It also wants staff cuts at Defence headquarters in Canberra and the effective abolition of the Defence Materiel Organisation, which equips the armed forces.
Prime Minister Tony Abbott repeatedly has said he wants defence spending increased to two per cent of Gross Domestic Product (GDP) over the next 10 years.
But the commission's report, released on Thursday, says the government should better assess the "balance of strategic and fiscal priorities".
It believes defence funding should be determined on the basis of the capability needed to meet the various strategic threats Australia could face.
"This should result in a better balance between risk and resourcing - and implies a force structure focused on the most important threats," it says.
The government must also ensure Defence improves the effectivness and transparency of its spending, it says.
Any growth guarantee should come with obligations to ensure it is spent efficiently.
"The Defence budget needs greater scrutiny and a more strategic and effective approach to settling and managing spending," the commission's report says.
The commission expresses doubts as to whether Defence HQ has the capacity to drive better efficiency, saying "it's grown too complex and top-heavy".
"A simpler and leaner structure is a priority," it says.
It recommends Canberra-based Defence HQ staff numbers be slashed to 1998 levels.
The DMO should be "significantly reduced in size" and integrated back into the Department of Defence, it says.
Defence currently costs about $25.3 billion a year, or six per cent of all commonwealth spending.
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