Cash? No cash here, says ASPI ‘Cost of Defence’ report

The global and regional strategic architecture of the post–Cold War era – dominated in large part by an unquestioned US primacy, an open trading order, and a rules-based framework for resolving disputes – looked durable, if imperfect. The central question that first edition asked was, by today’s standards, almost quaint: was Australia spending enough to maintain a broadly capable force for peacetime tasks, peacekeeping commitments and the Global War on Terror?

Fast forward a quarter of a century and the 2026 edition of the same annual report asks questions that are considerably harder in circumstances that would have been barely imaginable to its authors 25 years ago.

The world in which this edition is published is one the 2026 National Defence Strategy described as characterised by “fracture, rivalry and disorder” and the fastest military development in the Indo-Pacific since World War II, driven in large part by the rise of China and its now not-so-secret ambitions for the Indo-Pacific and global order.

China’s reported defence spending reached US$314 billion in 2025, more than three times than that of Japan’s, and approximately 13 times of Australia’s spending, and growing at more than 7 per cent year on year. Building on this spending and its implications for Beijing’s conventional forces, China’s strategic nuclear arsenal is expected to exceed 1,000 nuclear warheads by 2030.

Meanwhile, flashpoints in the Taiwan Strait, the South China Sea and the Korean Peninsula present risks of miscalculation that could escalate to conflict. Europe is in a sustained arms-building cycle triggered by Russia’s invasion of Ukraine in 2022. And as Treasurer Jim Chalmers delivered the 2026–27 federal budget on 12 May, a US–Israeli bombing campaign in Iran was under way, oil prices were spiking, inflation was rising, and Treasury was quietly modelling scenarios in which the defence budget lost $10 billion in purchasing power over four years.

It was against this domestic and international backdrop and in this geopolitical, economic and fiscal environment simultaneously that the Albanese government delivered what it described as a historic defence commitment. Indeed, we have been frequently reminded time and time again that we now live in the “most dangerous time since the end of the Second World War”, a position that has been met with unusual bipartisan agreement in the increasingly polarised world of the Canberra bubble.

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Accordingly, Treasurer Chalmers announced an additional $53 billion as part of the 2026 National Defence Strategy (NDS) and supporting Integrated Investment Program (IIP) for defence over the coming decade. Defence Minister Richard Marles extracted $6.8 billion in new money from cabinet’s expenditure review committee, a feat achieved at a budget that delivered only $500 million in net new spending across the entire federal government.

The Australian Strategic Policy Institute’s annual assessment exists precisely to ask the question those headlines do not: does the money in the budget actually translate into the capability the strategy demands? The answer, in 2026, is a qualified no, or at best, not yet, and certainly not fast enough.

Time waits for no man, nor does the Indo-Pacific

Before examining what the budget does and does not fund, it is worth understanding the strategic context against which the spending must be judged, because that context has shifted materially since even the 2024 National Defence Strategy was published.

Australia’s defence spending grew from US$33 billion to US$37 billion in constant dollar terms between 2020 and 2024, a real increase of approximately 12 per cent. That sounds significant until placed beside its neighbours. Over the same five years, China’s reported defence spending rose approximately 43 per cent in real terms. India’s defence spending grew by 24 per cent, Japan’s by 36 per cent, and South Korea’s by 23 per cent.

The regional median growth rate was approximately 28 per cent. Australia’s growth rate sits below all of those, below the regional median and below every major Indo-Pacific peer. The consequence is a relative decline in Australia’s standing. Australia’s share of Indo-Pacific defence spending fell from approximately 5.3 per cent in 2020 to approximately 4.4 per cent in 2024.

A ranking that was inside the region’s top five at the start of the decade now sits outside it. The IIP’s published decade trajectory closes part of that gap, but on present assumptions does not restore Australia’s 2020 relative position by 2035.

Meanwhile, the global response to this strategic environment has accelerated sharply, with the Indo-Pacific leading the charge, Japan has lifted defence spending to approximately 1.8 per cent of gross domestic product (GDP) in 2025 and is committed to 2.0 per cent by 2027. South Korea spent US$53 billion in 2025, approximately 2.7 per cent of GDP with major investment in indigenous strike, integrated air and missile defence and shipbuilding. Meanwhile, India, the region’s other rising giant, spent US$86 billion in 2025, placing it inside the global top five.

