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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. 36 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 37 Forum Scientiae Oeconomia Volume 4 (2016) Special Issue No. 1 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. 38 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. 39 Forum Scientiae Oeconomia Volume 4 (2016) Special Issue No. 1 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 40 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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