Taiwanese President Lai Ching-te has pledged to raise the budget for defense to 3 percent of the GDP. Lai’s pledge takes place at a time of substantial budget cuts pushed for by the Kuomintang (KMT), which controls the legislature. Lai’s Democratic Progressive Party (DPP) has accused the KMT of slashing 34 percent of available government operational funding.
The budget cuts will impact defense projects such as Taiwan’s domestic submarine program, as well as its drone program, considered of key importance in Taiwan’s efforts to strengthen asymmetric defense. A defense industry cluster in Chiayi, including for a drone training facility that was announced last December, will see its budget reduced by 30 percent Taiwan’s Coast Guard has warned that it may not have enough money to pay shipbuilders at a time when the service is increasingly called to respond to gray-zone activity by Chinese vessels. Likewise, 30 percent of defense-related operational expenses will be frozen, including funds for ammunition, fuel, and spare parts for military equipment.
Military recruitment is also likely to be affected by the budget cuts. The KMT budget sliced funding for the publicity budget of all government ministries by 60 percent, with the KMT claiming that government agencies use such funds to propagandize on behalf of the DPP. But the military uses these funds to advertise to potential recruits. More broadly, the ability of the government to communicate what social services it offers will be impacted by the cuts.
The cuts to Taiwan’s defense budget have raised alarm, especially as U.S. President Donald Trump is expected to turn up pressure on Taiwan in his second term. Individuals such as Robert O’Brian, the last of Trump’s national security advisers during his first term, have called on Taiwan to increase its defense budget to 5 percent of GDP. But Trump upped the ante late last year with calls for Taiwan to increase its defense budget to 10 percent of GDP, as a condition of U.S. support.
Taiwan has defended itself by citing the expectation that NATO countries spend 2 percent or more of their GDP on defense. Taiwan is at a similar level; so is the United States. DPP politicians such as party Secretary-General Lin Yu-chang have defended Taiwan’s record, pointing out that under the DPP, military spending increased by 70 percent.
But an increase of the defense budget to 10 percent of GDP would not be feasible for Taiwan. Experts have suggested that an increase even to 5 percent of GDP might not be feasible, seeing as this would increase the defense budget to 43 percent of government spending in 2024. Bringing military spending to 3 percent of GDP would still represent 26 percent of all government spending in 2024. Thus Lai’s planned increase may still be challenging. It hardly seems likely that the Taiwanese government would be able to increase military spending to the level Trump demanded.
As Liu I-chen noted in a November 2024 article for The Diplomat, Israel is often cited as a model for Taiwan. Because Israel spends more than 5 percent of its GDP on defense, that number has become an often-raised target for Taiwan. Yet Israel’s total government spending was between 36 percent to 44 percent of GDP between 2018 and 2024 – several times that of Taiwan to begin with. Taiwan’s total government spending is only 13.7 percent of its GDP, which is significantly less than other OECD nations.
It is also worth noting that not all defense-related budgetary items are classified as defense spending. For example, the Ministry of Digital Affairs (MODA) has the responsibility to fend off cyberattacks on government systems; monitor for and defend against attacks on the electricity grid, water system, stock market, and telecommunications; and maintain critical infrastructure that would be targeted by China in wartime such as submarine cables. Yet its budget is not traditionally considered as “defense spending” by Taiwan.
In one version of the cuts proposed by the KMT, the MODA’s budget would have been reduced to 1 Taiwanese dollar. MODA’s funding was ultimately reduced by 40 percent.
Indeed, the wide-ranging cuts called for by the KMT will significantly impact social services in Taiwan, with warnings that everything from the ability to order train tickets online to subsidies for education and social housing and funding for public television will be affected. While anger over the end of such services has the potential to turn the public against the KMT, the party is likely betting that the public will blame the DPP-controlled central government for the deterioration in public services.
In this context, it’s unlikely that the DPP would entertain the thought of committing electoral suicide by reducing all social services in favor of increasing defense spending. However, Lai’s recent comments suggest a potential path forward.
The DPP has signaled it will be proposing special budgets to prevent a deterioration in either Taiwan’s defense budget or social services – or at least force the KMT to take full ownership of refusing funding for specific purpose. Beyond defense spending, Lai has stated that he will use special budgets to seek funding for subsidies for education, childcare, and maintaining conditions for the continued development of industry.
To pay for this, Lai would draw on record windfall in terms of tax revenue for the government. Taiwan experienced a three-year high in GDP growth this year, bringing in NT$497.2 billion more in taxes than budgeted for by the government. This windfall seems to counter the KMT’s claims that government budget cuts are necessary. The KMT has called for the extra tax revenue to be returned to the public in the form of cash hand-outs rather than be used for government spending.
At the same time, the public is increasingly becoming aware of Trump’s demands against Taiwan. Trump’s calls for Taiwan to increase its defense budget may not be the most compelling example for Taiwanese, as calls for Taiwan to increase its military spending are sometimes read as the DPP leaning into the China threat as part of its electioneering.
Rather, the greatest amount of media in Taiwan reporting on Trump has centered on his threat of tariffs against Taiwanese semiconductors. The U.S. president has repeatedly alleged that Taiwan “stole” the U.S. semiconductor industry and now must be punished using tariffs to induce the semiconductor industry to return to the United States. Although Taiwanese semiconductor manufacturing giant TSMC built a fab in Arizona under the Biden administration – raising fears in Taiwan about the loss of critical IP that keeps the world dependent on Taiwanese semiconductors – this has evidently not placated Trump.
With the United States under Trump seen as increasingly likely to suddenly turn on Taiwan, then, this raises the stakes regarding the battle over Taiwan’s defense budget. But the budget question remains at an impasse, with neither the DPP nor the KMT likely to move.
