Both Australia and the US are in the process of making significant cuts to defence spending as the two nations come to terms with what Mr Panetta has previously described as the "new fiscal reality".
Defence Minister Stephen Smith was forced to hose down suggestions over the weekend that the US was unhappy with Australia's spending cuts, insisting that cutbacks will not affect international operations such as the war effort in Afghanistan.
Mr Panetta, who is in Australia for the annual AUSMIN talks between the two countries' defence and foreign affairs ministers, says both nations continue to face threats despite the budget situation.
"As we face budget constrictions in both of our countries, we still confront threats in the world - threats that are real," Mr Panetta said in his opening remarks at the talks.
"We still have to fight a war in Afghanistan and complete that mission, we still have to deal with terrorism in the world, we still have to confront the threat from North Korea in this region, (and) we have other threats around the world that are still real."And so our challenge is how do we ensure that we develop the kind of priorities that keep us strong, so that we can confront those challenges, protect our countries, and advance peace and prosperity in this region.
