Challenges and opportunities
Chapter 5 – International Defence Economics
This chapter is divided into three parts. The first examines key international defence spending trends. The second explores Australian defence spending in an international and historical context, and the third explores the continuing impact of the Global Financial Crisis (GFC) on countries’ abilities to spend on defence.
Throughout this chapter, defence spending statistics from a variety of source are used. Given the unresolvable questions of definition and reliability, one source is usually as good as another. For that reason, the most convenient source of data has been chosen to allow for a consistent comparison in each case.
International defence spending
According to the Stockholm International Peace Research Institute (SIPRI), the world
expended a total of US$1,776 billion on defence in 2014, equivalent to around 2.3% of global GDP. With the exception of China, the bulk of the spending occurred in the developed economies of North America and Western Europe, with East Asia also figuring highly in the data, see Figure 5.1.
Figure 5.1: Geographic distribution of defence expenditure 2014
Source: Stockholm International Peace Research Institute (SIPRI) Military Expenditure Database 2015 edition, www.sipri.org.
Global defence spending from 1988 to 2014 is graphed in Figure 5.2, where ‘BRIC’ refers to the emerging powers of Brazil, Russia, India and China, and the US allies outside of Europe are Australia, Canada, Japan, Korea, New Zealand and Taiwan. As can be seen, the peace dividend following the end of the Cold War resulted in a contraction in global defence expenditure of around 30% over a decade. From 2001 to 2010, the trend reversed as the United States mobilised following the attacks 9/11.
0 100 200 300 400 500 600 700
billion 2014 US$
158 Figure 5.2: Global defence spending 1988 to 2014
Source: Stockholm International Peace Research Institute (SIPRI) Military Expenditure Database 2015 edition, www.sipri.org.
Russian spending interpolated for 1991. Chinese spending extrapolated for 1988. Soviet spending used for Russia pre 1992.
The United States dominates global defence spending, and the US-led invasions of Afghanistan and Iraq gave rise to a decade-long increase in the global figure. In 2014 the United States accounted for 33.7% of global defence spending, and once its friends and allies are taken into account the ‘West’ as a whole accounts for just over 58.6%. However, around 2010, global defence spending peaked as expenditure in the United States and other developed nations began to fall.
It is now clear that the world (or at least the developed world) is experiencing another downward swing in defence spending. The United States and most of the countries of Western Europe are projecting either insipid growth or declining defence expenditures into the second half of the decade. In part, this reflects a mini peace dividend from the
drawdown of Western forces in Iraq and Afghanistan. At least as important, however, are the mounting fiscal pressures across developed economies.
A combination of rising social spending and the legacy of crippling debts due to the 2008 GFC are forcing many countries to reconsider the priority for defence spending. Western Europe in particular is facing a long-term fiscal crunch due its ageing population; with tax revenues falling and pension costs rising, something has to give. In the absence of a serious deterioration in the strategic situation in Europe—beyond the current ructions caused by Russia— it’s likely that cuts to defence spending will be the most politically expedient course of action for many European countries in the years ahead.
But not all trends are downwards. Falling year-on-year defence spending by the United States (-6.5%) and Western Europe (-2.5%) was counterbalanced by growth in other US allies (1.1%), the BRICs (+7.0%) and the rest of the world (+4.2%). Across the past five years, spending by the US and its allies has declined by 14% while spending by the BRICs has grown by 21.8% and spending by the rest of the world has grown by 20%. Change is underway.
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
constant 2011 US$
Rest of World BRICs
US Asia-Pacific allies Western Europe United States
159 The United States
After a decade of strong growth, the US defence budget has moderated over the past seven years and is falling. The trend is likely to continue; until 2021 US defence spending is
theoretically capped under the Budget Control Acts of 2011 and 2013 (sequestration) in response to mounting fiscal pressures—though some remission has occurred.
Over the past several years, the cuts have been accommodated through reduced personnel numbers (and remuneration), base closures, acquisition deferrals, and the early retirement of some assets. Since 2011, the US army has lost 98,000 active duty and reserve personnel.