Looking closer to home, across south-east Asia, defence spending grew approximately 35 per cent in real terms across the decade to 2025. The region, in aggregate, is responding to the strategic environment faster and at greater scale than Australia.

It is against this backdrop that ASPI’s blunt judgement must be understood: “The CIPs that this report assesses are, against the regional pace, the minimum credible response.”

A history of big promises, little delivery

The 2026 edition arrived, as ASPI executive director Justin Bassi noted in the foreword, at a “different strategic environment from any of its predecessors”. But the structural problem the report documents is not new. It is, in significant respects, the same problem that has appeared in every edition since 2001: the gap between what governments commit to on paper and what they appropriate in practice.

The 25-year arc of Australian defence budgeting tells a story in four phases. The post–September 11 expansion locked in real annual growth of 3 per cent, sustained combat deployments to Iraq and Afghanistan, and produced the Super Hornet, the Abrams tank and the initial Wedgetail acquisitions. Then the 2009 Defence white paper diagnosed the emerging China challenge and committed to nuclear-powered submarines, air warfare destroyers and the Joint Strike Fighter. The global financial crisis collapsed the funding that its own diagnosis demanded.

The decade that followed, roughly 2012 to 2020 was one of systematic policy-funding decoupling. Defence spending fell to a nadir below 1.6 per cent of GDP in 2013. The capability edge was sustained on paper through projects that were quietly delayed, descoped or reprofiled. The 2 per cent target, set aspirationally in 2013 and committed firmly in 2016, was met in 2021 largely because the GDP denominator shrank during the pandemic.

The 2020 Defence Strategic Update represented an honest reckoning: it declared that strategic warning time was gone and forecast accelerated investment in long-range strike, cyber, space and guided weapons.

The 2023 Defence Strategic Review and the 2024 National Defence Strategy deepened the shift, introducing the Strategy of Denial, establishing 12 Capability Investment Priorities (CIPs) and locking in a biennial review cycle. AUKUS was announced. The guided weapons and explosive ordnance enterprise moved from concept to contracts.

The 2026 NDS is the next inflection point. For the first time, the government has set out a funding profile targeting 3.0 per cent of GDP on the NATO measure by 2033–34. The total decade investment commitment of $887 billion, including approximately $425 billion in capability acquisition, compares to roughly $330 billion in the 2024 NDS and approximately $270 billion when the 2020 Defence Strategic Update was released.

The arc, as ASPI characterised it, is one of “gradual comprehension and inconsistency followed by belated action”. Australia recognised its strategic environment was changing in 2009 but failed to fund the response. By 2016 it had acknowledged the China threat but kept the Defence posture largely on course. By 2020 it admitted warning time was gone. By 2024 it adopted a new strategy of deterrence. By 2026 it has projected funding at a scale designed to make that strategy real. The cumulative cost of those delays, in ASPI’s calculation, is approximately $285 billion in lost capability investment since the 1990s.

That historical record is the essential lens through which this budget must be read. What is presented as a historic defence commitment is, in significant measure, a catch-up program. The question is whether the catch-up will be any more faithfully delivered than the commitments that preceded it.

A budget that falls back as it steps forward

The 2026–27 Defence budget totals approximately $66.4 billion or $181.9 million every single day. It is the opening figure of the ASPI report and is deployed deliberately: the headline billions that accompany annual budget announcements can numb the senses. That daily figure does not.

But the headline figure represents a nominal decrease of roughly $752 million on the 2025–26 estimated actuals, and the whole-of-government defence spend in Budget Paper No. 1 falls by $799 million or 1.5 per cent before backloaded growth begins from 2027–28. Understanding why those figures move in opposite directions to the $53 billion announcement requires reading the fine print that ASPI, characteristically, refuses to let pass.

The explanation lies in the mechanics of how the headline figure is constructed. Defence Minister Marles extracted $6.8 billion in new money from cabinet’s expenditure review committee, a significant achievement at a budget where most of his ministerial colleagues were offered crumbs or faced cuts. But by the time ASPI traced that figure through the budget papers, most of it has disappeared before reaching the capital program.

