178 ESC 09 E rev 1 - INFORMATION DOCUMENT* - THE GLOBAL FINANCIAL CRISIS AND ITS IMPACT ON DEFENCE BUDGETS
HUGH BAYLEY (UNITED KINGDOM) - RAPPORTEUR
* this is an information document only
III. NATIONAL DEFENCE BUDGETS: A SURVEY OF KEY ISSUES IN NATO MEMBER COUNTRIES
1. In 2008, it was estimated that global military expenditures totalled $1,464 billion, representing an increase of 4% in real terms compared to 2007, and a 45% increase since 1999. Despite the overall growth of governments’ defence budgets in the past decade, the global financial crisis has had a significant and far-reaching impact that will eventually compel governments to reassess national budgets. Economically burdened nations are now compelled to restructure budgets to cope with the current crisis and reflect new fiscal realities. Government efforts to stabilize and reinvigorate their national economies raises the question of how these adjustments will affect defence expenditures and the manner in which governments will seek to achieve national and international security goals.
2. In a discussion following a presentation by Neil Davies, Chief Economist and Head of Division for Economic Statistics and Advice at the UK Ministry of Defence, to the Economics and Security Committee (ESC) in Oslo, Norway, several ESC members noted that it would be useful to have a detailed assessment of envisioned defence spending in NATO countries in the coming years. Members of the committee further inquired how these cuts would be managed and whether this would affect their future commitment to NATO missions. This document is not intended to provide a detailed account of the various defence ministries’ spending budgets. Instead, it will survey the landscape of recent defence budgetary trends and shifts the 28 NATO member countries are contemplating as a consequence of the global financial crisis. The profiles below are thus snapshots of highly complex situations and are intended only to point to several key factors shaping those situations.
3. To avert recession and the possibility of complete economic collapse in the wake of the global financial crisis, most NATO governments pursued expansionary economic policies and adopted significant fiscal and monetary stimuli packages. This survey will suggest that NATO members have generally increased their defence budgets, and continue to contribute financial aid and forces to NATO expeditionary missions, such as Afghanistan.
4. While this may initially seem surprising, most defence spending involves long-term commitments, which are often difficult and expensive to reverse over the short run. Defence budgets for 2009 were already in place prior to the financial crisis, while planning for 2010 has limited governments’ ability to alter drastically their defence budgets. In light of increasing government debt, rising social welfare demands, and plummeting GDPs, maintaining current defence spending may prove difficult over the medium term. Experts agree that regardless of near-term funding streams, the nations’ defence ministries and military services all face tough budgetary decisions in the coming years. Though the document’s findings will demonstrate how defence budgets have not yet been drastically affected, governments have, however, started to restructure their budgets in anticipation of coming budgetary pressures. The document concludes that so far member countries have not sacrificed their obligation to national and international security, as well as their commitment to NATO’s mission. While current concern for these matters is warranted, this document suggests that governments may feel both politically and financially compelled to reduce defence outlays after 2011 if the economic situation does not improve substantially. The footnotes obviously point readers to more detailed accounts. The author would like to thank all those Parliaments that provided information for this information document.
5. According to the Implementation Plan for Transformation of the Armed Forces (2002-2010), Albania plans to increase spending by 0.1% GDP every year until 2010. Though Albania’s defence budget for 2009 is $270 million1 and the Ministry has pledged to spend 2% of GDP on defence in 2009, under-funding remains the primary challenge for Albania’s armed forces. Albania’s armed forces consist of 11,020 troops, but the current restructuring efforts will force the reduction of troops to roughly 10,000 men by 2010. Defence officials admit that Albania will continue to need bilateral assistance and international support to increase local force levels for international expeditionary forces, strengthen logistical support, and acquire military hardware.
