Stoltenberg called on European states to increase their spending, with the average for countries from the bloc now standing at 1.47%, compared with 3.16% in the US.
Overall, the US-led alliance reversed the downturn in 2015 and past year, defence spending rose 3.8 percent or $10 billion (9.3 billion euros), it noted.
"There has been progress but the job is far from done, we still have no fair burden-sharing within our alliance", NATO's Secretary-General Jens Stoltenberg said. "All allies have agreed to it at the highest level and it can be done", Stoltenberg said in the report.
The NATO annual report said only five countries met the two percent target - the US, Britain, Greece, Poland and Estonia - while Washington accounts for 68 percent of combined alliance defence spending.
That is the message the government has repeatedly delivered, emphasizing Canada's military contributions to Latvia, Ukraine and Iraq in lieu of large spending increases.
However, with only five allies meeting the 2% target, the North Atlantic Treaty Organisation chief said: "So in 2017, we must redouble our efforts to sustain the positive momentum and speed up national efforts to keep our pledge". Europe was last at two percent in 2000.
"And that's exactly why we decided in 2014 to stop the cuts, gradually increase, and move towards spending two per cent of GDP on defence". If Germany met the figure, for example, it would be spending on defence more than Russian Federation does, and it is unlikely its armed forces could efficiently absorb the extra money anyway.
A former prime minister of Norway, Stoltenberg acknowledged the hard choices politicians must make when it comes to spending limited taxpayer dollars.
The NATO annual report said only five countries met the two percent target - the United States, Britain, Greece, Poland and Estonia - while Washington still accounted for almost 70 percent of combined alliance defence spending.
Mr Etheridge said it showed "defence security lay with a good relationship with the U.S. and not European Union countries who have failed with their worldwide commitments".
"But my message is that if we are decreasing defence spending in times with reduced tensions, we have to be able to increase defence spending when tensions are going up and now tensions have gone up".