Fenella McGerty
Global defence spending contracted in real terms for the second consecutive year in 2022, even as a full-scale war raged in Ukraine and tensions rose in East Asia. Inflation presented a key challenge for policymakers and served to erode increases to defence spending that were implemented.
Data in the 2023 edition of The Military Balance indicates that although competing strategic drivers served to push defence spending upwards, economic challenges weighed on public-spending decisions. These included soaring rates of inflation, weaker currencies and ongoing supply-chain disruption.
In nominal terms, global defence spending has been on a strong upward trajectory over the last five years, increasing from a nominal USD1.7 trillion in 2017 to USD2.0tr in 2022. Until recently, the same could be said of defence spending in real terms, but this upward trend stalled in 2021 and 2022 owing to escalating inflation, leading to a widening delta between nominal and real spending. Using 2015 as the base year for real terms calculations, the difference came to USD101bn in 2020. This more than doubled to USD222bn in 2021 and increased again to USD312bn in 2022.
Indeed, since 2017, the cumulative impact of inflation on defence expenditure has wiped nearly USD850bn from the effective purchasing power of global defence investment, even as governments have seen their security challenges sharpen. Had inflation continued on the steady trajectory evident before 2021, the cumulative impact would have been much lower, closer to an estimated USD580bn.
Regional shiftsEurope and Asia were the only regions that exhibited real-terms defence spending growth in both 2021 and 2022. More regions managed real growth in 2022, despite rising inflation, but this was ostensibly due to one-off surges in single countries rather than a regional trend. Defence spending in Sub-Saharan African returned to real growth as Ethiopia more than quadrupled its defence budget from USD0.38bn in 2021 to USD1.58bn in 2022 after the government resumed its conflict with the Tigray People’s Liberation Front.
Other dramatic uplifts were made in-year to reflect shifts in the strategic environment or economic conditions facing the country. Unsurprisingly, Russian and Eurasian spending saw a significant uplift as Russia revealed a significantly higher budget for 2022 than initially budgeted; without the revision, regional spending would have declined in real terms in 2022. Russia’s original core 2022 budget of RUB3.50tr (USD50.0bn) was revised upward to RUB4.68tr (USD66.9bn), with corresponding total military expenditure increasing from an estimated RUB4.98tr (USD71.1bn) to RUB6.15tr (USD87.9bn). In December 2022, Saudi Arabia revealed that the planned SAR171bn (USD45.6bn) defence budget for 2022 was substantially revised upwards to SAR245bn (USD65.3bn); this had the effect of dramatically altering the 2022 growth trend in the Middle East and North Africa (MENA) region, from a 2% real reduction, into a 9% uplift.
In light of these revisions, the main driver behind the 2022 global reduction in real-terms defence spending was again the low rate of nominal growth in the US defence budget amid the 8% inflation rate there last year. The US defence budget increased from USD760bn in 2021 to USD766bn (including adjustments from the Office of Management and Budget), equating to a 5.8% cut in real terms. The 2023 US budget looks set to implement a more sizeable uplift to defence, not least through various adjustments and mark-ups made throughout the budget approval process to accommodate inflation. As such, the global trend may again return to real growth in 2023, particularly if increases continue in regions like Europe and Asia. Moreover, with most forecasts suggesting that inflation will abate, the purchasing power of any future uplifts for defence will strengthen.
European persistenceEuropean defence spending growth was significant in 2021, reaching 3.5% in real terms which outpaced the rate of growth of all other regions globally. It had been expected that, in the short term, regional defence spending growth would be more subdued in light of fiscal pressure following the coronavirus pandemic. Indeed, initial defence budget announcements in 2022 indicated as much. However, Russia’s invasion of Ukraine, which began on 24 February, caused a marked change of course. In the months that followed, around 20 European countries pledged to increase their defence spending. Notable increases were announced by Germany and Poland with uplifts supplemented by special funds, primarily aimed at bolstering capability investment.
Despite mounting economic challenges, 2022 marked the eighth consecutive year of real growth in European defence spending, albeit at a lower rate of 0.8%. Nonetheless, it is noteworthy that this growth has been maintained, given that Russia’s invasion of Ukraine – while motivating higher defence spending – also caused widespread damage and disruption to European economies. This environment created conflicting public-spending priorities for policymakers.
Defence spending increases are set to continue in Europe throughout the 2020s in line with the many commitments made in 2022. However, beyond the ongoing impact of inflation, they will be tempered in some countries by other public-spending constraints, not least the higher costs of debt servicing as interest rates increase. With such acute inflationary risks now pervasive in the global economy, it is becoming increasingly important to consider the difference between economy-wide inflation, or consumer price index inflation, and the inflation rates affecting defence in order to more accurately assess the purchasing power of a defence budget. Furthermore, should the weakness of domestic currencies against the dollar that emerged over 2022 persist into 2023, it will present a further challenge for already-pressured defence procurement budgets, not least because of the need to replenish equipment stocks donated to Ukraine.
Balancing actThe difficult conditions are not limited to Europe. Amidst mounting economic and fiscal challenges, regional defence budget growth in Asia in 2022 was significantly below trend in real terms compared with the previous decade. This was partially the result of constrained government spending, particularly in Southeast Asia, but it was also due to the impact of inflation on the spending power of defence budgets. In China, the 7% nominal increase in the 2022 budget, over 2021 figures, represents a CNY95bn (USD16bn) boost in funding for the People’s Liberation Army the largest ever annual increase in absolute terms, even though growth has in recent years stalled in real terms. Elsewhere, where significant growth did occur, it was generally the result of the approval of large special budgets for defence, such as in Japan and Taiwan. This suggests that, as in Europe, strategic factors have enabled defence spending trends in some countries to overcome wider budgetary constraints.
While enabling more rapid investment in defence, such extra-budgetary funds for defence in both Asia and Europe can have the effect of reducing transparency which is not ideal during times of heightened geopolitical tensions. Looking forward, governments globally will need to continue balancing threat drivers against economic realities. Any improvement in the latter over the coming years will help to ease the situation governments are presently experiencing, one where the value of their defence investments is being undercut even as security challenges sharpen.
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