6. Belgium spends just over 1% of its GDP on defence (half of NATO’s suggested level), and NATO criticized its armed forces modernisation plan for 2000-2015 for not meeting the expected military expenditure threshold of member states. The 2000-2015 defence modernisation programme anticipates personnel reductions of over 16%. The government will channel resulting savings into funds for international peace operations, procurement investment, and spending for about 24 major modernisation projects.2
7. Despite the global financial crisis, Prime Minister Herman A. Van Rompuy has also announced that Belgium would double its civilian aid to Afghanistan. In 2009 and 2010, Belgium’s budget for Afghanistan will reach €12 million ($17 million) per year.3 Moreover, the Belgian Defence Minister, Pieter de Crem, has stated that the government has increased its ground troop strength in northern Afghanistan and continued to provide F-16s in the south. In regards to the Belgian government’s current €200 million deficit on the account of the Treasury,4 Defence Minister DeCrem has promised to sell outdated materials to bring much needed funds into the MoD.
8. The Bulgarian economy has and continues to be significantly affected by the economic crisis. Economists predict that Bulgarian GDP is set to contract by around 6% in 2009, and according to Fitch Ratings, Bulgaria has $26.2 billion of debt due in 2009, equal to 6% of the GDP. Furthermore, the latest NATO press release criticized Bulgaria for only allocating $12,384 per capita for defence (in comparison, the Czech Republic allocates $24,476 per capita, Denmark $36,891, and the US $46,941). These are worrisome numbers, and raise concern for how the global financial crisis will affect the limited amount of funds already budgeted for defence.
9. Bulgaria's Defence Ministry is working to make its forces interoperable with other NATO forces and is seeking to standardise and codify its military hardware to comply with NATO standards. The new Defence Minister, Nikolay Mladenov, recently reported that the Ministry is now operating almost like a construction firm. He made it clear that his top priorities would be to prevent cuts in the salaries of the military, and to guarantee sufficient funds for Bulgarian military missions abroad. Mladenov further noted that the Ministry staff was too large (currently employing 1,440 people and its Social Agency maintains about 800), and personnel cuts would be necessary to achieve optimization.
10. The economic slowdown in Canada has compelled the government to impose a freeze on new defence programmes. It has announced that spending would remain in line with the 2007 budget. In 2008, however, the Prime Minister laid out the Canada First Defence Strategy, a 20year programme designed to enhance force capacity by investing in ‘four pillars’: personnel, equipment, readiness, and infrastructure. It will increase force size to 100,000 (70,000 regular and 30,000 reserve); replace core equipment fleets; strengthen readiness to deploy and sustain troops once deployed; and improve and modernise defence infrastructure. Over the next 20 years, the Canada First Defence Strategy will expand the annual defence budget from approximately $18 billion in 2008-09 to over $30 billion in 2027–28.5
11. In the 2008-2009 budget round, the Finance Minister announced plans to increase defence spending by 1.5% a year until 2011. After which increases of 2% per year could be expected until 2020, amounting to an additional CAD 12 billion for defence for over a 20-year period.6 Despite the global economic downturn and a $50 billion deficit, in May 2009, Defence Minister Peter MacKay reassured the elite of the defence industry that the crisis would not prevent the Canadian government from spending $60 billion on new equipment.7
12. Although Croatia initially anticipated spending 2% of its GDP on defence by 2010,8 because of the economic crisis this benchmark will unlikely be achieved. Croatia now anticipates cutting its military budget by about €74 million. After a meeting on 6 March 2009 amongst Ministers of Defence from southeast European countries, Croatian Defence Minister Branko Vukelic reassured the international community that Croatia would continue to participate in NATO, UN and EU missions in Afghanistan, Chad, and the Golan Heights, and would strive to adopt NATO equipment standards. Croatian President Stjepan Mesic has also reaffirmed the country’s commitment to NATO, while noting that modernizing and equipping the army would continue, although at a slower pace than originally anticipated.9
13. Croatia currently has 270 troops in northern Afghanistan as part of the NATO-led ISAF forces,10 and plans to dedicate to NATO operations a motorized infantry company, an engineering platoon, and a nuclear, chemical, and biological weapons defence platoon.
