Well, the Disruptor-in-Chief, US President Donald Trump is at it again. At today’s NATO summit he demanded that the members of NATO need to quickly increase their defence spending not only to meet the committed target of 2 percent of GDP but to also double their commitments to 4 percent of GDP. Needless to say, all of this presented an opportunity to try and take a look at some of the numbers to see where things actually stand and to put the numbers into some kind of longer term perspective.
So, I have put together data on military spending, GDP and central government expenditure for the G-7 countries. For Canada, I have data from Historical Statistics of Canada, the Urquhart and Statistics Canada GDP numbers and the Federal Fiscal Reference Tables. For the other countries, the numbers for 1950 to 2000 are taken from the Correlates of War Data Project while those from 2001 to 2017 are from the World Bank database. Note that for Germany, it is military spending for both East and West Germany from 1955 to 1989 and GDP also is combined for both countries for the 1955 to 1989 period. Why only the G-7 and not all of NATO? Well, time is money and as I do not have much of either I have opted for a truncated comparison.
Exhibit A is military spending as a share of GDP from 1950 to 2016. In the wake of WWII, spending as a share of GDP has trended down. A couple of points. In 1955, military spending as a share of GDP ranged from a high of 9.5 percent for the United States to a low of 2.5 percent for Japan – Canada incidentally was at 6.3 percent. By 2017, the highest military spending to GDP share is again for the United States – at 3.1 percent of GDP and Japan is the lowest at just about 1 percent. Canada and Italy incidentally are the next lowest at 1.2 percent each.
What is interesting is that at 3.1 percent of its GDP, if the United States wants a defence expenditure to GDP ratio of 4 percent for its partners, it will also have to commit to a significant increase in military spending on its own. And, as we know the American President campaigned on boosting defence spending and even wants to create a Space Force. However, American military spending has been falling as a share of GDP since 2010 when it was at 4.7 percent. As a share of GDP US military spending fell below 4 percent in 1995 and bottomed out at 2.9 percent in 2000-2001 and it only began to rise after 9/11. The Great Recession put a dent in American military spending.
And, while military spending as a share of GDP is one way of measuring a resource commitment, those military spending dollars have to come out of a government budget and all things given, more money for the military means less for other government priorities. Exhibit B presents a more direct comparison of the resource constraints facing countries – the share of the central government budgets devoted to military spending.
In 1955, everyone spent a much larger proportion of their government budgets on defence than they do today. Nearly 60 percent of the US federal budget was spent on defense – the highest share of the G-7 with Canada coming in second place at 38 percent. After that, France was spending 36 percent, Germany and the UK about 32 percent each and Italy and Japan were at 19 and 20 percent respectively. Of course, times have changed, and governments do spend more and on a greater variety of social goods as well. The military budget share has fallen. By 2016, the United States was still spending the largest government budgetary share on defence at 14 percent. Canada was again second at 8 percent. Japan was third at 5.5 percent followed by the UK and France at about 5 percent each, then Germany at just over 4 percent and finally Italy at just under 4 percent.
While using the defence expenditure to GDP ratio may be a good target in terms of measuring the resources a society devotes to defence, the money does have to come from a government budget. In the case of Canada, raising our defence expenditure to GDP ratio from 1.2 percent to 4 percent given a 2018 forecast GDP of 2.142 trillion dollars would mean defence spending rising from approximately 26 billion dollars to 86 billion dollars. As a share of a projected federal budget of 338.5 billion dollars, it means defence growing from approximately 8 percent of the federal budget to 25 percent. Even opting for 2 percent would result in defence spending growing to 43 billion dollars making defence nearly 13 percent of federal spending.
While not at Cold War levels - when the defence share of the budget was over 30 percent - we have not been at these kinds of defence budget shares since the 1980s and to get to it while not increasing federal spending which is already at a deficit means there would have to be a lot of other things cut from the budget. Unless of course there are tax increases to fund new military spending but that would seem to be a non-starter. Needless to say, this would be the dilemma facing all of the members of NATO. Just to get to 2 percent of GDP would add substantial spending to governments around the world. Getting to 4 percent in the absence of a direct military threat seems unrealistic and represents a massive re-militarization of the world given most G-7 members have been below 4 percent of GDP since the 1980s.
So what is this about? Is this a stick for President Trump to wave at Putin when they meet? Is this playing to Trump's domestic audience? Is it a massive Keynesian stimulus plan designed to boost American defence industries? I suppose we would have to take the need to increase military spending on faith and be content that all this represents the policy goals of a stable genius.