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Beyond the percentage: Australia’s defence debate needs a smarter metric

The global strategic landscape is undeniably shifting. Great power competition is reasserting itself, technological disruption is accelerating, and the familiar certainties of decades past are eroding. For a trading nation such as Australia, deeply connected to global flows and situated in a dynamic Indo-Pacific, understanding this new reality is paramount. Yet, in discussions about our preparedness, we too often default to a seemingly simple metric: defence spending as a percentage of GDP.

Such a singular figure is intuitively appealing and easily digestible for public discussion. Indeed, it can act as a powerful rallying cry to mobilise national effort and provide licence for the government to increase defence spending. But relying on this percentage is profoundly insufficient. It fundamentally misunderstands the complexities of modern defence and risks misdirecting precious resources. In a world where technological superiority and strategic agility increasingly trump sheer mass, a percentage point, while politically potent, tells us next to nothing about our actual capacity to deter aggression or defend our interests.

The latest figures from institutions including SIPRI underscore the global trend of increasing military expenditure. World military spending reached a staggering US$2.7 trillion in 2024, marking the steepest rise since the end of the Cold War and the 10th consecutive year of increases. This surge reflects heightened tensions and a widespread perception of increased insecurity. The corresponding rise in the ‘global military burden’—the share of global GDP allocated to military expenditure—provides a macro-level snapshot. However, using this figure as the primary benchmark for defence effort is deeply flawed for numerous reasons. It’s not just the amount, but the efficacy of that spending, that truly matters.

Firstly, the percentage of GDP is inherently distorted by the vast differences in national economies. A large, wealthy nation can spend a relatively small percentage of its GDP on defence and still command an enormous budget in absolute terms, capable of funding advanced research, large forces and global reach. A smaller economy, even dedicating a higher percentage of its GDP, may only achieve a fraction of that absolute spending, limiting the scale and sophistication of its capabilities. Australia, with a significant but not superpower-sized economy, faces this reality; comparing our GDP percentage directly with that of a much larger power overlooks the vast disparity in the actual funds available for investment.

Secondly, and crucially, the metric fails to account for significant differences in the cost of inputs between countries, particularly labour costs. In high-income nations such as Australia, personnel costs—salaries, training, healthcare and pensions—constitute a substantial portion of the defence budget. These costs are inherently higher per service member or civilian employee than in countries with lower prevailing wages. Consequently, two nations spending the same percentage of their GDP could have dramatically different amounts remaining for equipment acquisition, infrastructure, research or technology. A percentage point buys a different mix of capabilities depending on the wage environment.

Moreover, the character of modern conflict has fundamentally changed the strategic calculus. Today’s strategic advantage is increasingly derived from advanced technology, including cyber capabilities, artificial intelligence, sophisticated sensors and precision-guided munitions. These are expensive, high-impact capabilities. The Defence Digital Strategy and Roadmap 2024 acknowledges the need for ‘mission capable information and communication technology (ICT) able to fight and win in the digital age’. Investing in this digital backbone involves complex and costly programs that don’t fit neatly into traditional spending categories and whose effect isn’t measured by a simple GDP ratio.

The efficiency of defence spending is also completely opaque when considered only as a percentage of GDP. A nation spending a high percentage could be plagued by inefficient procurement, waste or poor strategic planning, resulting in minimal capability enhancement. What matters is the return on investment: the genuine, deployable capability generated per dollar. Without focusing on efficiency, increasing the percentage may just mean more money is misspent.

Different security threats and geographies also render a universal GDP percentage benchmark irrelevant. A nation facing primarily domestic issues has different needs than one caught in great-power competition. Geography, alliances and adversary capabilities are far more determinative than a simple economic ratio.

The metric also doesn’t differentiate effectively between various types of defence spending, including personnel, operations, procurement, and research and development. A nation focused on research and development might show a lower percentage of procurement spending today but be building significant future capability; another maintaining high operational tempo might show a higher percentage on operations. Both affect the GDP percentage differently but reflect distinct strategic priorities and timelines.

As Australia navigates a complex Indo-Pacific, the key is not a symbolic GDP percentage, but building the most effective, integrated force possible with available resources. This means rigorous strategic prioritisation: investing in capabilities directly relevant to deterring coercion in our region, including long-range strike, cyber resilience, northern infrastructure; and interoperability with partners. It demands relentless efficiency in procurement, ensuring funds translate rapidly into deployed capability. It requires sustained investment in the skilled workforce needed for complex systems, acknowledging that higher labour costs affect our spending power differently.