F. CZECH REPUBLIC
14. The Czech Republic’s defence spending has been constrained by competing government priorities, and will unlikely meet NATO’s suggested defence spending of 2% GDP before 2014. The Defence Ministry estimates that between 1.5 and 1.7% of GDP will be spent on defence over the next four years. According to the approved state budget for 2010, the Czech Defence Ministry’s budget will fall by CZK 7 billion ($364 million). Whereas the defence sector was allocated CZK 56 billion ($2.9 billion) in 2009, it will be reduced to CZK 49 billion ($2.5 billion) in 2010.
15. The Czech Republic has reassured the international community that major modernization projects are unlikely to be affected. The Defence Ministry will likely proceed with the purchase of 107 Pandur II armoured personnel carriers (APCs) and four Casa C-295M transport aircrafts. The budget reduction will also not affect foreign missions, which cost around CZK 3 billion ($182 million).
16. The Danish government is currently working on its National Defence Bill, which will establish a framework for Danish Armed Forces spending until 2015. Despite the economic crisis, the Danish government has indicated plans on increasing defence spending. The annual increase could be as high as $100 million. This, however, contradicts figures provided by Danish National Statistics, which predicts defence spending will likely fall in 2010 from $4.72 billion to $4.67 billion. Several opposition parties, including the Social Democrats (SDP), oppose increases in defence spending, especially the purchase of aircrafts. The SDP also opposes increases in funding for Denmark's military operations in Afghanistan, and wants the government to cut the overall defence budget in the face of serious economic challenges.11
17. In April 2008, Denmark increased its force level in Afghanistan to 698. The Parliament of Denmark projected that spending in Afghanistan for 2009 is about DKK 745 million to defence and about DKK 400 million to development.
18. As a result of the global financial crisis, in June 2009, the Estonian Ministry of Defence revealed a $3 million cut in the defence budget from $414 million in 2008 to $411 million in 2009.12 The economic crisis has also spurred movement towards joint defence procurement among Latvia, Lithuania, and Estonia. Officials from the three countries are seeking to harmonize their national procurement plans in order to eliminate differences in the armament and equipment contributed by each country.13
19. In January 2009, the new Defence Development Plan for 2009-2018 was adopted, which seeks to strengthen Estonia’s national defence capability and that country’s capacity to contribute to international security. The 2007-2010 budget plan identifies the following procurement priorities: EEK 10 billion ($887 million) for the development of modern, multipurpose and quickly reacting military components; EEK 1.2 billion ($106 million) for two multipurpose ships, renovation of the Kati, a spill response vessel, and other critical equipment; and, EEK 1.9 billion ($168 million) to participate in NATO integrated air safety system and to develop an air-policing airport in Amari that meets minimum requirements.14
20. Estonia has also participated in NATO-led operations in Afghanistan since 2003. Estonia currently has 150 personnel stationed there,15 and deployed additional troops for the elections in August 2009.
21. In response to the global financial crisis, France has pursued an expansionary economic policy. It will increase its defence budget for 2009 and 2010 by €1.8 billion to reach €32.02 billion. The 2009 budget included increased allocations for spending in R&D (€110 million), materiel procurement (€1,425 million), and infrastructure and transport work (€220 million). For foreign operations France will increase spending from 2008 by €50 million to roughly €888 million in 2009, of which €115 million will be dedicated to NATO operations in 2009.
22. Defence Minister Herve Morin recently noted that the six-year plan will inevitably require equipment cuts and procurement delays because a 40% increase in investment would be needed to pay for planned programmes and those funds may not all be available.16 The Ministry of Defence, however, has been authorized €500 million in supplementary funding. Total supplementary spending amounts to €1,485 million for 2009 and €770 million for 2010.17
23. In order to underwrite the €1.8 billion ($2.3 billion) rise in defence spending, France intends to close bases around the country and sell property and radio frequencies. Over three years, defence officials hope to acquire €4.5 billion from asset sales and savings, which will subsequently be utilized for equipment modernizations and pay rises for military and civilian staff. Defence spending from 2009 to 2020 is estimated to total €377 billion.18 Defence spending would be held constant in real terms until 2012, after which it would increase annually by 1% above the inflation rate.19
24. Germany’s defence budget for 2009 rose by €1.6 billion, a 5.6% increase over 2008 levels20. The budget for 2010 has already been set at €31 billion.
