batteries. And they are quarantining these new ventures from their unviable traditional assets; AGL has split its business into old and new generation, presumably to prevent the former from dragging everything down with it.

Whether these measures will be successful remains to be seen. History is replete with incumbents overtaken by disruptive innovation (Kodak, for instance), but there are also examples of companies that have successfully reinvented themselves (Netflix is a recent one).

So, what does this mean for the Department of Defence? Will it too be left with expensive stranded assets? It certainly is facing disruptive innovations. These include the robotic and autonomous systems I mentioned in my last post, but there are many more, such as the proliferation of cheap guided weapons that challenge a business model based on expensive, crewed platforms such as surface ships and armoured vehicles. There’s also the question of what happens when the world moves away from fossil-fuel-driven transport and the global infrastructure to produce and distribute liquid fuels dries up. That’s not so far away, with many countries having already agreed to end the sale of new petrol and diesel cars by 2030.

There are, then, many technological innovations that could leave Defence with stranded assets. In the defence context, stranded can mean uneconomical, but it also means technologically obsolete, to the point that it’s just too risky to deploy the outmoded capability. As I noted in my previous post, day one of the next war is the worst time to have this realisation.

One way to avoid stranded assets is to not invest in them in the first place—that’s the tipping point the electricity sector has reached. But Defence is a long way from there. It continues to invest in traditional platforms that face the disruptive threats identified above, even ones that won’t enter service for a decade. Defence’s domestic shipbuilding program is spending around $1.7 billion in 2020-21; that’s likely to grow to $4 billion per year. The frigate and submarine programs between them are likely to spend around $20 billion before the first of each class enters service in 2031 and 2034, respectively.

In times of uncertainty, it’s wise not to be overly invested in one potential future. That means hedging by spreading risk. One way to do this is to invest in other futures, especially when there’s a high likelihood they will occur. In Defence’s case, that would mean investing in research and development on the kinds of disruptive technologies mentioned above. But it’s hard to argue that Defence is taking a balanced approach. Its two innovation funds, the Next Generation Technologies Fund and the Innovation Hub, are each budgeted at around $100 million per year over the next decade. Out of a total defence budget of more than $40 billion per year, that’s less than 0.5%, far short of what technologically innovative organisations invest in R&D.

There are likely to be other lines of R&D spending in Defence than just its two innovation funds, but it’s difficult to identify them from the outside. In response to ASPI’s inquiry on total R&D spending, Defence stated, ‘The Australian government has committed around $3 billion of capability investment in Defence innovation, science and technology over the next decade.’ That’s still well short of 1%.

Defence does have substantial investment in robotic and autonomous systems programmed into its future investment plan—but those large sums are still some time away and by then Defence will be deep into the acquisition of the next generation of large, expensive crewed systems with the sunk costs rapidly mounting.

So when we reach the tipping point of whatever disruptive technological innovation is coming down the track, it’s highly likely that Defence will have a long list of potentially stranded assets on its books. Because of the huge economic and cultural outlays on them, Defence will be unwilling to simply write them off. It’s likely that Defence will attempt to adapt them to reap some return on its investment. After all, one of the main selling points of crewed, multirole platforms is their versatility and adaptability.

We can already see that approach emerging with the development of concepts such as human–machine teaming in which those large, crewed platforms continue to play a key role as motherships or command-and-control nodes in distributed webs consisting of large numbers of small uncrewed systems. I’ll look at whether this is a viable way to ‘unstrand’ those traditional assets in my next post.