The real measure of a nation’s defence effort lies not in a simple economic ratio; it lies  in the strategic coherence, efficiency and tangible capability delivered by its investments. For Australia, moving beyond the GDP percentage trap and focusing on smart, targeted and effective spending is essential for safeguarding our security.

Australia’s defence budget before and after the 2009 white paper

Thanks to Michael Pezzullo’s Strategist article last month, we now know that Australia’s 2009 defence white paper foresaw our risky future and planned for it.

The white paper’s outlook for Chinese force development and the associated geopolitical risks has largely come to pass. It anticipated the world we now inhabit.

To face the changes, it envisaged Australian force expansion in five-yearly cycles that would extend into the 2030s and be informed by regular reappraisals of strategic risk. Had we stuck with the white paper’s plan, Pezzullo writes, 2025–26 defence spending would be $85 billion to $90 billion instead of the actual $59 billion. We would have an easily adjustable force structure and a level of expenditure that could pay for it.

Instead, this landmark policy was set aside when Kevin Rudd lost the prime ministership in 2010.

I can add to the story. In the years that followed the white paper, Australia and the United States thought diplomatic approaches could handle rising China. The US still wanted us to implement the 2009 white paper, but it was focused on making progress with its Strategic and Economic Dialogue with China. This occurred during my term as ambassador to the United States from 2010 to 2016.

Before we get to that, let’s go back to the 1987 defence white paper, which I delivered, which Paul Dibb wrote and which, as Pezzullo writes in another article, ‘established the self-reliant defence of Australia as the organising principle of our defence strategy.’

The 1987 and 2009 white papers both argued for a force structure that could achieve a self-reliant capability with our own resources in our area of direct military interest, covering the approaches to the continent. The explicit objective in 1987 was to be able to handle threats to Australia without imposing on the US greater burdens than the provision of equipment and intelligence, not an obligation to intervene. We wanted to be an easy ally.

The task in 1987 was much easier and far less urgent than what we must do now. China in defence terms was barely considered. In fact, we eschewed identifying any potential opponents, because the focus on the modest capabilities of our neighbours did not require naming a country.

By 2009 an opponent was identifiable and the outlook was much more severe. The force requirements for meeting it in a regional strategy were still achievable—if there was enough money and focus.

In 1987, we didn’t set resources as a fraction of GDP, though, if we had, it would have been a continuation the effort we’d maintained since the Vietnam War, 2.5 to 3.0 percent of GDP. Defence spending in 1987 was around 10 percent of the federal budget.

Resources looked adequate. For the navy, for example, there was some confidence we could buy eight submarines of what became the Collins class, replacing the six Oberon-class boats we had. When the Collins program was approved, it was for six submarines, but the submission to Cabinet noted if that number were achieved another two could be sought.

The surface fleet was more confidently projected at 17 ships, up from the 12 we had at the time. These were to be three destroyers (which were already in service), six first-tier frigates (four in service, one building and one planned) and eight new second-tier frigates of what became the Anzac class.

It was estimated that a fleet of 20 ships would be needed to cover the entrances through the archipelago north of Australia that led to our continental approaches. But it was hoped New Zealand would come up with four ships. (It eventually bought two Anzacs.) As the next decade-and-a-half proceeded, the two extra submarines were not built. The destroyers and first-tier frigates eventually paid off and were replaced with not nine ships, as expected, but three, the present Hobart-class destroyers. The surface fleet slowly declined.

The inflexion point was the 1994 white paper. We took a peace dividend from the end of the Cold War. This was despite our rejection in 1987 of the Cold War as the basis of spending. We argued in 1987 that the force structure we needed was based on regional, not global, strategic circumstances.

Moreover, the 1994 white paper changed the guidance for spending to a fraction of GDP, which it set at about 2 percent. With that much money the 1987 objective of controlling the approaches to the continent was still doable, but by 2009 the outlook demanded much more.

When the 2009 white paper was published, we were in fact below 2 percent of GDP, and the defence share of the budget was below the 10 percent we had had in 1987. Since 2009, the 1994 target has been reached only in the past two budgets. If we had reached Pezzullo’s figure of $85 billion to $90 billion for 2025–26, we would be around 3 percent.

