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A delicate equilibrium: IHS Jane's annual defence
spending review
The year 2014 represented an important milestone for the global defence industry, marking the end of
an extended period of defence budget cuts. The IHS Jane's Defence Budgets team reports
Global defence expenditure in 2014 increased for the first time since 2010, rising by 0.85% in real terms to
USD1,597.1 billion. Although military spending is expected to remain largely flat in 2015, the post-financial
crisis trend of successive annual cuts appears to have been broken.
The conclusion to the extended period of reductions in military spending seen over the past five years can,
however, perhaps be more accurately interpreted as the attainment of a delicate equilibrium. While strong
budget growth was apparent in the Middle East and North Africa (MENA), Russia, and to a lesser extent in
Asia, the increase in global terms can largely be attributed to a slowdown in the rate at which the US
budget fell, rather than a true acceleration of global growth across the board. While additional resources
were allocated to defence in absolute terms, the trend towards lower military expenditure as a proportion
of GDP also continued, with total global spending falling from 2.15% of GDP in 2013 to 2.1% in 2014. Based
on current projections, in 2016 overall spending will fall below the 2% of GDP threshold - which NATO
theoretically holds as a standard level of investment - and will continue to fall over the remainder of the
decade. As such, the increases in military spending at present are in line with economic trends and
certainly do not provide any evidence of a shift towards a prioritisation of defence.
Global defence expenditure, 2009-2020. (IHS)
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Regional breakdown of 2014 spending - USD1,597.1 billion. (IHS)
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[Continued in full version…]
US and NATO
Despite the initiation of operations against IS, overall the US defence budget - the only budget of a scale
capable of dictating global trends - has declined from its fiscal year 2010 (FY 2010) peak of USD743.3
billion. This is primarily due to the steep decline in Overseas Contingency Operations (OCO) funding as
combat operations wound down in Afghanistan. While the base budget has remained stable at USD496
billion in nominal terms between FY 2013 to FY 2015, OCO has fallen from a high of USD186.9 billion in FY
2008 to USD64.3 billion in FY 2015, making the total request for FY 2015 USD560.4 billion. While the base
budget is expected to see nominal terms increases from FY2016 onwards, declining OCO spending is
expected to cause a further real-terms degradation in the overall budget request through to FY 2020 as the
US reduces its troop strength in Afghanistan and faces continuing pressure from sequester reductions,
which are likely to restart in FY 2016. Even so, while the well-publicised cuts in the Pentagon's budget in
recent years have largely driven the negative global trend, the United States continues to dominate
military spending, accounting for 36.7% of global expenditure.
The challenging budgetary conditions are also distinctly apparent across the Atlantic, where defence
spending has also continued to shrink among NATO's major Western European powers. Regional spending
totalled USD262.7 billion in 2009 and has contracted by 2% on average every year, falling to USD237.7
billion in 2014. Defence budgets in the five largest Western European markets (the United Kingdom,
France, Germany, Italy, and Spain) decreased by 2.3% in 2014, while spending is expected to continue to
contract in 2016 and 2017, driven by further cuts in the United Kingdom and, to a lesser extent, Italy.
The UK defence budget, the largest in NATO aside from the US, has been cut by an average of 3.6% every
year since 2009 and is expected to continue to fall until at least 2017. Having largely worked through the
effects of the restructuring and budgetary cuts imposed by the 2010 Strategic Defence and Security Review
(SDSR), the UK armed forces await the publication of the 2015 SDSR with some trepidation. A further
rebalancing of force levels with additional reductions in overall defence expenditure appear highly likely
given ambitious targets to reduce the fiscal deficit set out in the Treasury's 2014 Autumn Statement.
In response to the crisis in Ukraine, a number of NATO's new Eastern European members announced
intentions to increase defence spending to the alliance's threshold target of 2% of GDP. Announcements
made in 2014 by Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Romania, and Slovakia - several of
which were made at September 2014's NATO summit in Cardiff - indicated that defence spending would be
increased among the alliance's new members and were welcomed by partner states. Nevertheless, this
additional resource will not be sufficient to offset cuts among the larger NATO members, while the ability
of these countries to implement the increases to their full extent is still in question.
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Fastest declining markets, 2012-14. (IHS)
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[Continued in full version…]
Middle East and North Africa
In direct contrast to prevailing trends in the West, expenditure in MENA has expanded rapidly over the
past three years, led by huge budget increases in Algeria, Oman and Saudi Arabia. Between 2011 and 2014
regional spending increased by 29.6% in real terms from USD108.5 billion to USD140.2 billion: by far the
largest proportional increase in defence spending of any region over the period. Military budgets in MENA
now account for 8.8% of the global total compared with 6.9% in 2009. The growth was primarily the result
of an apparent acceleration in procurement activity, with related spending increasing by 49.7% in real
terms to USD25.9 billion.
Although this period of increased investment in equipment acquisition can be partially explained by delays
to a number of programmes in 2009 and 2010 as social and internal security policy became the focus of
many governments, the drive was facilitated by increased energy revenues. The level of investment in
missile defence systems over the course of 2013 and 2014 provides a clear indication that procurement
growth has also been motivated by specific security concerns. While procurement activity is expected to
slow in the short term, there can be little doubt that equipment acquisitions will continue where they are
deemed to be essential requirements based upon emerging threats in the region.
