Taiwan is a potential flashpoint for a war between China and the United States, which is the island's most important backer and biggest arms supplier.
Beijing claims democratic Taiwan as part of its territory and has threatened to use force to bring the self-ruled island under control.
Premier Cho Jung-tai, asked by an opposition lawmaker if Taiwan could increase defence spending to 10 percent of GDP, or about NT$2.6 trillion ($78.88 billion), said "it's impossible given our current budget scale".
The government estimates 2025 gross domestic product of about NT$26.88 trillion.
However, the government's total budget for 2025 was cut to around NT$2.9 trillion, from a proposed NT$3.1 trillion, by the opposition-controlled parliament in January.
The opposition bloc rejected Cho's call to reconsider the budget cuts.
US President Donald Trump called during campaigning last year for Taiwan to raise its military spending to 10 percent of GDP.
Elbridge Colby, a senior defence adviser to Trump, also raised the issue in a Senate hearing this month.
"President Trump has made the same demand not only for Taiwan but also for many countries," Cho told lawmakers.
"At this stage, the Republic of China (Taiwan's official name) absolutely does not have the capacity to compile a defence budget of NT$2.6 trillion".
Taiwan's government was planning to increase defence spending to a record NT$647 billion in 2025, or around 2.5 percent of GDP.
However, some items were cut or frozen, including a 50 percent freeze on spending for a submarine programme and drone industry park.
President Lai Ching-te's party warns that the budget cuts will hamper Taiwan's ability to govern and harm its security.
Lai has said his government will prioritise "special budgets" to increase defence spending to more than three percent of GDP to show the island's self-defence determination.
China has increased pressure on Taiwan in recent years with military drills and near-daily dispatches of warplanes and naval vessels around the island.
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