When I was ambassador to Washington, the US constantly pressed me for Defence spending to reach 2 percent of GDP. US officials noted both the contents of the white paper and our reluctance to spend.

I used to point to an unusual position shared by the two countries’ national governments. Both had available about 25 percent of GDP to spend. With that, the US government did defence, social security, Medicare and Medicaid. Beyond those items, the federal government used funds for leveraging the states, local government and the private sector. There were no other programs on which the federal government was the major or exclusive provider.

But our 25 percent, I pointed out, covered pensions and defence and also universal health care, the universities, the 35 percent of students in private schools, a substantial subsidy for state schools and a range of social benefits (for example far more complete unemployment benefits than the US government provides). Today we could add the National Disability Insurance Scheme to the list.

A US defence secretary meeting Treasury and Congress for the upcoming year’s funds sees smiling faces. Here a defence minister sees no smiling faces.

It’s worth comparing US and Australian national-government spending of about 25 percent of GDP with the figures for European countries, including Britain, Germany, France and the Scandinavian countries, which all spend around 45 percent or more. The truth is we were nowhere near resourcing the 2009 plan.

Then there was the issue of focus. The 2009 white paper sought to prioritise our area of direct military interest in a way that no major defence policy statement had since the 1980s.

Our military had been and was heavily occupied—dramatically with East Timorese independence and then with Afghanistan and the Middle East. Our force structure needed only small adjustments for meeting these tasks. We performed as usual to very high standards and impressed our allies.

I remember a meeting in the Oval Office between prime minister Tony Abbott and president Barack Obama. Vice president Joe Biden and almost all Obama’s senior state, defence, trade and intelligence officials were present. They were ready to take us to task on fighting global warming, where they were not happy with our efforts.

But Obama began by asking Abbott for more general views on affairs.

‘Well,’ Abbott said, ‘we know that most foreign leaders who come to see you are unhappy about some aspect of US policy. We have no problems. Or there’s something they want. But we are happy with everything we get from you.’

‘But I want to tell you we think you are about to get into a lot of trouble in the Middle East [fighting ISIS in Iraq], and when you do we will be with you in numbers.’

The atmosphere deflated. How could you pressure a fellow who had said that?

I heard that, for months afterwards, whenever Obama was frustrated by allies, he’d say, ‘We need more Tony Abbotts.’

The prospective military tasks were expeditionary missions. In the first half of the 2010s, these were our focus, despite the clarity of outlook in the 2009 white paper. Except in promoting the solidity of the alliance, they had nothing to do with Australia being able to prevail in its own area of military interest. And the operations were readily achievable within the approximately 1.6 percent of GDP we were spending at the time on defence.

By 2009, China was emerging as the pacing power for the US in the Western Pacific. It was the main factor in Obama’s rebalancing of US forces to the Indo-Pacific, announced in 2011. This was the zone that Australia’s 2009 white paper addressed. China’s rise and the US pivot to Asia was the context in which the US pressured us to spend 2 percent of GDP on defence.

The Chinese forcefully objected to the 2009 white paper. Rudd rejected the complaints. There were domestic objections, too, some based on the importance of achieving satisfactory diplomatic dealings with China.

Also, with such a small fiscal pie to carve up, many people were concerned with the other pressures on the budget. Such pressures tend to be immediately politically salient. Except in a confrontation or when war threatens, defence tends not to be.

Later, the Obama administration was focussed on a process it had put in place in 2009, the Strategic and Economic Dialogue with China. To some extent this effort to deal with the China problem diplomatically took the administration’s attention away from pressuring us to implement the 2009 white paper.

Under the Sino-US dialogue, an annual meeting took place alternately in Beijing and Washington. It covered security, including the main points at issue between the two powers, such as military issues around Taiwan and US deployments in waters close to China. The nuclear ambition of North Korea was also a preponderant issue.

This dialogue with China, I reported back to the Australian government, was probably the most important diplomatic effort that engaged the US.

The 2009 white paper is worth reading again. It provided for very disciplined force-structure development on a timeline that would have met what Australia now confronts. With the reliability of the Trump administration in doubt, self-reliance in the framework of the alliance has become critical. We really do need to be able to deter hostile developments in our area of direct military interest.

We are headed towards spending 2.3 percent of GDP on defence, in large part to pay for nuclear submarines. I believe as time goes by we will move to 3 percent of GDP.

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.