Growing Security Fears Boost Defence Budgets
Security fears and threats to stability have driven many Western governments to end cuts to defence spending, according to a new report released today by IHS Inc., the leading global source of critical information and insight.
The IHS Jane’s Defence Budgets Annual Report examines and forecasts defence expenditure for 104 countries and captures 99 percent of global defence spend.
Key points from this year’s report:
- Asia Pacific’s share of global defence spending will rise from one fifth in 2010 to almost one third by 2020. In the same time frame, North America is expected to fall from almost half to around one third of global spending;
- Growth accelerated in Asia Pacific as states bordering the South China Sea boosted defence spending;
- Eastern Europe replaced the Middle East as the region with the fastest growing defence budgets, with double-digit increases in response to the Ukraine crisis;
- Russia saw the largest increase in defence spending for a decade, but cuts will begin next year due to deteriorating economic and fiscal conditions;
- Low oil prices have seen the unprecedented period of budget increases in the Middle East come to an end, however cuts were limited.
Global defence spending is set to increase from $1.65 trillion in 2015 to $1.68 trillion in 2016 as global economic growth accelerates and Western markets respond to heightened security concerns. Globally, 2016 is expected to mark the return to defence budget growth, which is expected to be sustained for the remainder of the decade. NATO defence spending is expected to increase for the first time since 2010.
“This year was another year of flat defence spending but we are now entering a growth period,” said Fenella McGerty, principal analyst at IHS. “Defence strategies have shifted in the West in light of worsening security threats.”
While the US continues to be the largest single player, the Asia Pacific region will be the driving force behind global defence budget growth over the next five years.
Meanwhile, lower oil prices are serving to subdue the Middle East and North Africa regions. “Of the ten fastest growing defence budgets in 2015, just three were in the Middle East, down from six last year,” McGerty said.
In terms of defence investment, $1.6 trillion is expected to be spent on defence procurement from 2016 to 2020, with a further $560 billion due to be invested into research and development.
Asia Pacific spending accelerates as regional tensions rise; China continues to dominate
“Rising tensions in Asia Pacific have seen a long overdue process of military modernization move up the political agenda in a number of countries,” said Craig Caffrey, principal analyst at IHS. “The Philippines, Indonesia, Japan and Vietnam are all following China’s lead and we see no sign of this trend coming to an end.” By 2020, total regional spending is expected to reach $533 billion annually from $435 billion in 2015.
Chinese defence spending makes up about 40 percent of all defence spending in the Asia Pacific region. Between 2010 and 2015, China’s defence budget increased by around 43 percent in real terms, from roughly $134 billion to $191 billion. Despite a slowdown in China’s economy, the country’s defence budget is expected to grow further to $255 billion by 2020.
Despite a decade of cuts, Japan remains one of the world’s largest spenders, with a defence budget of roughly $49 billion in 2015. Since 2012 increased emphasis on defence under the Abe administration has seen core spending return to growth. However, in reality, core expenditure remains flat and has declined as a share of state spending and GDP.
Regional conflict and modernisation efforts spur growth in Eastern Europe and Baltics
After a turbulent five years, defence spending is set to soar in Eastern Europe as countries move towards spending 2 percent of GDP on defence. “Driven by the crisis in the Ukraine and Poland’s modernisation programme, Eastern Europe is now the fastest growing region globally,” McGerty said. “This position has been held by the Middle East for the last three years.”
Defence spending growth in the region averaged 13 percent in 2015, up from 4 percent in 2014, according to the IHS report. Notably, Ukraine’s defence budget increased by 70 percent in the past year as Kiev responded to unrest in the east of the country. Meanwhile Lithuania, Poland, Slovakia and Latvia also enacted double-digit real terms increases.
“The regional surge in defence spending is particularly notable in the North-East,” McGerty said. “We saw remarkable growth of 20 percent in the Baltics in 2015 and this is expected to continue in 2016.”
After three years of rapid growth, Middle East spending levels off
Propelled by record energy sector revenues, the Middle East was the fastest growing region globally between 2012 and 2014. But, 2015 saw the first defence budget cuts for a decade as oil prices crashed. “We saw the first marginal cuts in 2015, but, those cuts are now expected to deepen in 2016 as states are forced into pursuing fiscal consolidation with more vigour,” Caffrey said.
Nevertheless, heightened regional security concerns are expected to ensure that defence budgets are protected in relative terms. “As the Gulf States take a more active role in regional security, we will likely see upward pressure on defence budgets in the medium to long term,” Caffrey said. As a result defence spending in the region is expected to be largely flat at $170 billion over the next two years with a major downturn seen as unlikely.
The countries with the fastest growing defence budgets in the region in 2015 were Iran, Tunisia and Israel. Saudi Arabia will still spend the most on defence in the Middle East and North Africa region, with $46 billion in 2015.
Western Europe emerges from five years of cuts
Since 2010, Western European spending has contracted by 1.3 percent on average every year. However, 2016 will be the first year of increased defence spending in Western Europe, as major procurement projects come online and as governments boost spending in response to growing security fears.
“2015 appears to be the year when defence turned a corner in Western Europe,” McGerty said. “There was widespread recognition that cuts need to end and the region needs to respond to an increasingly complex security environment.” As a result of changes implemented this year, an extra €50 billion is expected to be spent on defence over the next five years, the IHS report said.
The UK, France and Germany account for more than 60 percent of regional spending in Europe and have held their places in the top 10 of global spenders in 2015. Notably, Norway and Finland will grow the most in 2016, with 10 percent and 6 percent growth rates, respectively.
Russia reaches peak spending
2015 was the year Russian defence spending peaked after a decade of staggering defence budget growth. The country’s core defence budget has trebled since 2007 in nominal terms, reaching 4.3 percent of GDP this year. Russia’s 2015 defence budget was $54 billion, up from $45 billion in 2014.
“Russian defence spending was starting to look unaffordable even before 2015’s economic and fiscal downturn,” Caffrey said. “Cuts are now unavoidable as Moscow tries to keep its budget deficit in check.” Russia’s defence budget is expected to fall in real terms over the next five years; however spending is still projected to be higher in 2020 than what it was in 2014.
The US defence budget declined from $625.0 billion in 2014 to $595.3 billion in 2015. Notably, the US 2015 budget represents 36 percent of the global defence budget, down from 46 percent of the global total in 2010. “However, the US defence budget is still greater than the sum of the next nine countries' defence budgets,” said Guy Eastman, senior analyst at IHS.
About the IHS Jane’s Annual Defence Budgets Report
The IHS Jane’s Annual Defence Budgets Report is the world’s most comprehensive, forward-looking study of government’s defence budgets. Tracking 99 percent of the global defence expenditure from 104 of the world’s largest defence budgets, data is compiled from IHS Jane’s Defence Budgets online solution platform. It includes five-year forecasts, historical data, budget charting, trend evaluation and in-depth analysis by country. In this study, values are based on constant 2015 US dollars.