Tag Archive for: Military spending

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.

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.

Some US allies contribute, some loaf. Here’s a numerical assessment

Which US allies have paid their bills, as President Donald Trump would see things? Which, having given the United States little support in return for its security guarantee, now risk losing it?

The short answer, derived from our numerical methodology, is that only nine countries in the US’s main European and Indo-Pacific alliance networks are genuine net contributors to their partnerships with Washington. Australia, Britain and the Netherlands rank highest. Poland, Norway and France are also pulling their weight.

Sixteen countries in those alliances, though not quite free-riders, can fairly be called cheap-riders, according to our assessment, which measures allies’ commitments of blood and treasure. Another 12 may be classified as blatant cheap-riders, notably including Japan, which has the largest economy among the US’s friends.

Our assessment does not focus on Washington’s Latin American and Caribbean allies, but, if it did, they’d all be classed as cheap-riders or blatant cheap-riders.

With Trump taking the unprecedented step of linking protection with payment, our analysis aims to clarify allies’ risks of US abandonment. For the NATO and Indo-Pacific allies, this is no mere academic exercise. European NATO members face an aggressive Russia that has threatened to expand its war against Ukraine. And US allies in the Indo-Pacific confront an increasingly assertive and powerful Beijing, alongside growing nuclear and missile threats from Pyongyang.

Contrary to expectations, we found that proximity to these threats did not necessarily correlate with higher contribution to the US alliance, especially in Europe.

Within alliances that are asymmetric, as any with the US must be, weaker partners cannot fully compensate the stronger partner for protection. They’re not rich enough. But they can contribute (or, in Trump’s parlance, ‘pay’) through such actions as providing international diplomatic support, forward bases or niche military capabilities.

Trump generally attaches greater weight to more readily quantifiable measures, such as defence spending as a percentage of GDP. So we follow him, answering the bottom-line question ‘Who’s paid?’ by asking five component questions with readily quantifiable insights. We aggregate the results into an overall payment score.

First, has the ally met its defence spending targets over the lifetime of the alliance? Washington expects allies to spend at least 2 percent of GDP on defence (though Trump has floated higher standards). By doing so, allies develop properly funded independent military capabilities, reducing the US’s burden of guaranteeing their security. Higher spending also makes them more useful potential partners in US-led coalitions operating outside the alliance areas. Consistently meeting the 2 percent target, amid constant pressures on the public purse, also demonstrates a domestic political resolve that enhances the alliance’s deterrent potential. So we assess lifetime spending by comparing each ally’s total defence expenditure and GDP during its time in alliance with the US. Net contributors meet the 2 percent threshold, whereas net cheap-riders fall short.

Second, has the ally met its defence spending targets over the past decade? Military capabilities, accrued over time, atrophy without sufficient ongoing funding. Washington, for example, built a world-class navy in the American Civil War—which, after years of underinvestment, amounted to just ‘an alphabet of floating washtubs’. Correspondingly, recent defence spending provides insight into which allies have maintained the military capability and preparedness that Washington values. And, again, it shows political resolve. We assess recent spending by considering allies’ defence expenditures and GDPs since 2015 (when combat operations in the last US-led ground-war ended and when Trump’s full engagement in politics began). Net contributors meet the 2 percent threshold, whereas those falling short have either been persistent cheap-riders or, having formerly paid their dues, have now decided to take it easy.

Third, how much US weaponry has the ally purchased? Allied acquisitions of US military equipment, such as aircraft, give Washington several benefits: revenue from and longer production runs of existing systems (for example, F-16s); more work from their maintenance programs; savings from cooperative development of new systems (such as the F-35); and improved US and allied fighting strength thanks to the ease of operating common equipment. We assess weapons purchases by considering allies’ relative shares of US arms transfers and global GDP during their alliance tenure. Scores under 1 indicate comparatively limited purchases, whereas those exceeding 1 denote outsized purchases, and those above 2 show purchases that greatly favour US suppliers.