The single largest factor is foreign exchange. The Australian dollar’s strengthening from US65 cents to US72 cents over the past year mechanically reduces the Australian dollar cost of US-sourced equipment without changing a single delivery schedule or capability outcome. Budget Paper No. 1 attributed $883.8 million of the 2026–27 decrease and $2.2 billion over the forward estimates to this exchange-rate adjustment alone. A further $864 million is transferred from the Defence budget to the Australian Submarine Corporation.

Defence has also been directed to reduce its spending on external consultants and contractors by $3 billion over the forward estimates, with a further $1.4 billion cut in 2029–30. The net result, as ASPI calculated, is that the $6.8 billion agreed as a budget measure is “whittled back to just $845 million of genuine appropriation”. Of every dollar in the decade-long $53 billion announcement, approximately four cents is actually appropriated in this budget year.

The remaining 96 cents sits in forward estimates promises, decade out-year profiles, contingency reserve allocations, and what the government termed “alternative financing” arrangements that ASPI assessed as premature to count as firm defence funding.

The shape of Defence’s three major cost categories tells its own story. Workforce spending is up $815 million to $18.39 billion, the only major line to grow year on year. Acquisition of new capability is down $724 million to $21 billion. Sustainment is down $283 million to $18.52 billion. The government is paying for the people in advance of the platforms they will operate, building the future force while accepting reduced readiness in the present.

The alternate financing question

The government’s $53 billion decade announcement includes $5 billion over the next four years and $15 billion over the decade in what it called “alternative financing”, capital to be raised through public–private partnerships or investment by government-operated funds in commercial-return vehicles that remain off-budget.

The often cited example is the $550 million Headquarters Joint Operations Command at Bungendore in NSW, to be built by the private sector and managed by a firm connected to the industry superannuation funds. Australia’s $4.5 trillion superannuation sector is an undeniably attractive pool of capital for government investment priorities, from transport infrastructure to northern development.

Well-structured public–private partnerships can deliver public policy objectives at lower cost.

But ASPI’s judgement is firm: “It is premature, before negotiations have commenced, to count amounts that might be raised as a component of defence funding.” The rate of return that private financiers will demand, and the terms and timelines for repayment, remain unknown. Until successive budgets demonstrate, project by project, that these mechanisms deliver capability at comparable cost to direct appropriation, the alternative financing line remains a policy intention rather than a funded program.

The proceeds of Defence real estate divestments, estimated at roughly $1.8 billion net after remediation and heritage costs, carry the same caveat. “The quantum of alternative financing,” ASPI concluded, “is a heroic ask.”

Funny numbers and the NATO ‘standard’

Defence spending peaked at 2.13 per cent of GDP on the portfolio appropriation measure in 2025–26 before falling to 2.02 per cent in 2026–27. The decade preceding the 2026 NDS was spent hovering inside a narrow band either side of 2.0 per cent. The 2026–27 budget does not break that pattern.

The government this year shifted to using the NATO model for measuring Australia’s defence spending, stating that Australia is currently spending approximately 2.8 per cent on that broader measure and projecting a reach of 3.0 per cent by 2033–34. ASPI judged the shift to the NATO model to be sensible for international comparison.

It also finds that Australia’s 1.5 per cent broader resilience component is closer to being met than the public debate typically acknowledges, and that Australia decisively exceeds NATO’s Wales Pledge requiring at least 20 per cent of annual defence expenditure to be directed to major new equipment. The trajectory is, in those respects, in the right direction.

The core defence floor is a different matter. NATO adopted a new 3.5 per cent core military capability standard in 2025, to be reached by 2035. On the government’s own projections, the gap between Australia’s 3.0 per cent trajectory and the new NATO floor “remains real”. The defensible framing, on ASPI’s analysis, is that the gap is narrowing but not yet closing.

