When toggling auto layout on for a frame that has existing contents, it defaults to “hug.” If you have already taken time to size the frame, you now have to redo your work.
Example: I’m creating a 4x4 grid layout with an icon at the center of each square. I do a first draft freehand/without auto layout. I then add a frame around each icon, with a fixed width corresponding to my 4 grid cells. When I turn on auto layout, the frame then shrinks to hug each icon, causing me to have to redo my work of manually resizing my fixed-width/height grid cells.
For padding/space between, Figma tries to retain your manual positioning when you convert to auto layout. For instance, if you frame two text frames and apply auto layout, you’ll see “121” or whatever random amount they were originally separated by as the space between, and same for padding. So it seems like the corollary of this functionality would be to default to fixed width/height when turning on auto layout, preserving your original size, just as it preserves your original space between/padding.