When Graham's former law school classmate
Paul Martin succeeded Chrétien as Prime Minister in December 2003, Martin left Graham at Foreign Affairs, but after an election in June 2004 reduced the Liberals to a minority, Martin moved him to National Defence. This would normally be regarded as a demotion, but Martin had promised during the election campaign to increase defence spending, and he indicated to Graham that he would enjoy prime ministerial backing in his efforts to rebuild the Canadian military after the economies resulting from the deficit-reduction program that Martin had implemented in the early 1990s as Minister of Finance. Perhaps Graham's biggest success as Defence Minister was implementing a new doctrinal and budgetary framework for Canadian defence policy. He persuaded Martin and Finance Minister
Ralph Goodale to accept a $13-billion increase in defence spending, the largest in a generation, as part of the 2005 budget. This entailed significant capital expenditures, including the acquisition of Hercules aircraft to provide the Canadian Forces (CF) with tactical airlift capability. In addition, the CF command structure was overhauled to improve the capacity to respond to either domestic disaster or terrorist threat, including the creation of a new Canada Command. Graham and General
Rick Hillier, whose 2005 appointment as Chief of the Defence Staff (CDS) he recommended, sought to transform the CF into a more mobile force, capable of conducting armed "peacemaking" and humanitarian interventions. This broke with both the Cold War emphasis on preparation for large-scale conventional hostilities across defined international borders, and the recent Canadian tradition of lightly armed peacekeeping under UN auspices. Restoring security and order to the failed or failing states that served as bases for terrorists was placed at the centre of CF doctrine. This conception of the CF's future role was set out in a Defence Policy Statement that fed into the Martin government's broader review of
Canadian foreign policy. In the weeks leading up to the January
2006 federal election, Graham oversaw the negotiations of an agreement, signed by Hillier and the Afghan Defence Minister, governing the treatment of Afghan detainees captured by Canadian personnel and turned over to Afghan authorities. After revelations in 2010 that some detainees had been tortured, Graham appeared before a parliamentary committee investigating the matter. He conceded that the agreement had been imperfect, lacking as it did a mechanism for monitoring the treatment of prisoners after they were placed in Afghan custody, but pointed out that its omissions were more readily apparent in retrospect than they were at the time, and that it had been developed on the best available advice to meet unprecedented circumstances.
Interim Liberal leader After the Liberals were defeated in the 2006 election and the Conservatives formed a minority government under
Stephen Harper, Graham served as interim Leader of the Liberal Party and Leader of the Opposition, until the December 2006 leadership convention that elected Stéphane Dion as Leader. Graham was neutral in the race to choose a new leader. On February 22, 2007, he announced he would not be a candidate for reelection in the next federal election. On June 19, he announced that he was stepping down as an MP, effective July 2. This freed up the seat for former Ontario Premier and leadership contender
Bob Rae (who, like Graham, would later become interim Liberal leader) to run as the Liberal candidate in the resulting by-election. ==Electoral history==