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Fastest growing markets, 2012-14. (IHS)
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[Continued in full version…]
Asia
The outlook in Asia appears both more positive and more stable. Spending in the Asia-Pacific region is
expected to grow from USD415.6 billion in 2014 to USD547.1 billion by 2020: more than 30% of the global
total. The region has already seen its share of total global expenditure rise from 21.6% in 2009 to 26% in
2014 driven by China, India, and resurgent growth in the emerging markets of Southeast Asia. By 2020
combined defence spending in the Asia-Pacific region is expected to draw level with, and surpass, that of
the United States and be more than twice that of the European Union (EU).
While Asia's economic expansion will continue to form the foundation of further growth in military
spending, strategic concerns have also motivated increased investment in defence in a number of
countries. Despite the continued gradual slowdown in Chinese economic performance, Beijing announced
a 12.2% nominal terms increase in its defence budget in February 2014: the largest increase since 2011.
While growth on such a scale has been common since the 1990s, when combined with China's more
assertive stance in the region this has contributed to Japan's decision to increase its core budget in 2014
and to request record spending for 2015.
In July 2014, India's core defence allocation for FY 2014-15 was revised upwards to INR2.29 trillion
(USD38.8 billion) in the first budget of the new Bharatiya Janata Party (BJP) government, providing further
evidence that the new government is intent on bolstering the Indian military and more specifically on
accelerating procurement activity.
While growth in the South Korean defence budget fell to its lowest level for five years in 2014, the budget
for 2015, finalised by the National Assembly in December 2014, suggests that growth will accelerate again
to 4.9%. Based on current government projections, South Korea will surpass Australia to become the
fourth-largest spender on defence in the Asia-Pacific region in 2015, behind China, Japan, and India.
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Indonesia also continues to emerge from a period of chronic underfunding and has seen its defence budget
expand rapidly over the past five years. While the 2015 budget - an increase of 14% in nominal terms to
INR95 trillion (USD8.1 billion) - remains open to revision by the new government in Jakarta, newly elected
President Joko Widodo has reiterated the government's intention to increase Indonesian defence
expenditure to 1.5% of GDP over the next five years from 0.9% at present.
[Continued in full version…]
Russia
While the scale of budget increases in Russia has been a driver of global growth since 2011, the
deterioration in Moscow's economic and fiscal outlook looks set to remove this stimulus to defence
spending over the coming years. While the Russian defence budget increased by 17.8% in 2014 - the fourth
consecutive year of double digit growth - to reach RUB2,475.4 billion (USD54.4 billion), events over the
course of the year have placed substantial obstacles in the way of plans for future growth. Although
defence expenditure looks set for a further significant increase in 2015, the economic repercussions of
Moscow's actions in Ukraine, combined with a precipitous fall in the price of oil over the course of 2014,
look set to derail previously announced spending plans for 2016 and 2017. With about half of government
revenues generated by the oil and gas sector and the price of oil falling below USD60 a barrel in early 2015
against budget assumptions of USD100 for 2015-17, fiscal pressures are set to escalate significantly.
[Continued in full version…]
Latin America
Perhaps more unexpectedly, military budgets have also come under pressure in Latin America as a result of
a weakening short-term economic outlook. Expenditure fell by 3.1% in 2014 to about USD71.6 billion as
GDP growth slowed and both Argentina and Venezuela saw their economies contract. The region also saw
its share of global spending fall marginally to just under 4.5% of the global defence market from 4.7% in
2013, with spending falling as a percentage of GDP in a number of countries. Chilean spending at USD5.6
billion reached a low of 1.9% of GDP in 2014, having peaked at 2.9% in 2011. Colombia's relative success in
its counterinsurgency campaigns has also led to a lessening in the emphasis placed on defence in the state
budget, with expenditure on the military expected to drop below 2% of GDP by 2018.
[Continued in full version…]
Outlook
While trends have differed significantly from region to region and country to country, the end to an
extended period of defence budget cuts certainly represents an important milestone for a global defence
industry that has had to deal with the dual pressures of a shrinking market and increased competition.
Western manufacturers in particular have faced significant challenges as their home markets have
declined. As recently as 2010 the United States, United Kingdom, and France accounted for 53.5% of all
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global spending with total defence expenditure of USD884.0 billion a year; however, just five years later in
2014 these figures dropped to 44.6% and USD712.7 billion and are expected to continue to fall. The
difficulty for Western suppliers is that, while spending stopped falling in global terms in 2014, the defence
budgets of their home nations have continued to fall. The proliferation of naturally smaller growth markets
in Asia and elsewhere has also served to fragment spending, increase competition between traditional
suppliers and boost emerging competitors.
Although defence expenditure returned to growth in 2014, a more cautious approach to further spending
increases in recent high-growth markets like Algeria, Oman, and Saudi Arabia, coupled with ongoing
budgetary constraints in the West, is expected to cause global military spending to flatten out at about
USD1.6 trillion in 2015. Nevertheless, growth is expected to gradually accelerate from 2016 and be
sustained for the remainder of the decade as fiscal consolidation efforts continue to ease in major
developed economies. In the longer term, Jane's Defence Budgets expects global defence spending to
surpass its previous 2010 peak of USD1,661.7 billion before the end of the decade.
Global investment expediture (2009-2020). (IHS)
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Copyright © IHS Global Limited, 2015
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world-leading analysis of commercial, industrial and technological defence developments, budget and
programme forecasts, and insight into new and emerging defence markets around the world.
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