Sequestration has also put pressure on the readiness of the US military by reducing the money available for operations and maintenance.
Further cuts may be necessary. Figure 5.3 shows historical US defence spending and the National Defence Budget Estimates for FY2016 out to 2020. The actual level of defence spending post-2015 is uncertain, higher and lower levels of defence spending than depicted are possible.
Figure 5.3: US defence spending 1950 to 2020
Source: FY 2016 US budget papers (Tables 7.1 and 7.2) and various sources for the cost of major wars.
Even if US baseline defence spending returns to its long-term historical trend of 0.84%
annual real growth (relative to the US CPI), the size of US armed forces will continue to decline. Over the past six decades, the annual cost of maintaining a US Navy vessel in service has risen by around 3% above inflation. Over the same period, the costs of aircraft and soldiers have risen in real terms by similar amounts. As a result, the strength of the army has more than halved and the numbers of aircraft and ships have been reduced four-fold since the 1950s (see ASPI Policy Analysis #56, Trends in US defence spending: implications for Australia, 2010).Consequently, although the United States remains the most powerful military force on earth, its ability to mount large-scale operations has been slowly eroding, along with its capacity for concurrent operations.
0 100 200 300 400 500 600 700 800 900
1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
billion FY2014 US dollars
Cost of major wars
Baseline national defense funding Trend
Korean war Vietnam war
Reagan build up
Gulf war
Invasion of Iraq
9/11 Baseline 0.84% pa real growth
End of Cold War
160 The People's Republic of China
China has enjoyed rapid economic growth since the early 1990s. Over the same period, defence spending has grown apace. Controversy surrounds the scale of Chinese defence spending. US estimates of Chinese spending are substantially higher than the official figure.
Independent estimates fall somewhere in between, see Figure 5.4.
By any estimate, Chinese defence spending is rising rapidly; by around 9% to 10% per year above inflation over the past decade, as measured in US$. In terms of Chinese currency, the growth rate averaged 12.7% between 2002 and 2011 (the ongoing appreciation of the RMB and differential inflation means that the growth rate differs from that calculated using US$).
Because defence spending growth has been matched by strong growth in the Chinese economy, the defence share of GDP has remained below 2%—at least according to official figures.
Although China is often criticised (including by Australia) for not being transparent enough about its military build-up, its periodic defence white papers are reasonably clear and largely consistent with what can be observed; China is developing the military capability to exclude the United States and its allies from its maritime approaches with a particular focus on operations against Taiwan. This is reflected in a focus on developing and modernising what the US term ‘anti-access/area denial capabilities’.
To a lesser extent, China is investing in power-projection assets—including an aircraft carrier—to protect its sea lines of communication and assert its interests further afield. By the end of the decade, China will have the ability to deploy and sustain a modest joint force, including several battalions on low-intensity operations far from China.
Figure 5.4: Chinese defence spending 1990 to 2015
Sources: Analysis of data from SIPRI Military Expenditure Database 2015, www.sipri.org; Pentagon Report to Congress on the Military Power of the People’s Republic of China, FY2013, globalsecurity.org, and media sources.
0 50 100 150 200 250
2012 US$ (billion)
SIPRI (9.9% p.a) Official (10.8% p.a.)
Range of Pentagon estimates for 2012
161 Comparing the United States and China Much speculation surrounds the changing economic and strategic balance between the United States and China. Here’s some numbers to put things in perspective.
According to the World Bank, the United States economy (US$16.8 trillion) was 1.8 times larger than China’s (US$9.2 trillion) at market exchange rates in 2013. If China’s economy grows at 7% per annum and the US at 2.5% per annum, it will only take 12 years for economic parity to be reached in 2027.
The raw statistics for recent military expenditure by the United States and the People’s Republic of China are shown in Table 5.1. Note that China’s smaller GDP share gives it a relatively greater capacity to increase defence spending.
