Australia faces a ‘guns or butter’ problem: defence spending or social programmes?

Caught between China and its US ally, Australia’s ‘have-your-cake-and-eat-it-too’ defence approach carries risks, a new analysis reveals

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Australian soldiers board a Royal Australian Air Force aircraft last week bound for the Middle East for to assist government efforts supporting Australians seeking to leave the region. Photo: Australian Defence Force / AFP

Published: 2:54pm, 24 Jun 2025Updated: 3:11pm, 24 Jun 2025

Australia confronts a “guns or butter” choice between a bigger defence budget and expanding national disability insurance and other social programmes, according to multinational banking and financial services company Rabobank, which calls for economic statecraft to navigate a risky regional security environment.

For now, the government is opting for “butter”, but it retains substantial fiscal headroom to bolster military spending when compared to peer economies, Rabobank economist Benjamin Picton said in a research note on Tuesday. The nation’s debt is lower than that of its counterparts as a share of its gross domestic product.

Australian officials have warned that the nation faces its most complex strategic circumstances since World War II. The government aims to pivot its military posture to deterrence, including via drones and missiles, to complement a planned fleet of nuclear-powered submarines due to be delivered in the 2030s under the Aukus deal.

A Virginia-class nuclear-powered attack submarine of the type Australia is set to acquire from the early 2030s. Photo: US Navy

But Canberra is caught between the expanding military footprint of China, which is also Australia’s biggest trading partner, and its traditional US ally that is seeking to check Beijing’s expansion in the Asia-Pacific.

Picton pointed out the contradiction of Australia deepening military engagement with Washington via Aukus to deter China while trying to keep defence spending low enough to “remain relatively inoffensive” to Beijing.

“This have-your-cake-and-eat-it-too approach carries risk that Australia will be forced into supporting US foreign policy interests against its own, while also being underprepared if a major conflict were to break out, or if the US were to revise its strategic doctrine in the Western Pacific,” Picton said.

As a result, Australia faces higher defence, social programmes and debt servicing costs which may put pressure on long-dated government bonds, Picton said.