NATO bowed to Trump's defence demands. It'll cost them 19,800 fighter jets
Governments around the world agreeing to the change will need to make some tough decisions in the context of other budget pressures, says Euan Graham, a senior analyst at the Australian Strategic Policy Institute.
'How the government cuts the pie of the tax take is going to require hard, hard decisions,' Graham says.
The UK, for example, which has agreed to hit the 5 per cent target by 2035, is slashing foreign aid to pay for its additional $155 billion defence spending bill.
'That is not an announcement that I am happy to make,' UK Prime Minister Keir Starmer said of the change. 'However, the realities of our dangerous new era mean that the defence and national security of our country must always come first.'
Other countries lifting their spending to meet the new target include Germany, France and Italy. They will need to boost their annual spending by $220 billion, $153 billion and $135 billion, respectively.
Earlier this month, Rutte warned NATO members that if they didn't pledge to up defence spending to 5 per cent, 'you'd better learn to speak Russian'.
But Spain, which spent just 1.3 per cent of its GDP on defence last year, refused the increase. The extra spending would force the country to 'drastically raise taxes on the middle class, or severely cut the size of our welfare state,' Spanish Prime Minister Pedro Sanchez said.
The NATO agreement could see Australia dragged further into the debate over defence spending by bolstering the Trump White House's argument that US allies can spend more on defence. US Defence Secretary Peter Hegseth has told Australia to increase defence spending to 3.5 per cent of GDP, which the Albanese has pushed back against in favour of its plan to lift expenditure to 2.3 per cent.
The Coalition went to the election promising to lift defence spending to 3 per cent of GDP by 2035-36, which the Parliamentary Budget Office said this week would cost $156 billion and add $24 billion in interest costs.
If Australia's defence spending was lifted to 5 per cent in the same time frame, the cost to the federal budget would be $261 billion and have an additional $40 billion in interest.
Rabobank senior strategist Ben Picton said the debate was about 'guns or butter'.
'The Australian government is faced with choices between increasing the defence budget to expand capability or increasing spending on social programs like the National Disability Insurance Scheme (NDIS), aged care, and childcare,' Picton said in a research note this week.
'Clearly, Australia is currently choosing 'butter' but retains substantial headroom in the budget to increase spending by comparison to peer economies.'
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The Australian government spent about $56 billion on defence in 2024-25 – more than the $44 billion it spent on the NDIS.
Eminent economist Saul Eslake believes that no government will cut spending on social services to beef up defence. 'You'd make a lot of people pissed off and it's hard to do, which to me means you've got to look to the revenue side [to raise more money],' Eslake says.
But Graham says Australians would understand a cut to services – like the NDIS – if the government was 'honest about the nature of the threat' posed to national security.
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Countries would spend 3.5 per cent of GDP on core defence - such as troops and weapons - and 1.5 per cent on broader defence-related measures such as cyber security, protecting pipelines and adapting roads and bridges to handle heavy military vehicles. All NATO members have backed a statement enshrining the target, although Spain declared it does not need to meet the goal and can meet its commitments by spending much less. Rutte disputes that but accepted a diplomatic fudge with Spanish Prime Minister Pedro Sanchez as part of his efforts to give Trump a diplomatic victory and make the summit go smoothly. Spain said on Wednesday that it did not expect its stance to have any repercussions. Rutte has kept the summit and its final statement short and focused on the spending pledge to try to avert any friction with Trump. Ukrainian President Volodymyr Zelenskiy had to settle for attending the pre-summit dinner on Tuesday evening rather than the main meeting on Wednesday, although he was set to meet Trump separately. Hungarian Prime Minister Viktor Orban diluted the display of unity when he told reporters that NATO had no business in Ukraine and that Russia was not strong enough to represent a real threat to NATO. The Kremlin has accused NATO of being on a path of rampant militarisation and portraying Russia as a "fiend of hell" in order to justify its big increase in defence spending. NATO leaders are set to sign up to a big increase in defence spending at a short summit tailor-made for US President Donald Trump, who struck a reassuring tone on his commitment to protecting fellow members of the alliance. The summit is expected to endorse a higher defence spending goal of five per cent of GDP - a response to a demand by Trump and to Europeans' fears that Russia poses a growing threat to their security following the 2022 invasion of Ukraine. NATO Secretary-General Mark Rutte acknowledged that it was not easy for European countries and Canada to find the extra money but said it was vital to do so. "There is absolute conviction with my colleagues at the table that, given this threat from the Russians, given the international security situation, there is no alternative," he told reporters. Speaking to media before the summit opened on Wednesday, Trump played down concerns over his commitment to mutual defence among allies as set out by Article 5 of NATO's charter, saying: "We're with them all the way." The debate has been fuelled by Trump's own comments on the way to the summit on Tuesday. Speaking to reporters aboard Air Force One, he had said there were "numerous definitions" of the clause. Finnish President Alexander Stubb, whose country borders Russia and joined NATO two years ago, said the alliance was evolving. "I think we're witnessing the birth of a new NATO, which means a more balanced NATO and a NATO which has more European responsibility," he told reporters. The new spending target - to be achieved over the next 10 years - is a jump worth hundreds of billions of dollars a year from the current goal of two per cent of GDP, although it will be measured differently. Countries would spend 3.5 per cent of GDP on core defence - such as troops and weapons - and 1.5 per cent on broader defence-related measures such as cyber security, protecting pipelines and adapting roads and bridges to handle heavy military vehicles. All NATO members have backed a statement enshrining the target, although Spain declared it does not need to meet the goal and can meet its commitments by spending much less. Rutte disputes that but accepted a diplomatic fudge with Spanish Prime Minister Pedro Sanchez as part of his efforts to give Trump a diplomatic victory and make the summit go smoothly. Spain said on Wednesday that it did not expect its stance to have any repercussions. Rutte has kept the summit and its final statement short and focused on the spending pledge to try to avert any friction with Trump. Ukrainian President Volodymyr Zelenskiy had to settle for attending the pre-summit dinner on Tuesday evening rather than the main meeting on Wednesday, although he was set to meet Trump separately. Hungarian Prime Minister Viktor Orban diluted the display of unity when he told reporters that NATO had no business in Ukraine and that Russia was not strong enough to represent a real threat to NATO. The Kremlin has accused NATO of being on a path of rampant militarisation and portraying Russia as a "fiend of hell" in order to justify its big increase in defence spending.