The historical parallel is instructive, and sobering. The 2009 Defence White Paper committed to sustained real growth in defence spending. The global financial crisis and subsequent budget repair produced a cumulative funding shortfall of approximately $48 billion against that commitment. The 2026 budget has now appropriated enough in actuals to reduce that 2009 shortfall to approximately $19.1 billion – a meaningful but only partial recovery.

The government’s claim that its 2026 commitment represents the greatest peacetime defence funding increase in Australian history is, in ASPI’s assessment, “unproven and overstated”. A more defensible claim is that it is one of the largest contemporary peacetime increases and one of the most consequential attempts to reverse a long period of relative underfunding.

That distinction matters in the policy debate.

The approvals gap

The most structurally revealing finding in ASPI’s analysis is what it called the “approval gap”. Across all 12 CIPs, most of the total committed investment typically 75–80 per cent by dollar value, remains formally unapproved, awaiting second-pass business case approval, further government consideration, or completion of design work before a contract can be placed.

That is not, in itself, alarming. A 10-year investment plan necessarily includes large volumes of future decisions. What is alarming is that the approved share has held inside a remarkably narrow band of 30–33 per cent across successive reporting cycles, even as the total IIP denominator has grown substantially. The 2026–27 budget converts 33–35 per cent of total acquisition investment into approved and funded delivery, in line with, not above, the historical average.

ASPI raised a pointed possibility: the approved share may not be a strategic variable at all. It may be “an institutional throughput limit”, the maximum number of projects the Defence organisation and the government can move through first pass, second pass, contract award, workforce mobilisation and industry engagement in any given year. If that limit sits within the institution rather than on the page of the IIP, then announcing more projects and committing more money in the budget will not materially shift what is actually approved and contracted.

The most acute example is integrated air and missile defence (IAMD), designated CIP 7, and described by ASPI as Australia’s most critical acknowledged capability gap. The decade investment program for IAMD is estimated at $21–30 billion, of that, just $850 million is formally approved.

The E-7A Wedgetail airborne early warning and control aircraft, one of the largest single platform-replacement decisions in the entire program at an estimated $10–15 billion, carries only $5 million in approved funding. Active missile defence, estimated at $7.2–10 billion, carries $210 million. The 2026 IIP committed to a new medium-range ground-based air defence system with Australian industry involvement, which addressed what independent analysis had consistently identified as the most critical tier gap in the IAMD architecture. But the commitment sits largely on paper.

Northern base infrastructure, the physical foundation of the Strategy of Denial tells a similar story. With $1.6 billion approved against a $13–16 billion program, and RAAF Tindal, Darwin and Scherger still in early preconstruction phases, the NDS’ own funding profile concentrates the heaviest northern base expenditure in the 2032–35 window. The implication is direct: “The force that the strategy requires won’t be fully funded, let alone delivered, until the risk window may already be closing.”

There is, however, a structural counter-gravity force reshaping every other approval decision. AUKUS Pillar 1, the nuclear-powered submarine pathway, has become the financial centre of gravity of the entire program. The first Virginia Class submarine purchases are scheduled for the early 2030s. The British SSN-AUKUS is planned for the late 2030s.

The sovereign Australian SSN-AUKUS is expected in the early 2040s. The total decade commitment to SSN-AUKUS infrastructure and capability acquisition remains the single largest line in the investment program. ASPI’s data shows that the pattern of approvals in this budget is “consistent with a system that has resolved the centre of gravity in favour of the submarine program and is sequencing the rest of the program around what’s left”.

Paying for tomorrow, at the cost of today

The reduction in acquisition and sustainment funding has consequences that are not abstract. Less spare parts stockholding, less training intensity, less platform availability, less ammunition consumption, and less time at sea, in the air and in the field are the practical results.

The Australian National Audit Office’s 2024–25 Major Projects Report provides the texture: schedule slippage of multiple years across a range of programs and contingency drawdowns absorbing cost growth that would previously have appeared as published budget variation.

The 2026 NDS describes the 2030s as the period of greatest strategic risk and asks the present force to carry the deterrence load through the optimal pathway window to that decade. The present force is being asked to carry that load while being simultaneously reduced.

