iscover
A fragmented geo-political environment and economic pressures are expected to drive spending in Australia’s defence industrial base, according to 2026 Intergenerational Report published by the Australian government.
The 2026 Intergenerational Report was released by Treasury on 21 September this year and examines economic, fiscal and structural changes likely to shape Australia over the next 40 years.
The report forecasts Australia's population reaching about 39.3 million by 2065–66 but is also expected to experience significant aging. In addition, the report forecasts that labour productivity growth of 1.2 percent a year.
The report outlines that geopolitical fragmentation as one of five major transitions shaping Australia and expects increasing strategic competition, possible conflict and disruption to global trade and investment flows over the next decades.
In response, Australia’s defence industrial ecosystem will be considered crucial for industrial capability, resilient supply chains and greater national preparedness.
“A challenging global strategic environment is driving defence spending. Australia faces an environment increasingly characterised by fracture, rivalry, and disorder. The 2026 National Defence Strategy identified an increasingly contested geostrategic environment,” according to the report.
“In response, and aligned with increased defence spending across the globe, the Australian Government is investing significantly more in national security.
“In line with the common methodology adopted by NATO allies to measure defence expenditure, Defence funding is now projected to rise to approximately 3 per cent of GDP by 2033–34.
“Consistent with this methodology, this includes all forms of Commonwealth investment in Defence, including portfolios delivering defence capabilities particularly in the National Intelligence Community, investments in Defence infrastructure, operations, Defence housing and some administered benefits for Australian Defence Force personnel.
“This funding is the highest total amount spent on defence in Australian history and the highest share of GDP since the end of the Cold War.
“This includes a significant increase in direct expenditure within the Defence portfolio alone, rising from 2.1 per cent of GDP in 2025–26 to 2.5 per cent of GDP in 2033–34. For long-term modelling purposes, Defence portfolio expenditure is assumed to be 2.5 per cent.”
The report outlines that the largest component of non-financial assets is defence acquisitions, and non-financial assets themselves are projected to grow from 8 per cent of GDP in 2026–27 to 9 per cent of GDP in 2065–66 as purchases of non-financial assets exceed sales and depreciations.
“Defence spending as a share of the economy is expected to increase over the next decade, reflecting growing global uncertainty and geopolitical fragmentation. This follows gradual falls since the end of the Cold War in the early 1990s through to the mid-2010s,” according to the report.
“Additional pressures such as further spending on defence, the impacts of climate change and the rise of AI are more difficult to quantify and present risks to the fiscal outlook.
“The Government’s investments in resilience and security will reduce Australia’s exposure to risks stemming from a more uncertain geopolitical environment, while still maintaining benefits of an open economy. The Government is investing in a more modern and resilient energy system, stronger supply chains and critical technologies, while also cutting nuisance tariffs and supporting stronger and more diversified trade.
“The Government is bolstering Australia’s defence capability through major investments in military capabilities and deepening partnerships and engagement with the region.
“Bottlenecks in critical inputs present significant risk. Loss of small upstream inputs matters if firms rely on them and cannot replace them quickly. For example, the refining of minerals critical to energy systems, advanced manufacturing, defence technologies and digital infrastructure are heavily concentrated with limited near-term substitution options."
In addition, Treasury expects that artificial intelligence will have a substantial influence on the Australian economy over the next four decades.
“AI will also increase the scale, speed and sophistication of information weaponisation and radicalisation. At the same time, it is expected to lower barriers to harmful biological and chemical activity and simplify criminal and terrorist activity planning,” according to the report.
“National security challenges, including foreign interference, could arise from dependence on foreign developed and owned frontier models. Australia benefits when it gains early access to these AI models to better understand AI-enabled risks and bolster defences.”
Want to see more stories from trusted news sources?
Make Defence Connect a preferred news source on Google.
Click here to add Defence Connect as a preferred news source.