25. Despite an increase in the defence budget, Germany has begun restructuring current defence programmes and commitments in anticipation of the latter implications from the global financial crisis. In order to finance the wide-ranging structural changes and capability requirements, the Ministry of Defence has announced a series of measures intended to save €26 billion by 2015: personnel cuts will continue with a further 17% reduction in military personnel and 40% reduction in civilians by 2010; the number of military bases will be reduced from over 600 to roughly 400; and several procurement programmes will be cancelled or scaled back. There are concerns that tight budgetary conditions may prompt Germany to pull out of its partnership with the US and Italy on the Medium Extended Air Defence System (MEADS).21
26. In 2008, the Greek government made significant improvements in the transparency and oversight of the national defence budget. The 2008 budget increased 6.9% from 2007 to €5.97 billion.
27. Though Greece hopes to restructure substantially its domestic defence industries and upgrade its technological infrastructure, the economic downturn will likely impair this effort. The 2010 defence budget is slated for a 15% cut, in order to husband resources needed to weather the economic crisis. Estimates put Greece’s military spending between €6-10 billion (3-4% GDP per year).22 The defence budget will be further cut by 10% through to 2015 in an attempt to reduce the Greek deficit.23 Over the next five years, Greece will allocate roughly €15.5 billion for procurement: 26% of the funds will be allocated for upgrading and modernization of existing systems, 19% for naval operations, 19% for air operations, 15% for ground operations, and 5% for air defence.24
28. Hungary has been hit particularly hard by the global financial crisis, with GDP falling 6.7% this year alone.25 In response, the International Monetary Fund (IMF) and the European Union assembled an emergency financial rescue package of $25.1 billion. In March 2009, the Hungarian government reaffirmed its commitment to NATO operations in Afghanistan, as well as its ongoing effort to modernise national defence forces in compliance with NATO standards.
29. Military expenditure has fallen substantially over the last decade, due to pressures on government finances and the need to reduce the overall budget deficit. Among the Central and East European countries Hungary has one of the smallest defence industrial sectors. The Hungarian National Assembly has held a series of debates on budgetary planning in light of the financial crisis.
30. Although a long standing and important member of NATO, Iceland does not have a standing army although it maintains a coast guard and a Crisis Response Unit. Because of the severe economic crisis in Iceland, which has been made all the more trying due to the failure of the country’s banking system, the government will have to radically change the funding and structure of the Icelandic Defence Agency. Some of the Defence Agency’s tasks include: participation in coordinated NATO Air Surveillance and Policing operations; preparation and execution of defence exercises in Iceland; execution of the US-Iceland bilateral defence agreement from 1951; and, cooperation with international institutions in the field of defence.26There have been calls to save money by merging different operations of the Agency with that of other institutions. According to the 2009 budget, ISK 1.2 billion ($11 million, €8 million) will be allocated to the Iceland Defence Agency.27
31. The restructuring of the Italian defence budget reflects the current three-year spending reduction plans imposed by Finance Minister Giulio Tremonti on all Italian ministries. The 2009 defence budget was characterized by a 4% decrease in spending from €21.13 in 2008 to €20.29 billion in 2009. As a result of this contraction, Italian defence spending will account for just 1.24% of the GDP in 2009.
32. Future spending plans suggest that forces will be further reduced to 141,000 by 2012 (in 1995 force levels were 330,000). The 2009 functioning budget includes a decrease of 24.9% in training expenditures, a 36.7% decrease in maintenance expenditures and a 45.8% decrease in infrastructure expenditure.
