Rishi Sunak has rejected pleas to increase defence spending to 3% of the size of the economy despite acknowledging the growing challenges posed by China and Russia.

The Prime Minister said an updated foreign and security policy would show the UK is “ready to stand our ground” and “ensure we are never vulnerable to the actions of a hostile power”.

He promised a further £5 billion for defence over this year and next, although significant sums will be swallowed up by replenishing ammunition stockpiles handed to Ukraine and work on the Aukus project to develop nuclear-powered submarines for Australia.

That short-term funding is only around half of what Defence Secretary Ben Wallace had reportedly demanded as the military budgets are squeezed by the impact of Vladimir Putin’s invasion of Ukraine and high inflation.

As the Government sets out the 2023 integrated review refresh (IR23) on Monday, Mr Sunak is visiting San Diego, California, for talks with Aukus allies US President Joe Biden and Australian Prime Minister Anthony Albanese.

Mr Sunak will set out an ambition to increase defence spending to 2.5% of gross domestic product – a measure of the size of the economy – in the longer term.

The Defence Secretary has previously called for 3%, something that ex-prime minister Liz Truss had promised, as has the Tory chairman of the Commons Defence Committee Tobias Ellwood.

The UK was already on a trajectory to reach 2.5% by the end of the decade under plans set out while Boris Johnson was in No 10.

Mr Sunak insisted he had worked closely with the Defence Secretary on the funding package and claimed the 2.5% pledge was “the UK demonstrating leadership on this issue” with other Nato allies urged to follow.

He told reporters on the flight to San Diego that spending would go from 2% to 2.25% between 2020 and 2025.

“At that point, we will set out the trajectory for the next phase,” he said.

The Ministry of Defence insisted Mr Wallace was “delighted” with the settlement in these “economically challenging times”.

The spokesman said: “The Defence Secretary looks forward to working with the Prime Minister and the Treasury to make sure that our Armed Forces receive the investment now and into the future to keep us all safe.”

But Labour accused the Tories of failing to secure Britain’s national defence for the future.

Shadow defence secretary John Healey said: “This announcement does not deal with capability gaps that weaken our national defence and undermine the UK’s Nato contribution. When 25 other Nato nations have already rebooted defence plans and spending since Russia’s invasion of Ukraine, the Conservatives are still dragging their feet on the big decisions.”

The IR23 document, which will be formally launched with a Commons statement on Monday, updates the 2021 integrated review following the war in Ukraine and pressure from Tory MPs to take a tougher line on China.

Mr Sunak acknowledged the Chinese Communist Party’s military, financial and diplomatic activity represented an “epoch-defining challenge”.

The Prime Minister, who described China as the biggest long-term threat facing the UK during his leadership bid last year, said: “It’s a regime that is increasingly authoritarian at home and assertive abroad, and has a desire to reshape the world order.

“We’ve recognised it as the biggest state-based threat to our economic security. What I would say is I don’t think it’s smart or sophisticated foreign policy to reduce our relationship with China, which after all is a country with one-and-a-half-billion people, second biggest economy, and member of the UN Security Council, to just two words, and that’s why in the IR you will see a very thoughtful and detailed approach to China.”

Setting out the aims of IR23, he said: “As the world becomes more volatile and competition between states becomes more intense, the UK must be ready to stand our ground.

“By investing in our armed forces for the long-term, we will be ready for the challenges of today and of the future. As I will discuss with our American and Australian allies in the US today, the UK will remain a leading contributor to Nato and a reliable international partner, standing up for our values from Ukraine to the South China Seas.

“We have seen all too clearly in the last year how global crises impact us at home, with Russia’s appalling invasion of Ukraine driving up energy and food prices.

“We will fortify our national defences, from economic security to technology supply chains and intelligence expertise, to ensure we are never again vulnerable to the actions of a hostile power.”

From Monday, a new National Protective Security Authority within MI5 will give expert advice to UK businesses and other organisations.

Funding for the Government-wide China capabilities programme will be doubled, boosting Mandarin language training and diplomatic skills.

A new national security college curriculum will boost expertise across government while a £1 billion integrated security fund will replace an existing scheme to focus on the priorities in the integrated review.

The UK’s critical minerals strategy will be updated to ensure access to vital resources while the BBC World Service will be given an additional £20 million to maintain 47 language services to help tackle disinformation from hostile states.

The Australian, UK and US leaders will meet on Monday to discuss the next stage of the Aukus project, which is expected to see thousands of British workers involved in designing and building the new submarines.

Mr Albanese is expected to opt for a British-designed fleet, with US boats being purchased as a stop-gap measure.

Negotiations over the last 18 months have presented the Canberra government with a choice between a British or US design.

Reports suggest Australia could opt for a modified version of the British Astute-class submarine, plugging the gap until it enters into service in the 2040s with up to five American Virginia-class boats.

The UK hopes that Aukus will result in work for British shipyards such as BAE Systems’ facility in Barrow-in-Furness, Cumbria.