Download NATO WALES SUMMIT IMPLICATIONS: PROSPECTIVE OF DEFENCE

NATO WALES SUMMIT IMPLICATIONS:
PROSPECTIVE OF DEFENCE EXPENDITURES
IN SELECTED NATO COUNTRIES
Vladan Holcner
e-mail: [email protected]
University of Defence in Brno, Czech Republic
Abstract. Defence capabilities planning and development require long-term approach connected with stability in resources available. Thus, adequate level of stability and predictability of future amounts of defence expenditures represents one of
the prerequisites for effective development of defence capabilities and fulfilment of
commitments within defence alliances. This paper analyzes approaches of selected
NATO member countries to eventual stabilization of defence expenditures and examines effectiveness of implemented measures.
Key words: defence expenditures, defence planning, gross domestic product, stabilization.
Introduction
Defence expenditures are an integral part of public finance, aimed to ensure
one of the primary functions of a state, i.e. to provide common goods of national security (Walancik 2014). They represent total funds spend in given country
to maintain and develop its armed forces both in the peace time and war. Their
amount results from public choice, reflecting actual demand for defence expenditures, based on security, economic and last but not least political considerations (Odehnal, Sedlačík 2015). The amount of funds allocated to defence is
to reflect analysis of future uncertain and indefinite states and conditions (Urban et al. 2013) Prospective of future defence expenditures therefore depends
upon development of security threats, national decision regarding reflection of
these threats and security of financial sector, public finance in given country in
particular (Pochenchuk 2014).
The North Atlantic Treaty Organization Summit, held in Wales in September 2014, resulted in a declaration of heads of state and governments of the
member countries, representing commitments of the Alliance and its members to respond to current changes in international security and conditions of
defence capabilities of the Alliance. Besides others, these commitments have
included the intent reversing further decline in defence expenditures and initiating their gradual growth in order to achieve better balanced defence burden
sharing within the Alliance.
Forum Scientiae Oeconomia Volume 4 (2016) Special Issue No. 1
Member countries that have allocated defence expenditures on the NATO
recommended level of at least GDP 2% and at least 20% of defence expenditures towards investments, have agreed to maintain these levels. Those member countries that have allocated less than GDP 2% to defence have agreed to
eliminate any further decline in their defence expenditures and to gradually
increase their defence spending in real terms in order to reach the level of GDP
2% in 2025 at latest. Similarly, member countries that direct less than 20% of
their defence expenditures at investments have agreed to reach this investment
level within the same time horizon (NATO 2014).
The level of defence expenditures of GDP 2% and the limit of 20% of investments are no novelty. They have represented a long-term recommendation of
NATO towards its members. In 2014, only six NATO member countries have
met this requirement, namely Estonia, France, Greece, Turkey, UK and USA
(SIPRI 2016). Around 14% of total NATO member countries defence expenditures aimed at investments (Mičánek et al. 2014). In contrast to these average
values, in 2014 US defence expenditures represented app. two thirds of total
NATO member countries defence spending. On a long-term basis, US defence
expenditures include around 25% of investments (SIPRI 2016).
Are these commitments feasible? Will be NATO member countries able to
adjust their attitudes ensuring well balanced defence burden sharing within
the Alliance? Will NATO member countries allocate defence expenditures
amounts corresponding with actual need of filling existing defence capability
gaps? Can we expect that in 2025 defence expenditures will reach the level
stated in the NATO Wales Summit Declaration?
1. Methodology
To indicate potential answers to the questions raised above, an analysis of
defence expenditures in selected NATO member countries has been carried out.
Intentionally, this analysis has been conducted using defence expenditures data
of selected NATO members, representing traditional NATO members as well
as countries, joining NATO more recently. Similarly, countries representing
different economic performance have been selected. The research has been
conducted using data of Bulgaria, Czech Republic, Denmark, Germany, Poland
and Slovenia, covering a period of 22 years between 1993 and 2014. Trends in
defence expenditures, measured by absolute values in real terms and their relations to GDP, have been identified using methods of descriptive statistics. In
addition, these trends have been compared with eventual measures of defence
expenditures stabilization in respective countries. Data regarding approaches
of selected NATO member countries to defence expenditures stabilization have
been gathered using a questionnaire survey and a series of structured interviews within international subject matter expert community.
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NATO wales summit implications: prospective of defence expenditures...
2. Approaches to defence expenditures stabilization in
selected NATO nations
Based on a questionnaire survey and follow-up interviews, an overview of
approaches to defence expenditures stabilization in selected NATO member
countries over the past 20 years has been formed as of the end of the year 2015.
