In an increasingly contested Asia, with China rising and America rebalancing, middle powers are struggling to redefine their defense strategies.  One such player, Australia, has now done so in a way that seeks to reconcile its extensive national interests with a close U.S. alliance, a web of new Asian security partners and a relationship of mutual respect with China.

It almost succeeds, but stumbles on a critical factor – money.  The current Australian Labor government is underspending on defense and so far the conservative opposition – likely to win power in an election due this September – is not promising much more.

Four years ago, the then Australian prime minister Kevin Rudd launched a defense white paper amid furious concern about China’s destabilizing rise. A much stronger Australian Defence Force was promised with new-generation submarines, cruise missiles, and joint strike fighters. This blunt document and its unusually clumsy diplomatic handling added to a drumbeat of political mistrust between Australia and its largest customer.

But a lack of credible budgeting undermined this vision of projected Australian firepower, and Canberra was caught committing the cardinal sin of statecraft: speaking loudly whilst carrying a small stick, the opposite of Teddy Roosevelt’s dictum.

With a quite different defense white paper launched last Friday, successor Prime Minister Julia Gillard treads a notably more cautious line, declaring that Australia "does not approach China as an adversary." China is listed this time as a military partner, complete with bilateral exercises, confidence-building dialogue and even an Australia-China Military Culture and Friendship week. 

The document builds on Ms. Gillard’s optimistic narrative of a prosperous ‘Asian Century’. It offers some even-handed and sophisticated appraisals of U.S.-China relations, and some acknowledgement of the need to watch for and manage risk, but does not fully convey how the Asian strategic environment is deteriorating and the possibilities of conflict rising.

So whereas the Chinese saw the Rudd plan as a red rag, it is tempting to caricature Australia’s new strategy as raising a white flag.

That is certainly not fair: alliance commitments still feature fundamentally in Canberra’s military strategy. The white paper says Australia will uphold a rules based-order, is prepared "to conduct conventional combat operations to counter aggression or coercion against our partners," and commits to buying electronic warfare aircraft that could help in such a contingency.

It also confirms steps to use Australian territory in support of the Obama Administration’s Asia pivot, beyond the presence of Marines in Darwin. Notably, airfields in northern Australia and the Cocos Islands in the Indian Ocean will be upgraded. This needs to be done for Australia aircraft anyway, notably the new P-8A Poseidon fleet currently being acquired, but will open the way to their possible future use by the U.S. military.

Notably, the white paper rejects the idea, advanced by prominent scholar and former official Hugh White, that Australia will somehow have to choose between the United States and China, and emphasizes the likelihood that those powers will succeed in avoiding major conflict.

The white paper also redraws the map of Australian security in a way that may not appeal to Beijing. It makes Australia the first country officially to define its region of strategic interest as the Indo-Pacific. This in itself is not an anti-China move, since the Indo-Pacific is above all an objective description of the super-region in which China is rising, given its large economic, energy and diplomatic equities across the Indian Ocean. And it is a natural fit with Australia’s two-ocean geography and the increasing attention being paid to resources development and military infrastructure in the country’s sparsely-populated north and west.

Still, like the multilateral forums which Australia’s new security policy also endorses (such as the East Asia Summit), this bold promotion of a broad Indo-Pacific canvas may discomfort Beijing insofar as it dilutes China’s influence and cements India’s place in the Asian power game.

From a diplomatic point of view, Canberra’s new document is an admirable balance between affirming alliance ties and not unduly insulting China. Indeed, defense diplomacy is one of the paper’s big themes, with pages devoted to how Australia’s small military is busy deepening constructive engagement all around the region, from Indonesia to India to Vietnam and Japan as well as China.

Yet it is hard to the escape the suspicion that one reason diplomacy gets such a big run in a supposedly military document is that it is much cheaper than preparing for war. For the worst-kept secret of Australian defense policy is that the fiscal cupboard is pretty much bare. The Australian economy has done much better than most developed economies in the post-financial crisis era, but the government still faces a serious budget deficit and a long list of domestic spending priorities in an election year.

This cut-price approach will make it increasingly hard for Australia to possess the cutting-edge forces it would need to contribute substantially to high-end contingencies alongside the United States in Asia. Moreover, highly constrained defense spending is at odds with the white paper’s expansive view of Australia’s national interests and military tasks – from stabilizing South Pacific nations to patrolling the Indo-Pacific commons and protecting the nation’s vast territories and offshore resources.

Last year Defense Minster Stephen Smith pointed to Pentagon austerity post Afghanistan as a precedent for Australia to extract its own peace dividend. This line was too clever by half.

While U.S. military spending is coming down from the unsustainable heights of  4.7% of GDP, Australia’s has hovered at 1.8% since 2001. Last year this was slashed to just 1.56% of GDP, its lowest level since the 1930s.

Australia is resigning itself to a European level of defense spending in a turbulent Indo-Pacific Asia where most military budgets are rising and competitive arms modernization is well advanced. This developed country risks letting its technology edge erode and its strategic weight slip away.

Whilst both sides of Australian politics claim to aspire to an eventual return to defense spending around 2% of GDP, neither is making that a priority.  

In particular, Australia is showing itself in no rush to acquire new submarines, even though it says it will press ahead with building 12 to replace its troubled fleet of six.

In the absence of strengthened maritime capabilities any time soon, Australia is starting to realize the alliance value of its strategic real estate.  An American space-tracking radar is being set up in Western Australia, increased rotations of U.S. bombers through Australian airfields are likely, and greater U.S. Navy access to Australia’s Indian Ocean coast may be next.

But a latent uncertainty in all of this may lie in what Australians think. There is already wariness among Australian elites as to how integrated the U.S. and Australian militaries should become. Even the most pro-alliance voices would naturally want Australia to have a say before it found itself at war.

Polling by Australian think tank the Lowy Institute shows that 55 percent of Australians are comfortable with U.S. bases in their country. But nobody knows for sure how Australians would feel if such bases became launch-pads for action in an Asian century gone wrong. So rather than resolving the nation’s security uncertainties, the new policy document confirms how difficult this will be to manage in the years ahead.

Rory Medcalf is director of the international security program at the Lowy Institute, Sydney. Follow him on Twitter: @Rory_Medcalf