33. Latvia’s GDP is projected to contract by 18% this year, which has raised concerns about the sustainability of government spending. Latvia nevertheless remains committed to maintaining defence spending levels at 2% of the GDP until 2010. Its leaders see doing so as an expression of the nation’s strong commitment to NATO membership. The government has already ordered a 40% reduction on planned budget expenditures with the exception of EU budget payments, Defence Ministry payments to NATO and the UN, and other payments to international organisations. Once implemented, the budget amendment will result in the Defence Ministry’s budget being reduced by LVL 30.8 million ($60.8 million).28
34. In light of the global financial crisis and its very serious impact on Lithuania and, faced with increasing debt and a collapse in economic growth, the Lithuanian government has reduced its 2009 defence budget to $430.8 million, a level 20% below the defence allocation for 2008. This marks Lithuania’s first defence cuts since 1999. The new budget will reduce spending for light arms and surveillance equipment by 8.5% (LTL 25.1 million), personnel supplies by 6%, maintenance by 16.7%, communications by 7.5%, transportations by 20.8%, and facilities maintenance by 68.8%.29 Lithuania will also look to co-operate with the other Baltic countries such as Latvia, Estonia, and Poland to establish a joint procurement plan to economize and reduce defence-operating costs.30
35. The chairman of the National Security and Defence Committee for the Lithuanian Parliament, Arvydas Anusauskas, has admitted that cuts in defence spending could make it more difficult to fulfil all the country’s international commitments. Defence spending will likely stand at 1.2% of GDP in 2009- the lowest of any NATO country31 but Lithuania is also in the midst of one of the steepest declines among NATO members.
36. Luxembourg has an army of approximately 450 professional soldiers, about 340 enlisted recruits and 100 civilians. The total budget stands at $369 million, or 0.9% of GDP. The Luxembourg government has been working on a package of economic and social measures to combat the global financial crisis, which includes the planning and development of infrastructure projects scheduled for 2011-2012. In 2005 Luxembourg spent approximately $310 million on defence, or about 0.85% of the GDP. Luxembourg participates in the NATO ISAF mission in Afghanistan, takes part in EU and NATO sponsored missions in Africa, and has committed to sending a team of de-mining experts to participate in UNIFIL in Lebanon.
37. The Netherlands economy appears to be weathering the economic crisis and it does not face the kinds of fiscal pressures that several other NATO member states confront. Defence spending in 2009 increased from €8.1 billion to €8.5 billion. The Dutch government estimates a 1% budget surplus for 201132. It forecasts that the government will contribute $13.9 billion in 2012 to defence spending- an increase of 23.9% over spending levels in 2007.33
38. In November 2007, the Dutch government agreed to remain an additional two years in Uruzgan, Afghanistan, beyond its original 1 August 2008. Foreign Minister Maxime Verhagen indicated the government would slightly reduce overall Dutch military presence during this time, and that if troops were still needed in the region at the end of this timeline, NATO would need to find others to fill the void. The Dutch currently have 1,730 troops in Afghanistan.34 The Dutch mission in Afghanistan is thus slated to conclude on 31 July 2010.
39. There has not been any political discussion within Parliament about reducing the defence budget as a consequence of the global financial crisis. Indeed, Norway increased 2009 defence spending by 2% to about $5.4 billion, mitigating fears among military leaders that the government would use the economic downturn to reduce defence outlays. In real terms, the 2% increase represents an additional $101 million for the Norwegian Armed Forces above what was distributed in 2008. Moreover, in January 2009, the armed forces had a budget increase of NOK 88 million, and in the revised national budget the government recently added NOK 505 million for international operations.
40. Defence Minister Anne-Grete Strøm-Erichsen assserts that the increase in the defence budget affirms the government's intention to bolster its military capability as part of Norway’s long-term strategy to strengthen and participate to a greater extent in NATO and UN international missions. The strategy aims to increase the armed forces by 1,000, thereby boosting the overall force size to 17,000. A budget increase of NOK 800 million is forecast over the next four years.