Out of the set of six selected countries, two have never implemented any stabilization mechanism focused particularly on the area of defence spending, namely
Bulgaria and Germany.
The Czech Republic has attempted to stabilize its defence expenditures several times. First, it was in 1996 when the Czech Government made the decision
to enhance its defence expenditures to reach their relative level of GDP 2% in
the year 2000 (The Czech Republic Government Decree 1996). The second
stabilization attempt, related to the 1999 Concept of the Defence Department
Development, tried to fix the defence spending even at the level of GDP 2.2%
until 2004 (The Czech Republic Government Decree 2002). In 2014, the Czech
Government has set absolute amounts of defence spending for the years 2004
through 2010 (Ministry of Defence of the Czech Republic 2014). The most recent Czech defence spending stabilization attempt, dated 2014, sets that within
a decade the Czech defence expenditures shall growth in real terms in each
year up to the level of GDP 1.4% in 2020 and maintain at least this level of
spending until 2024 (Deklarace... 2014). The last stabilization attempt has been
formalized as an agreement of political parties of the actual Government political parties’ coalition. The previous stabilization attempts were formalized as
the Czech Republic Government decrees, representing the decision or will of
the central administration body, therefore binding for all state administration
bodies, incl. the Ministry of Defence and the Ministry of Finance.
Denmark has stabilized its defence expenditures based on political Defence
Agreements, typically covering a period of 5 years. The current level of the
defence expenditures has been settled in the Danish Defence Agreement for
the years 2013-2017. The Defence Agreement includes prospective levels of
investment, current (operating) and personnel expenditures. Each year, based
on the annual Finance Act the defence expenditures framework spending levels
are compensating for inflation, as recorded in the Danish economy over the
previous year.
Poland has stabilized its defence expenditures since 2011 when the Polish
Parliament approved a law fixing future Polish defence expenditures at the level of GDP 1.95%. As a reaction to the NATO Summit in Wales, starting from
2016, this fixation has been increased to the level of GDP 2%. Since 2001, there
is a law stating that at least 20% of the overall amount of the Polish defence
spending shall represent investments. In addition, since 2014 there is a similar
legal requirement stating that 2.5% of the overall Polish defence spending shall
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aim at defence research and development. Since 2001, a supplementary stabilization instrument in the Polish defence expenditures has been installed, namely
the Armed Forces Modernization Fund, revenues of which have been generated
based on commercial use of military property and sales of redundant property,
host nation support related revenues and fines and penalties within the defence
department. This fund is eligible to fund armed forces related investments and
is entitle to manage its fund beyond the limits of individual fiscal years. All
the key stabilization efforts in the Polish defence spending have been legally
binding, based on laws, approved by the Polish Parliament. In addition, Poland
represents the only country out of the analyzed sample, which has apparently
responded to the NATO Wales Summit (as of November 2015).
In the past, the Slovenian political representation has adopted several commitments concerning future defence expenditures stabilization. In 1998, there
was a political declaration that the Slovenian defence expenditures shall reach
the level of GDP 2% in 2004. In 2003, a new commitment has been declared,
settling that in 2008 the level of GDP 2% shall be achieved. The most recent
stabilization attempt, reflecting concerns of NATO representatives, has been
the political commitment of the Slovenian prime minister that in 2016 the Slovenian defence expenditures will remain at the level of the previous year (GDP
0.96%) and that starting from 2017 defence expenditures shall increase by GDP
0.04% annually. In addition, a special law called Basic Development Program
was passed in 1994 and extended in 2001. The aim of this law was to provide
additional funds (besides the Ministry of Defence budget) for acquisitions of
armaments and other military equipment between the year 1994 and 2007. In
2008 a new Basic Development Program has been approved. The Table 1 bellow summarizes the stabilization efforts in the countries selected.
Fixation of Relative
Values of Future
Spending Applied
Future Revenues
Purposefully Bound
NO
NO
NO
NO
NO
NO
NO
NO
YES
YES
YES
NO
Denmark
YES
YES
NO
YES
YES
NO
NO
Germany
NO
NO
NO
NO
NO
NO
NO
Poland
YES
YES
YES
NO
NO
YES
YES
Slovenia
YES
YES
Partially
YES
NO
YES
YES
Source: Own elaboration.
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Fixation of Absolute Values of
Future Spending
Applied
NO
YES
Political-Declarative Stabilization
Mechanism Applied
Stabilization of
Capital Expenditures within Defence Spending
Bulgaria
Czech Rep.