The government is, in ASPI’s framing, “paying for the people in advance of the platforms they’ll operate”. It is defensible if the strategic environment demands a future force more than a present one, but it must be named for what it is. ASPI’s recommended corrective is direct: “Restoring present-day preparedness funding in the 2027–28 budget, rather than its further compression.”

The whole-of-nation gap

One of the more consequential critiques in the 2026 edition concerned what ASPI called the “national defence gap”. The 2026 NDS advances meaningfully on its 2024 predecessor by taking seriously the concept of national defence as a whole-of-nation proposition. Its language on industrial resilience, critical infrastructure, supply-chain security and civil preparedness draws explicitly on the total defence models pioneered by Sweden, Finland and Norway.

But the rhetorical advance, ASPI argued, makes the structural gap beneath it more consequential. As best ASPI can determine, the 2026–27 budget directed the entire national defence increase to the Defence portfolio alone. Home Affairs, Infrastructure, Industry, Treasury, the Department of Foreign Affairs and Trade, and the Attorney-General’s Department hold no published contribution plan, no capability target and no resourcing commitment tied to national defence.

The Treasurer’s $14.8 billion Strengthening Australia’s Fuel Resilience package is framed as a civil contingency and emissions transition measure, not defence-related, not reported against a national defence outcome, and not bound by any service-level agreement to provide specified fuel reserves to Defence in extremis. The Critical Minerals Strategic Reserve carries the same construction.

“Civil defence, critical infrastructure hardening, wartime supply-chain resilience, fuel and food security, industrial mobilisation and societal preparedness remain referenced in our national strategy but appear absent in our budget,” the report concluded. “They’re unfunded mandates dressed in the language of total defence.”

The report’s final crosscutting finding pointed towards a reform program that is, as yet, untested. The Defence Delivery Reforms scheduled for 2027–28, the standing up of the Defence Delivery Agency, announced in December 2025, and the National Armaments Director, are described by ASPI as “the central reform lever”

Their purpose is to lift the institutional throughput rate above the historical 30–33 per cent band that has, across successive IIPs, held firm regardless of how large the announced program has grown. If the reforms succeed, the IIP’s headline commitments become achievable. If they do not, the announced program will remain, in budget throughput terms, “a commitment in nominal excess of the approval system’s actual capacity to deliver”.

The 2027–28 budget is the government’s own chosen test.

The verdict – necessary, broadly right, dangerously late

ASPI’s overall judgement is measured but unflinching. The program is necessary; it is broadly correctly sized. The government’s strategy is not constrained by an inability to understand the threats or a lack of political will to commit. The 2026–27 budget represents the largest peacetime capability investment commitment in Australian history and should be recognised as such.

The constraints, however, are real, structural and compounding. They are found in the workforce, the industrial base, the integration across capabilities, the institutional follow-through required across multiple electoral cycles, and what ASPI called the “dangerous inconsistency” among Australia’s allies and strategic partners in working collectively against the common threats they all face.

The report closed with an observation that weighed over all 207 pages. The NDS does not describe a deteriorating strategic environment. It said the concept of deterioration is “no longer adequate”.

What it described instead is a strategic environment characterised by fracture, rivalry and disorder, and the fastest military development in the Indo-Pacific since World War II. The 2030s are the period of greatest strategic risk. The capability the Strategy of Denial requires must be ready before that risk window opens, not as it closes.

On present settings, the funding, the approvals, the workforce and the industrial base are all backloaded into precisely that window. Australia is spending more on defence than at any point in its peacetime history. The central question for the decade ahead is whether the institutions, the people, the industrial capacity and the political will exist to turn that spending into delivered capability, before the moment of greatest danger arrives.

As ASPI has been asking, in one form or another, for 25 years: the announcement is the easy part.

Get involved with the discussion and let us know your thoughts on Australia’s future role and position in the Indo-Pacific region and what you would like to see from Australia’s political leaders in terms of partisan and bipartisan agenda setting in the comments section below or get in touch at This email address is being protected from spambots. You need JavaScript enabled to view it. or at This email address is being protected from spambots. You need JavaScript enabled to view it..

Stephen Kuper

Steve has an extensive career across government, defence industry and advocacy, having previously worked for cabinet ministers at both Federal and State levels.