Fourth, has the ally supported US-led combat coalitions? Allied participation in military operations benefits Washington by providing international legitimation for the action and reducing the burden on the US. Alliances, however, are not wellsprings of guaranteed support: as self-interested actors, allies can decline to render aid or even defect to opposing blocs. Correspondingly, joining US-led coalitions builds good faith with Washington (and implicitly serves as down payment on reciprocal assistance). We assess participation by considering five ground-war coalitions (those for the wars in Korea, Vietnam, Persian Gulf, Afghanistan and Iraq) and five primarily air-war coalitions (in the Iraqi No-Fly Zones and campaigns in Bosnia, Kosovo and Libya and against ISIS). We allocate points according to the burden undertaken: for ground-wars, 8 points for providing frontline combat forces, 4 for supporting units, and 2 for financial assistance. For air wars (which involve less cost and risk), point values are halved. We count allies as consistently supportive if their points exceed 17 points and as reliable combat partners if they exceed 30.

Fifth, has the ally paid a blood price? Allied personnel losses, incurred while furthering Washington’s security interests, represent a shared sacrifice, one that demonstrates the highest form of loyalty (a value cherished by Trump) and implicitly serve as further down payment on reciprocal assistance. Since US-led air wars have featured minimal casualties, we assess losses by counting the number of US-led ground wars after World War II in which allies have suffered service deaths.

We generate overall payment scores by aggregating allies’ performances across all five measures. Each measure receives a 20 percent weighting, and we grant maximum points for:

—Meeting the 2 percent defence expenditure target during the period of alliance;

—Meeting it in the past 10 years;

—Greatly favouring the US in weapons purchases;

—Providing frontline combat forces for each US-led combat coalition; and

—Incurring personnel losses in each US-led coalition ground war.

Partial points are awarded relative to these maximums. Scores below 50 indicate blatant cheap-riding. Those exceeding 70 denote genuine net contributors—for example, 40 for meeting both spending targets, 20 for joining and suffering losses in more US-led coalitions than not, and 10 for outsized weapons purchases.

So, who’s paid?

The US alliance network contains few genuine net contributors, with only nine of 38 NATO and Indo-Pacific allies exceeding 70 points. Moreover, three net contributors deserve qualification: Greece and Turkey generally prioritise each other as a threat rather than NATO’s common adversary, Russia, and South Korea owes the US for its ongoing protection along with its defence during the Korean War.

The Indo-Pacific allies contribute relatively more than their NATO counterparts, averaging higher overall and component scores (apart from participation in operations, among which were three NATO-centric air-war coalitions). Compared with NATO, the Indo-Pacific alliance network also includes a greater percentage of genuine net contributors (28 percent versus 22 percent) and a much lower percentage of blatant cheap-riders (14 percent versus 35 percent).

Notable cheap-riders include Germany and Japan, because they have large economies and therefore great potential military might.

It’s also remarkable that cheap-riding is common in the countries of NATO’s Eastern European expansion. Apart from Poland, Romania and the Baltics, all are blatant cheap-riders, even though their membership has brought added burdens and risks to the alliance, including the US.

Australia is well insulated against Trump’s potential revisions to US alliance policy, which largely (and, in light of our findings, rightly) concentrate on redressing NATO’s relative underpayment. Canberra is immune to similar charges: no other ally has given Washington comparatively more blood and treasure than Australia, and the Albanese government has already begun reversing recent dips in defence spending, pledging to spend 2.3 percent of GDP by 2034. Moreover, Australia’s ‘indispensable’ strategic partnerships with other US allies remain relatively safe: Britain ranks second in terms of its alliance contributions (which bodes well for AUKUS solvency), and Japan, though a definite laggard, has been steadily boosting what Trump would see as its payments. It’s greatly lifting defence spending, increasing host-nation financial support and reinterpreting its constitution to permit collective military action.

How, or whether, Canberra’s unrivalled contributions will affect its bargaining position with Washington remains to be seen and needs supplementing with qualitive analyses (as given here for the first Trump presidency).

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.