by Mauricio Hitschfeld, Álvaro Pina and Enes Sunel
For several decades the ‘peace dividend’ enabled governments to reduce the share of defence spending in total public expenditure, creating space to help meet demands for additional public expenditure on social protection and health. Growing geopolitical tensions are prompting reassessments of this strategy, with several countries announcing plans to increase defence spending over the next few years. These plans, which are already being implemented in some countries, will compound the rising pressures on the public finances from ageing societies, the climate transition and rising debt-service costs, as noted in the September 2023 OECD Interim Economic Outlook.
Across G20 countries as a whole, defence spending relative to GDP has declined in the past 50 years, from an average of about 3.8% in the 1970s to 2.4% in the 21st century. However, there have been marked differences across countries. US defence expenditure fell particularly sharply, from 6.0% of GDP in the 1980s to an average of 3.9% of GDP since the turn of the century (Figure 1). In relative terms, the gains from the end of the cold war were even larger for other OECD countries who are longstanding NATO members, with their joint spending declining from 2.8% of GDP in the 1980s to 1.6% of GDP since the year 2000. Military spending in non-NATO OECD members such as Australia, Japan and Mexico has in general been lower and more stable over time.
Figure 1. Global defence spending has declined since the 1970s
Defence spending, per cent of GDP, current prices
Note: OECD and NATO based on current membership. Aggregates show averages weighted by GDP at market prices in USD. Their composition changes over time due to data availability. Saudi Arabia is excluded from the non-OECD G20 aggregate due to the very high volatility of its defence spending.
Source: Stockholm International Peace Research Institute; and OECD calculations.
The reduction in spending has also been more modest in non-OECD G20 economies, a highly diverse group of countries. For instance, defence spending in China has become the second largest in the world in absolute terms, but relative to GDP is estimated to be close to the G20 median. Russia’s spending in per cent of GDP has remained internationally high since the mid‑1990s, particularly over the past decade.
Many OECD countries have begun to raise defence spending as a share of GDP over the last 2-3 years. There have been particularly strong increases in Greece and some Central and Eastern European countries, including Finland, Latvia, Lithuania and Poland, but also in many economies in Western Europe, partly reflecting military aid to Ukraine.
Further spending increases, sometimes sizeable, are likely in the coming years. France, Germany and Japan have started to implement detailed medium-term plans for that purpose, aiming at increases of about 0.4% of GDP, 0.7% of GDP and 1% of GDP respectively. In other countries, a long‑term target exists that implies higher defence spending (for instance, 2% of GDP in Canada and Italy, as per NATO commitments, and 2.5% of GDP in the United Kingdom) but medium-term plans to reach these levels have not yet been released. In contrast, the two OECD G20 countries where military expenditures as a share of GDP are highest, the United States and Korea, do not currently plan to further increase that share. Non‑OECD G20 countries have in general not increased defence spending as a share of GDP in the recent past (Russia is an exception), nor have they announced plans to do so in the medium term.
As with other areas of public spending, improvements in the efficiency of defence spending could help to contain the budget costs of achieving the intended improvement in military effectiveness. Options to enhance efficiency may differ across countries given, among other factors, the variation in the composition of defence spending (Figure 2). The average share of defence budgets spent on investment in equipment in the countries shown is 20% and on personnel costs 48%, with an average 29% devoted to maintenance and single-use equipment and 4% to other spending items, but there are large differences between countries.
Figure 2. The composition of defence spending differs substantially across countries
Shares in total defence spending, per cent, 2012-21 average, current prices
Note: Durable military equipment corresponds to gross fixed capital formation (GFCF), personnel to compensation of employees and maintenance and single-use equipment (such as ammunition) to intermediate consumption. Since GFCF is often volatile, a 10-year average is considered. Values for Korea correspond to the 2012-20 average.
Source: OECD Classification of the Functions of Government (COFOG) database; and OECD calculations.
References
OECD (2023), OECD Economic Outlook, Interim Report September 2023: Confronting Inflation and Low Growth, OECD Publishing, Paris, https://doi.org/10.1787/1f628002-en.