Defence Minister Richard Marles has outlined a 3000-person shortfall in the Australian Defence Force and a further 1000 within the department compared to its budgeted size.
The ADF is also battling an increase of people leaving the force since mid-2020.
"Right now we have a defence personnel crisis," Mr Marles said in a major defence policy address to the Sydney Institute on Monday.
The defence minister also outlined a more frontline role for Australia in the Indo-Pacific, saying it could not purely rely on Washington's might.
He said the acquisition of nuclear submarines under the trilateral AUKUS alliance with the US and UK would increase what Australia could bring to the table.
"Gone are the days of simply paying the entry price to obtain our guarantee from our security guarantor," he said.
"We will have to be willing and capable to act on our own terms when we have to."
Mr Marles outlined a pivot towards a new defence mindset of "impactful projection", or a greater focus on being able to strike and deter enemies further from Australia's shores.
"The reality is a tougher environment will require a more hard-nosed Australian approach to the defence of our interests," he said.
"Australian statecraft is only viable if it is underpinned by the ability to project force and power.
"We must invest in targeted capabilities that enable us to hold potential adversaries' forces at risk at a distance."
Mr Marles also spoke of the importance of expanding relationships and building new ones to better manage risks.
It includes working with allies to secure defence supplies, especially a reliable supply of ammunition in light of the war in Ukraine.
"We have to draw more effectively on both domestic industry and international partners to establish more responsive and secure supply chains," he said.
"This includes developing new manufacturing capabilities better integrated with key partners."
Japan's ambassador to Australia Shingo Yamagami has already offered Tokyo's support.
"AUKUS ... offers the possibility of cooperation on the transfer of defence technology that we increase regional deterrence and ensure superior capability," he told an Advancing AUKUS conference on Monday.
Such areas include artificial intelligence and autonomy, quantum technologies, undersea capabilities, advanced cyber warfare and hypersonic and counter-hypersonic weapons.
"The acquisition of such technology are all of vital importance to Japan," the ambassador said.
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