Table 5.1: United States and Chinese defence spending circa 2014/2015 Baseline defence
Plausible defence spending trajectories for the United States and China are plotted in Figure 5.5 based on the latest SIPRI estimate of Chinese spending (2014), and using growth rates commensurate with historical trends. It shows that it is fully possible for Chinese defence spending to exceed that of the United States within the next two decades.
Figure 5.5: Plausible US and Chinese defence spending trajectories
0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
billion 2014 US$ United States + 2.5%
(GDP neutral)
Comparison of US and PRC defence spending 2015
SIPRI estimate of PRC defence spending
US defence spending
162 United Kingdom
Like the United States, the United Kingdom ramped up defence spending in the 2000s (though not to the same extent). This trend is now being reversed as part of fiscal
consolidation. The 2011 UK defence budget set out real reductions in defence spending out to 2014-15. Subsequent decisions increased the reductions to 8.8% over four years. The initial moves to accommodate the budget cuts included:
• Military personnel reductions of 25,000 (from a base of 158,500) and civilian personnel cuts of 29,000 by 2015, plus the withdrawal of land forces from Germany by 2020.
Reduction in tank and heavy artillery numbers by 40% and 35% respectively.
• Immediate decommissioning of an existing Aircraft Carrier, one Landing Platform Helicopter and one Land Ship Dock. Continuing with plans to build two new aircraft carriers but keeping one at ‘extended readiness’ (mothballing). Putting one existing Landing Platform Dock ship at ‘extended readiness’.
• Scrapping of the Nimrod maritime patrol aircraft and Harrier jump-jet fleets and a reduction in the number of Chinook helicopters to be purchased from 22 to 12.
• Five year delay in the replacement of ballistic missile submarine fleet and reduction in the number of warheads from 160 to 120.
Spending for the remainder of the decade will depend on decisions to be taken by the newly elected UK government. Many UK commentators are pessimistic about the prospects for spending growth, and the US has expressed concern about the UK’s future capacity to contribute to coalition operations. Even if funding stays steady, further capability reductions may be necessary if internal budget pressures are not held in check.
Figure 5.6: United Kingdom defence spending 1955 to 2012
Source: UK House of Commons Library Report SN/SG/113, 2009 & SN/SG/3139, 2012, UK MoD, UK Defence Statistics 2014.
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8%
0 5 10 15 20 25 30 35 40 45
percent of GDP
billion 2013-14 UK£
Share of GDP Cost of recent operations
163 North Atlantic Treaty Organisation (NATO)
Until recently, NATO defence spending (exclusive of the United States) had been remarkably static in real terms since the end of the Cold War, with the subsequent expansion of NATO doing little to change the situation. However, in recent years spending has fallen.
Figure 5.7: NATO defence spending 1988 to 2014
Source: Analysis of data from SIPRI Military Expenditure Database 2015, www.sipri.org
The larger members of NATO and the scale of their present defence spending are given in Table 5.2. In addition to the United States and United Kingdom, many other NATO members are under pressure to reduce defence spending due to fiscal pressures—notwithstanding Russian adventurism. The resulting cuts are being accommodated in various ways. For example, in 2012 Italy announced plans to reduce its troop strength from 183,000 to 150,000 and reduce civilians from 30,000 to 20,000. Germany ended conscription in 2011, and since 2009 France has shed 54,000 military and civilian positions. Because these countries are subject to the same cost pressures as the United States, the scale of NATO forces will continue to decline in the years ahead making it even more difficult to undertake operations such as in Afghanistan.
Table 5.2: Key NATO members’ defence spending 2014
United States United Kingdom France Germany Italy Canada Spain Netherlands
Defence spending as a
share of GDP 3.34% 2.47% 1.90% 1.20% 1.16% 0.89% 1.07% 1.30%
Defence spending in
2014 US$ billions 581 61.8 53.0 43.9 24.3 15.9 15.1 10.8
Source: IISS, The Military Balance 2015.
0 200 400 600 800 1,000 1,200
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
billion 2011 US$
United States Non-US New NATO Non-US Old NATO
End of Cold War Attacks of 9/11
164