41. In the wake of Russia’s conflict with Georgia, Poland announced it would increase defence spending in 2009. It embarked upon a $22.7 billion 10-year modernization programme focused on air defence, helicopters, Navy, command and communications systems, and unmanned aerial reconnaissance equipment. The economic crisis, however, has compelled the government to announce a 7.8% cut in its defence budget for 2009 to PLN 22.6 billion ($6.5 billion) compared with the $7.5 billion budget on which it had originally planned. As Poland’s defence budget is pegged to its GDP, defence outlays hinge on national economic performance.35
42. The Ministry of Defence intends to keep defence expenditure in 2010 in line with the legal minimum requirement of 1.95% of the GDP. As of April 2009, defence spending was expected to rise gradually from PLN 23.8 billion in 2009 to PLN 28 billion in 2013. As a result of the global financial crisis, Poland has been reassessing priorities and defence commitments. It withdrew Polish Military Contingents from three UN-led operations, while increasing the number of Polish troops to 2,000 in Afghanistan in May 2009.
43. In 2008, the defence budget was set at €2.1 billion ($3.11 billion). The government stated that its priority would be the modernisation of equipment, the upgrading of infrastructure, and the continued reduction of personnel numbers. However, given the current economic climate, military spending is not a top priority for the current government, and it is unlikely to increase substantially over the short term.
44. The approved expenditures for the Ministry of National Defence for FY2009 were initially LEI 7,652 million, representing 1.32% of the GDP. In April 2009, after the state budget rectification, the new budget allocated to the Ministry of National Defence was reduced by LEI 696 million, which resulted in an adjusted budget of about LEI 6,955 million. As a consequence of the global financial crisis and fiscal pressures in Romania, the government has cancelled or postponed a series of new planned acquisitions. The only new expenditures and acquisitions involve NATO/EU related commitments or are absolute priorities such as those that might improve the protection of the deployed troops. The Ministry of Defence also suggests that Romania will maintain the current level of forces on foreign missions by withdrawing troops from Iraq and increasing the presence of Romania’s troops in Afghanistan.
45. Since defence expenditure levels are roughly correlated to economic performance in Slovakia, as long as economic growth is maintained the defence expenditure is expected to remain steady. In 2008, the budget increased by 11% from 2007; however, Slovakia’s reports to the UN revealed that the Defence Ministry had not spent its full budget. There has been some concern expressed about how the global financial crisis will shape Slovakia’s future defence budget. The Defence Ministry has already delayed plans to purchase new aircrafts, and the government recently announced it will seek savings of almost €332 million across the public sector. These could be signs that future defence spending might contract.
46. Since mid-2008, Slovakia has steadily increased its share of deployable troops to the ISAF mission in Afghanistan, KFOR in Kosovo, ALTHEA in Bosnia and Herzegovina, UNFICYP in Cyprus, and the UNTSO observer mission at the Lebanese, Syrian and Israeli borders. Slovakia has made a concerted effort to increase troop strength in Afghanistan from 70 in June 2008 to the current level of 246.36 Slovakian defence funding will continue to focus this year on personnel, training readiness, and equipment and infrastructure modernisation.
47. The economic downturn has compelled the Slovenian Defence Ministry to make draconian reductions in defence spending. The mid-term Defence Plan for 2007-2012 initially anticipated defence expenditures reaching 2% of Slovenia’s GDP by 2009; however, Slovenia will unlikely be able to achieve this mark before 2014. To reach that level of spending, the defence budget would have to be increased by between 8 and 16% over that period.
48. In March 2009, Defence Minister Ljubica Jelusic announced that the defence budget would be further cut and would only grow by 5.36% from 2008. Slovenian defence spending is heavily concentrated on efforts to transform the military from a conscript-force to a fully professional NATO-compatible service. Efforts are also underway to bring procurement spending under the main budget. Recent ministry activity includes the purchase of new combat vehicles for €438 million; stabilising personnel costs at around €210 million; and increasing funds for operations from €70 million in 2005 to €180 million by 2010.
