The Iran War, more than four years of Russia’s war on Ukraine and tensions in the Indo-Pacific have prompted most democratic nations to reset defence strategies and budgets. The strategic rationale is just as relevant for Australia.
Australia’s upcoming National Defence Strategy, set for release next month, will reportedly include a significant increase in defence spending. While some will argue an increase is due to demands from the US administration, it’s more likely that Canberra deems it necessary for a world that has shifted from episodic strategic instability to a more permanent condition of risk, one that directly affects Australian security.
What we are now likely to see, and should see, is a prompt rise in Australia’s defence spending above the current target of 2 percent of GDP.
Keir Giles’s analysis in Foreign Policy discussed the challenges facing Britain’s armed forces, which the Iran War has exposed. Australia finds itself in a similar quandary. Unpreparedness has followed decades of stop-start spending on the Australian Defence Force and particularly on its ability to defeat emerging threats.
Australia first declared an aspirational target of reaching 2 percent of GDP in the 2013 Defence White Paper and embedded it in the 2016 White Paper as a commitment. But it did so in a world that, despite some worries, looked mostly structurally stable. The central operational priority then was the campaign against Islamic State, not the prospect of concurrent major‑power conflicts and sustained grey‑zone pressure.
A decade on, that assumption has collapsed. Australia faces overlapping wars in Europe and the Middle East, regular missile and drone use against state targets, and an Indo‑Pacific that is more militarised and contested than at any time since 1945. Aggression in the South China Sea, sustained pressure on Taiwan, and a growing suite of coercive economic and cyber tools have turned competition into a grinding, long‑term stress test of national power rather than a temporary spike. Holding to a 2 percent target anchored in a very different era would be strategically unsound.
The United States has urged allies to do more. Last year at the Shangri‑La Dialogue and other meetings, Washington made clear its expectation that allies, including Australia, should lift spending towards 3.5 percent of GDP on hard military capability. That message was reinforced by the US National Defense Strategy released in January.
If Canberra’s main motivation was to placate Washington, it could have moved quickly last year. Instead, the Albanese government concentrated on explaining the mutual benefits of AUKUS, emphasising the contribution of joint facilities and Australia’s submarine, strike and enabling capabilities to shared deterrence architecture.
The political and diplomatic payoff was evident when Prime Minister Anthony Albanese’s October 2025 White House meeting with President Donald Trump was reported as one of the administration’s warmest bilateral encounters to date. Good strategy turned out to be good politics: by grounding spending in Australian assessments of risk and opportunity, Canberra both reassured Washington and preserved its own strategic agency.
The more telling comparison for Australia is the behaviour of other advanced democracies confronted with the same threat set. At the 2025 NATO summit, allies agreed a new spending minimum of 5 percent of GDP by 2035, with 3.5 percent devoted to core military capability and at least 1.5 percent to defence‑related infrastructure, resilience and industrial capacity. This was not a symbolic tweak to the old 2 percent benchmark; it was a recognition that the cost of credible deterrence and sustained war‑fighting was far higher than assumed even a decade earlier.
Several frontline states are already treating 5 percent as a floor, not a ceiling. Estonia’s leadership has signalled that Tallinn is spending around 5.2 percent of GDP on direct military capability and, once broader resilience investments are included under NATO’s formula, its defence-related outlays exceed 8 percent of GDP. Poland has moved towards 5 percent on hard capability. None of these choices can be explained by alliance politics alone; they are driven by proximity to Russian forces, live experience of hybrid warfare, a sober reading of a long war and the growing power of the Sino-Russian ‘no limits’ partnership.
In the Indo‑Pacific, Japan offers perhaps the clearest analogue for Australia. Tokyo has embarked on a multi‑year plan to massively increase defence spending to around 2 percent of GDP, including a 43-trillion-yen capability build‑up centred on missiles, air and maritime denial and industrial strengthening. South Korea, the Philippines and others are following with more modest but still meaningful increases. These trends suggest that Indo‑Pacific democracies are converging on the conclusion that resilience and deterrence in an age of major‑power rivalry require a larger, more sustained share of national output.
Australia’s adversaries have been operating at these higher levels for years. While Beijing’s official defence budget remains opaque, most independent assessments suggest that China’s true military spending is considerably higher than published figures and now constitutes the largest peacetime build‑up in modern history. Russia, meanwhile, has pushed its wartime defence outlays to levels that reshape its entire economy, prioritising munitions, armoured vehicles, and air defence at the expense of civilian investment.
China’s and Russia’s no-limits partnership complicates allied planning by increasing the risk of simultaneous crises in Europe and the Indo‑Pacific. That possibility has been underscored by the US-Israeli campaign against Iran, offering a demonstration of what high‑intensity operations actually consume: large stocks of precision munitions; resilient command and control; multi‑layered air and missile defence; and a defence industrial base able to replenish expended weapons at speed.
For countries such as Australia, with limited stocks and a slender industrial base, the lesson is that deterrence is about both buying major equipment, such as ships and aircraft, and funding the munitions, infrastructure, workforce and industry that make them relevant in a protracted crisis.
ASPI’s analysis of the 2025 Defence budget estimated Australia’s current defence outlays at around 2.05 percent of GDP, and the government has signalled a rise towards about 2.33 percent by the early 2030s. In 2016, 2 percent in a relatively stable environment may have been justifiable. In 2026, with multiple wars underway and the Indo‑Pacific under sustained pressure, clinging to that setting would be less so.
In this context, John Maynard Keynes’s attributed line ‘When the facts change, I change my mind. What do you do, sir?’ is more than a clever quote. It captures the core policy test facing Canberra: admitting that an era of chronic insecurity demands a larger allocation of national resources to defence, even when that competes with other worthy priorities.
The coming National Defence Strategy should meet that test. It should align ends to means for the world as it is, and the Defence budget should prioritise real dollars rather than commitments in the forward estimates. That would be the clearest signal that Canberra has, in Keynes’s spirit, changed its mind in response to changed facts.