In 2022, global military budgets hit an all-time high of USD2.2 trillion, according to the Stockholm International Peace Research Institute, the eighth consecutive year of increase. With Russia’s invasion of Ukraine, and China’s rapid build-up of its forces, this comes as no surprise. Still, the US accounts for almost 40% of global military expenditures, with its 2022 target at USD877 billion. Australia’s defence budget papers show spending for 2023-24 will reach AUD52 billion, some 2.04% of GDP and up from AUD49 billion (1.93% of GDP and reflected as USD33 billion in the graphic below) in 2022-23.
Source: Visual Capitalist
With the reinvigoration of the North Atlantic Treaty Organization (NATO) and coming on the heels of its meeting in Vilnius, member countries have been promising to spend more money on defense. In 2006, the defense ministers of NATO adopted a guideline that every NATO country should spend 2% of its GDP on the military. At the time, most NATO members spent far less, and little changed after the 2006 announcement.
In 2014, worried by Russia’s annexation of Crimea, NATO formalised the benchmark and urged countries to move toward it within the next decade. Still, most countries failed to meet it, to the frustration of the US. Wealthy countries like Germany, Denmark and the Netherlands (as well as Japan) seemed to be free loaders, able to spend more on their own social safety nets while the US protected them.
The situation seems to finally be changing, although there is still some way to go.
Source: NATO, New York Times (NYT)
Russia’s invasion of Ukraine last year has led to a new willingness for countries to pay for their own defense. European leaders have decided that the threat posed by an imperial and unpredictable Putin in Russia is here to stay – for a while at least.
Germany appears likely to meet the 2% threshold next year. In France, which was already close to the target, President Macron has promised to lift military spending by more than a third this decade. Australia, while not a NATO member, appears to have adopted the 2% target level. Other countries are also spending more.
From a “western” perspective, the arguments for more military spending involve both fairness and democracy. The fairness point: at a time when Americans are feeling the pinch and the US has a $32 trillion federal debt, why should Western Europe get the US to pay for its protection? And why should richer NATO countries like Germany be less willing to pay for defense than Lithuania, Latvia, Estonia, Greece and Poland (all of which have hit the 2% target)?
The democracy point: as articulated by President Biden, global affairs can be viewed as a contest between autocracy and democracy. On one side are Russia and China (with junior members like Iran, Venezuela, North Korea and a few others). On the other are the US, UK, Canada, Japan, Australia and much of Europe. As the NYT has it, “Democracy will be more likely to prevail if countries share the burdens of military spending.”
There are trade-offs, as always. The additional money that countries spend on defense is money they cannot spend on healthcare, education, refugee resettlement, public parks or clean energy. But the situation over the past few decades, when we enjoyed “the peace dividend” after the USSR collapsed, is clearly unsustainable, and we need to adapt to the times.
Disclaimer: Clime Asset Management Pty Limited | AFSL 221146 | ABN 72 098 420 770. The information provided in this post is intended for general use only. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information contained therein. Please consider the relevant disclosure document/s before investing in one of our products. Investment in securities and other financial products involves risk. An investment in a financial product may have the potential for capital growth and income but may also carry the risk that the total return on the investment may be less than the amount contributed directly by the investor. Investors risk losing some or all of their capital invested. Past performance of financial products is not a reliable indicator of future performance or returns.