Defence Spending:How Much is Enough?

Dr Teri McConvilleCranfield Defence and Security

Some Basic Economics

To understand debates about defence spending and its impact, we need some idea of what happens in an economy

04/20/23Capability-focused mgt - finance

2

Division of labour enables greater output through specialisation

3

Farmer

Shoemaker

Taxi driver

Teacher

Carpetmaker

Miner

Doctor

Tailor

Theeconomy

Each contributes to the economy

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And (in the cash economy)gets back cash

National Income =total of all incomes

or total of all production for cash

Impact of Government

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Farmer

Shoemaker

Taxi driver

Teacher

Carpetmaker

Miner

Doctor

Tailor

Theeconomy

Governmentcollects taxes

and payspeople to

provide someservices,

including defence and security

Trade = goods in & goods out

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Farmer

Shoemaker

Taxi driver

Teacher

Carpetmaker

Miner

Doctor

Tailor

Theeconomy

Trade balance

Trade in Moldova

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Balance of Trade Ukraine 2008

Inflation

• Things cost more and money is worth less because• The supply or flow of money grows faster than the

growth in the production of goods and services

• The government spends more than receives;

• Full employment raises cost of labour

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AzerbaijanAnnual Trends 2004-2009/10

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Everything has a price

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less moreproduct

pric

e

less

moresupply

demand

Defence Spending: How Much is Enough?

• Defence is like an umbrella• Defence sector can have power as a single

customer, but– It has the capacity to absorb infinite

resources• Defence industries might have a monopoly

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Impact of Defence Spending Provides security: which

encourages investment Provides employment Stimulates technological

advance that might be applied in civil sector

Can train soldiers with skills that are useful in civil the sector

Takes government resources away from other priorities

Government over-spending can cause excessive taxation and/or inflation

Absorbs good brains in non-productive activity

Arms imports and foreign exchange (contentious)

Can cause neighbours to spend more on defence

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Contrasting starting points

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What’s needed to make the

country secure?

How much can the country afford to spend

on defence?

What is needed to make a country secure?

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Dam

age

leve

l

Risk level

Invasionby neighbour

Act of piracy

Incursionby neighbour

High

LowHigh

Cheap to deter aneighbour

Expensive toprevent piracy

Costs of meeting a threatmay not be proportionalto the damage or risk level of the threat

How to measure the defence effort?

• Defence spending per head of population• Total defence spending• Defence spending as share of GDP• Armed forces as a percentage of the

population

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Source: SIPRI

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Source: SIPRI

Areas of Ambiguity

• Gendarmerie costs• search & rescue

services• aid to civil powers• military pensions• military housing costs• military and schools

costs

• Accounting system– cash– resource-based system

• Departmental cross charging for marginal costs of services from defence forces - disaster relief etc

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Czech Republic

Defence Spending comparedUSA

UKGreece Hungary

Turkey

Legend: Personnel Equipment Infrastructure Other

USA

UK

Turkey Czech Republic

HungaryGreece

Source: NATO

The legislative dimension• Government proposes how much is enough• Legislature decides in the budget for raising taxes

and allocating expenditure• Legislatures vary in detail of defence budget that

can see and in detail that they approve • Legislatures entitled to know how effectively and

efficiently money spent– approve the policy that guides

expenditure– approve the spending of funds in pursuit – of policy

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Accountability

Military ‘entrepreneurs’• In some states, the military raise some of their

own funds through commercial activities: – legality?– Outside the control of the legislature– Dilutes the ethos of the professional soldier

• UK practice: – military can sell goods/services when there is an

‘irreducible spare capacity’– Tight financial records of what occurs

• 2001 UK MoD received £40 million in rent and £915 million in other income in 2000-1

How much is enough?• No easy answers• Defence & security spending should not

damage the society it is supposed to protect.• IMF and the 2% of GDP norm/ceiling• No final answer

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The End

Well done for staying

with me.Any questions?

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Let’s put away the money, and take a break!