49. Between 2000 and 2007 Spanish military spending nearly doubled from €7.6 billion to €12.7 billion. Spain is the fifth highest defence spender in Europe, but political support for increased military spending is lukewarm. Budget increases ended in October 2008 when the global financial crisis shifted priorities away from military spending. The Spanish Ministry of Defence is preparing to decrease spending to €8.24 billion, which is a 3.9% decrease from the 2008 level of €8.49 billion.37 While spending on personnel is expected to rise by 2%, the Ministry of Science and Innovation announced that it would slash defence R&D outlays by 12% (to €1.45 billion) and investment is also likely to fall by 15% compared with 2008 levels. The Zapatero government’s commitment to tax cuts and increased social spending will place further pressure on the defence budget.38
50. Despite the smaller budget, the MoD intends to supply the army with a new fleet of mineprotected armoured fighting vehicles. Spain’s professional military will be 81,000 strong in 2009.
51. On 11 December 2007, Turkey’s parliament approved a 1.7% increase in the MoD’s FY2008 budget, which was fixed at TRY 13.27 billion ($8.84 billion). Operations against the Kurdistan Workers' Party (PKK) terrorist organisation in Iraq and a broad effort to bolster Turkey’s domestic defence industry by strengthening technological capacity are two factors which have increased military outlays.39
52. Despite the serious impact of the global financial crisis on Turkey and a 35% depreciation of the Turkish Lira against the dollar, MoD officials insist that the economic downturn will not adversely affect current defence procurement expenditures.40 In late 2008 Turkey approved a budget increase from TRY 13.27 billion to TRY 14.5 billion ($9.3 billion) for 2009, and the defence budget is forecasted to rise to TRY 15.70 billion in 2010. Some independent analysts, however, foresee an eventual decrease both in Turkey’s defence budget and in its troop strength due to the weak economy, EU pressures, and evolving threats.
AA. UNITED KINGDOM
53. Published in 2007, the UK Government’s Comprehensive Spending Review (CSR) for the financial years 2007/08-2010/11 provided defence with an agreed settlement of an average annual increase of 1.5% until 2010/11 (nearly £4 billion over the period in cash). The Core Defence budget was set at £32.6 Bn for 2007/08, £34.1Bn for 2008/09, £35.4Bn for 2009/10, and £36.9Bn for 2010/11. In 2009 the Defence Budget will be over 10% higher, in real terms, than in 1997, marking the longest period of sustained growth since the 1980s.
54. The cost of operations is additional to the Core Defence Budget and is met from the UK’s Treasury Reserve. In the financial year 2008/09, over £2.6Bn was spent in support of operations in Afghanistan and nearly £1.4Bn on Iraq - bringing the total spent on all UK operations since 2001 to over £14Bn. Included in this figure is £5.2Bn spent on Urgent Operational Requirements (UORs) in terms of equipment that could not have been anticipated through the normal procurement programme.
55. The UK Treasury does not put a limit on the amount of money available from the Reserve in support of the UK armed forces on operations. However, in recent years the Treasury and Ministry of Defence have agreed an estimate for the UOR funding - in financial year 2009/10, an estimate of £635 million was agreed for UORs. This estimate has subsequently been enhanced by £101 million to counter Improvised Explosive Devices, bringing the total UOR estimate to £736 million. Any expenditure over and above this estimate would initially be met by the Reserve, but would ultimately have to be repaid through the defence budget within two years.
56. While these defence spending levels have so far been sustained during the financial crisis, in January 2008 the Select Committee on Defence predicted that cuts in the defence programme are likely. In March 2008, the House of Commons Defence Committee concluded that the Government could not fund the MoD’s full-equipment programme and that it would need to make difficult decisions to compile a more realistic and affordable procurement programme. The next spending review will take place in 2010 during which time the future of the defence budget will become clearer.
