The previous Howard government left the defence budget in a mess and suffering a predicted shortfall of up to $6 billion over the next 10 years, Defence Minister Joel Fitzgibbon claimed today.

Many new equipment projects inherited from the coalition were problematic and the cost of sustaining defence capability had been alarmingly underestimated and underfunded, Mr Fitzgibbon told an Australian Strategic Policy Institute forum.

He warned that a defence budget of two per cent of GDP might not be enough.

"This shortfall in net personnel and operating costs presents the new government with a huge challenge," he said.

"These are the costs involved in manning and sustaining our ships, tanks and aircraft and I'm advised by my department that the shortfall may be up to $6 billion over the coming decade."

Mr Fitzgibbon accused the former government of committing to new capital equipment projects without taking proper account of their ongoing funding requirements.

"It's like factoring the cost of a new car into the family budget, without making any provision for fuel, insurance, rego or maintenance," he said.

Aside from the budget, the minister said defence personnel were also stretched.

Mr Fitzgibbon said Australian troops would be withdrawn from southern Iraq because the Australian Defence Force (ADF) was overstretched on operations in the Middle East, Afghanistan and East Timor.

He said a second reason for bringing home the 515-member Overwatch Battlegroup was that its work was done.

He said Labor remained committed to Iraq and its people. The 110-member security detachment will stay in Baghdad, an Australian warship will continue patrols in the northern Persian Gulf while RAAF AP-3C Orion surveillance aircraft will continue operations over Iraq and the Gulf.

"We continue to look at what more we can do in the form of non-military assistance," he said.

"But having so many people and resources tied up in an overwatch role was not sustainable."

During the election campaign, Labor slammed involvement in Iraq as the single greatest failure of national security policy since Vietnam. It said that had diverted defence resources away from what should be the principal focus of attention, Afghanistan.

In recent years, defence chiefs and the former government acknowledged defence was working hard, but never said it was overstretched.

Mr Fitzgibbon said some would think Labor's commitment to bring combat troops home from Iraq was populist.

"Nothing could be further from the truth," he said.

"There were two key drivers. First, our concurrency issues. Our forces are overstretched.

"With substantial deployments in Iraq, Afghanistan and East Timor, and smaller but important contributions elsewhere, around half of our infantry and cavalry are committed."

Mr Fitzgibbon said the army comprised six battalions while the deployments in Iraq, Afghanistan and East Timor roughly numbered three battalions.

"Others are getting ready to go or reconstituting after returning home," he said.

"We urgently need to free up numbers in order to be ready to meet contingencies which may arise closer to home."

Australia Defence Association executive director Neil James said everyone was in agreement that the job of the Overwatch Battlegroup in southern Iraq was done.

"But the same could not be said for the training task. Rebuilding the Iraqi security forces along democratic lines is an important and continuing job," he said.