Country
Legally Binding
Stabilization Mechanism Applied
Stabilization of
Overall Defence
Expenditures
Table 1. Summary of approaches to defence expenditures stabilization in selected NATO
member countries
NATO wales summit implications: prospective of defence expenditures...
3. Defence expenditures in selected NATO nations
To examine the actual efficiency of stabilization measures outlined above,
an analysis of defence expenditures developments in the countries selected is to
be carried out. To consider development of real purchase power of national defence sectors, values expressed in real terms are to be used (Holcner, Neubauer
2015). Using 2011 USD current prices data of the SIPRI Military Expenditures
Database (SIPRI, 2016), the Figure 1 bellow indicates trends in defence expenditures in selected NATO member countries between 1993 and 2014.
Figure 1. Defence expenditures in selected NATO member countries (USD, 2011 constant
prices)
Source: SIPRI 2016.
Between 1993 and 2014, only Poland has increased its defence expenditures
in real terms by 92% and Slovenia by less than 4%. The remaining four of the
six selected NATO member countries have either substantially or moderately
decreased their defence expenditures. In real terms, Bulgaria has decreased its
defence expenditures by app. 24%, the Czech Republic by app. 23%, Denmark
by 6% and Germany by 20% (SIPRI 2016).
Due to the significant difference between the amount of defence expenditures in Germany and other selected countries, the informative value visualization of development of absolute spending values is rather limited. Another
point of view of defence expenditures is their analysis in relation to national
GDP values, representing respective national defence burdens.
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Figure 2. Defence expenditures in selected NATO member countries (USD, 2011 constant
prices)
Source: SIPRI 2016.
Between 1993 and 2014, defence burdens in selected NATO member countries, measured as share of national defence expenditures of national GDP, decreased in all cases. In Bulgaria, the defence burden decreased by app. 48%, by
57% in the Czech Rep., by 32% in Denmark, by 37% in Germany, by 24% in
Poland and by 44% in Slovenia (Figure 2).
Neither absolute nor relative defence expenditures data indicate any difference between the countries that have implemented instruments aimed at defence spending stabilization and those countries that have been inactive in this
respect. Regarding development of national defence burdens, data indicate the
most stable situation in Poland, characterized by robust legally binding stabilization instruments, followed by Denmark with traditional political declaratory
stabilization mechanisms and Germany with no defence expenditures stabilization efforts. On the contrary the most visible turbulences in defence burden
development have been recorded in Bulgaria, Czech Republic and Slovenia.
Conclusions
The analysis of development of defence expenditures in selected NATO
member countries and their defence burdens when confronted with approaches of these countries to defence spending stabilization shows that there is no
evident link between the intensity of stabilization efforts and real stability of
defence expenditures data. This fact is closely linked to effectiveness of different stabilization mechanisms in individual countries.
Generally, the attempts to stabilize relative or absolute values of future defence expenditures in the Czech Republic have been ineffective. In spite of
the fact that the stabilization has been formalized as the Czech Government
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NATO wales summit implications: prospective of defence expenditures...
Decrees, the declared spending levels were reached just in two years. In the
Denmark, declarative political agreements concerning future defence expenditures seem to be rather effective. However, although between 1993 and 2014
the Danish defence expenditures have decreased just by 6% in real terms, its
national defence burden fell by app. 32%. Out of the analyzed sample of countries, the Poland seems to implement the most robust defence expenditures
stabilization policy, based on legally binding instruments – national laws determining future defence burden and share of investments and research and
development expenditures in future defence spending. The Polish policy seems
to be also rather successful, the Polish defence expenditures have increased by
92% in real terms. Nevertheless, national defence burden has decreased by app.
24%. Effectiveness of partially legally binding efforts in Slovenia seems to be
similar to the case of the Czech Republic. Upon implementation of relative defence expenditures thresholds, measures implemented seemed to be effective at
first. However gradually, defence expenditures reality diverted from the values
declared.
Based on the findings outlined above, it is possible to sum up that stability
of defence expenditures in time is not directly related to the particular stabilization measures implemented by national governments. Similarly, there
are differences among the countries concerning effectiveness of stabilization
measures implemented, regardless of their nature concerning their legal liability. Thus, it is possible to conclude that stability of defence expenditures is
a result rather of the long-term attitude and responsibility of national political
representation regarding the actual needs of defence capabilities development
than of particular stabilization measure implemented. The question is, whether
the past attitudes of NATO member countries towards their commitments within NATO and defence expenditures stabilization will be sufficient to fulfil their
current commitments resulting from NATO Summit in Wales.
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