The defense budget is an indicator to assess a country's potential military capabilities against others. The defense budget gives much information about the economic status, security intentions, threats, security situation in regions, R&D capacity, and several others of a country for both domestic and international audiences. Knowing close estimates of a country's defense budget and spending will help other countries to estimate the existing and future military capabilities, military-industrial complex capacity, and military projects. Also, help the government effectively budget, prioritize and distribute funds among military arms to strengthen the country's capabilities.
Considering the defense budget and spending importance to domestic and international audiences, transparency in reporting them is essential. The transparent publication of the defense budget helps to frame robust defense policies, procure armaments, avoid corruption, and invest in domestic research & development capabilities required for national security. Typically, countries' reported defense budgets and spending deviate primarily due to secrecy, off-the-books expenditure, corruption, and lack of government oversight. The spectrum ranges from developed democratic countries being more transparent to third world dictatorship countries being the worst performers.
For example, look at the US and China's top two world's biggest defense spenders and military powers. The US is a developed nation with a democratic system that provides a more transparent defense budget and spending report than China. Transparency helps the government allocate funds effectively to military domains, scrutinize the spending, accountability to citizens, frame robust defense policies, display military strength to the world, and strengthen its trust with citizens. Contrary to the US, China is a developing country with an authoritarian system with limited accountability to its citizens. The SIPRI and CSIS China Power Project identified a significant difference in China's reported defense budget to its actual spending over the last several years. Also, it can report inflated military capabilities to domestic and international audiences with vague defense budgets and spending. It is natural for countries to overrun their defense budgets due to geopolitical and security uncertainties. But in the case of China, the difference runs into tens of billions of dollars, with spending being way higher. The excess expenditure over the reported budgets making very difficult for countries to assess the Chinese actual military capacity, capabilities, the extent of ongoing developments, and R&D works. It creates a sense of insecurity for neighbouring countries and global power. It forces them to inflate their military budgets to outmatch potential Chinese capacity and capabilities, eventually contributing to the potential arms race. Thus, along with effective governance and domestic benefits, transparency in reporting defense budgets and spending is important for countries to avoid unnecessary security dilemmas and potential arms build-up.