BB. UNITED STATES
57. In May 2009 President Obama requested $533.8 billion for the FY2010 base defence budget and $130 billion for overseas contingency operations (OCO) in Iraq and Afghanistan. Though the budget proposal does represent a cut in Bush Administration projections, it still amounts to a 4% increase overall from 2009. Though US defence spending is rising, albeit at a slower pace under the Obama Administration, a number of analysts suggest that defence budget cuts are likely to occur over the coming years due to serious fiscal pressures. Jane’s forecasts a 6% drop in the FY2011 defence budget (to $644.55 billion), and by 2013 defence outlays could fall as low as $606.6 billion. A recent assessment of Obama's defence policies conducted by Morgan Stanley suggested that Obama "will not cut the DoD budget within his first 18 months in office", but could "curtail defence spending growth, with an eye for a potential defence budget peak possibly in 2010 or the year after".
58. There have already been important cuts in particular military programmes and hardware, which have been supported by US Secretary of Defence Robert Gates, who has continuously called for the curtailment of a number of big-ticket items in order to generate savings that could be applied to higher priority and more useable systems. Major weapons systems, especially those behind schedule, are under scrutiny. Secretary Gates has made compelling cases for ending programmes that significantly exceed their budgets or use limited tax dollars to buy more capability than the nation needs. Moreover, Secretary Gates wants to de-emphasize structures and spending for conventional warfare against larger enemies, and shift this money to programmes for “irregular” warfare against small and unpredictable adversaries.41
59. The Pentagon is planning to increase the number of special operations forces by 5%, and will hire more than 30,000 new civilian officials over the next five years, by gradually reducing the number of contractors to 26% of the Pentagon work force. The DoD will also have to manage the bill for withdrawing 130,000 US soldiers from Iraq, along with enough military hardware and gear to fill over 450,000 shipping containers.
60. In summary, many NATO members in Central and Eastern Europe are finding it financially necessary to reduce defence budgets and military personnel. Many are also redoubling efforts to focus on niche capabilities in order to put their defence spending on a more financially sustainable level; it is an economic approach based on the theory of comparative advantage. However, this requires a strong and reliable alliance if it is to work over the long run.
61. In Western Europe and the US, large procurement programmes are likely to be scaled back to free up spending for other policy priorities. Ballooning budget deficits is making this almost inevitable.
62. While the above survey may not have illustrated a drastic change and reduction in defence spending, the future contraction of defence budgets may be inevitable, particularly if the current recession endures or the recovery is weak. The report suggests that governments have taken precautionary measures by altering spending habits, but economists widely believe that defence spending may well be reduced over the longer term – after 2010 – when the real cost of dealing with the financial crisis emerges. When governments start reducing spending again and are forced to repay massive debts from borrowing, public sector budgets will come under increasing pressure. As the British MoD’s chief economist Neil Davies told members of the Economics and Security Committee in May 2009, although few countries are making substantial real cuts in defence outlays at the present time, beyond 2011, inflationary and fiscal pressures could force cuts in real defence spending.
63. This raises concerns in security circles, particularly as many feel that the global economic crisis has made the world a more dangerous place. The Chairman of the Joint Chiefs of Staff, Michael Mullen, recently noted that “the degree that this financial crisis has an impact on us, and it will, I worry about an increased level of insecurity [and] instability around the world.”
64. Since the potential impact of the financial crisis has yet to be fully understood, it is difficult to forecast how this will alter future defence spending. Nevertheless, defence ministries will be forced to make difficult decisions and assess the opportunity costs of their various operations and activities- sacrificing the lesser necessity over the greater, perceived need. Former US Undersecretary of Defence, Dov S. Zakheim, has warned that the lower rate of defence budget growth would manifest itself most sharply in acquisition accounts and procurement and R&D. He further warned that the economic crisis could have a major and deleterious impact on national defence budgets that would leave the West more vulnerable than it currently is. In the current era of economic scarcity, security is likely to be increasingly understood as a commodity and governments are going to be challenged once again to affix a value to it and ensure that their national budgets are sufficiently robust to make the necessary payments.
1 Jane’s Sentinel Country Risk Assessments (April 6, 2009)