Although as a share of GDP global defense spending has not changed in the decade leading up 2022, increasing security competition in Asia and Europe will lead to lead a significant acceleration of national defense spending, particularly in Europe and East Asia, though spending levels will remain well below the levels seen during the Cold War. Following the end of the Cold War, global defense expenditure declined sharply. Many of the Warsaw Pact countries, including post-Soviet Russia, faced severe financial difficulties, forcing them to sharply reduce defense spending. The end of strategic competition between NATO and the Warsaw Pact also led NATO countries and other U.S. allies to reduce defense expenditure. In the three decades following the end of the Cold war, global defense expenditure as a share of GDP fell from 4% of GDP to 2% of GDP, while in advanced economies it fell from 4% of GDP in 1970s to less than 2% of GDP in 2020.
In aggregate defense expenditure expanded in line with nominal GDP growth over the past decade. But this masks important shifts in military spending on a country-by-country and inter-regional levels. In real terms, U.S. defense expenditure increased less than 3% in 2013-22, while Chinese, Indian and Korean spending increased 63%, 47% and 37%. Japanese defense expenditure increased a respectable 18%. U.S. defense spending increased sharply in the early 2000s, peaked at just below 5% of GDP in 2010 and has since declined to below 3.5% of GDP. The United States proved a notable exception among the world’s largest economies against the backdrop of the wars in Afghanistan and Iraq. As a share of global GDP, military spending in 2022 was virtually unchanged compared to 2013.
Defense expenditure as a share of GDP varies significantly. Among the top-15 countries, Russia, Saud Arabia, Ukraine and Israel spend more than 4% of GDP on defense. Ukraine defense spending was estimated at a whopping than 1/3 of its GDP. In terms of GDP, Kuwait, Qatar, Oman are also major military spenders. Defense expenditure in European and East Asia is increasing rapidly. Global military spending reached $2.2 trillion in 2022. The five largest spender accounted for almost 2/3 of total spending. The world’s leading countries by military expenditure in dollar terms: United States ($877 billion), China ($292 billion), Russia ($86.4 billion), India ($81.4 billion) and Saudi Arabia ($ 75 billion). The fifteen largest spenders accounted for more than 80% of global spending.
Accelerating defense spending will be driven by intensifying international security competition in Eastern European and Asia. The war in Ukraine and geopolitical competition in the East and South China Sea as well as the Indian Ocean are leading virtually all major powers to increase defense spending faster than nominal GDP growth. By comparison, expenditure in South America and Africa has not changed dramatically. The war in Ukraine has forced Russia to raise defense expenditure very significantly and it has spurred European countries, especially Eastern European countries, to raise military spending. Against the backdrop of accelerating spending, global arms exports have also increased, too.
Among the G7 countries, Germany and Japan have announced significant increases of military spending over the next few years. Russia increased defense increased dramatically after the failed blitzkrieg against Ukraine. In 2024, Russia is set to spend 6% of GDP on defense, compared to an estimated 4% in 2022 (and 2014). By comparison, Soviet defense spending in the 1980s is estimated to have accounted for 15-17% of GDP. In 2022, the Japanese government announced a 60% of increase of defense expenditure by 2027, and Germany pledged to allocate an extra 5% of GDP to modernize its military forces and increase annual defense expenditure over the medium term. Many NATO members will increase defense expenditure above the level of economic growth in view of meeting the two-percent target they committed to in 2006. Currently, only 1/3 of NATO members meet the spending target.
Due to higher nominal growth and a larger spending base, the United States and China will account for the largest share of global spending increases with combined defense spending amounting to $2 trillion by the beginning of the next decade. Finally, global international arms transfers fell 5% in 2013-17 compared to 2018-22. However, imports increased almost 50% in Europe and East Asia, while declining in Africa, the Americas, the Middle East and Asia and Oceania as whole. Imports by South Korea (61%) and Japan (171%) were up sharply. Japan’s decision to increase defense expenditure should further raise Asian arms imports during 2023-27.
Although defense expenditure will increase tangibly for the foreseeable future, as a share of GDP it will remain well below levels seen during Cold War, absent the outbreak of hostilities in East Asia or a further significant escalation of the war in Ukraine. The major powers today have higher government debt and larger fiscal deficits than during the Cold war. Social welfare expenditure a share of GDP is much higher, constraining government’s fiscal space more than in the past. Government debt and fiscal deficits in most advanced economies are far higher than during the Cold. Implicit government liabilities are also much higher and will constrain government’s fiscal space over the medium- to long-term. In the short term, political constraints on limiting non-defense expenditure, higher taxes to finance defense spending or increased borrowing will limit how quickly defense expenditure will increase. In the context of peacetime competition, the political constraints on defense expenditure are greater due to domestic distributional conflict. For these reasons, the increase in defense spending in Europe and East Asia will be gradual.
However, should security competition heat up or lead to military conflict, the political constraints on spending increases would weaken quickly. While expenditure will increase faster than nominal GDP growth in any advanced economies, this may not be the case in the two countries with the world’s two largest defense budgets in dollar terms, the United States and China, which account for half of global spending. However, relative faster economic growth, particularly in China, current economic challenges notwithstanding, will nonetheless translate into significant increases in dollar terms. China has undoubtedly far greater scope to raise defense expenditure during peace time than the United States, given that Washington already spends twice as much as a share of GDP than China. Among the top-15 countries with the highest level in defense expenditure, China is best placed to increase spending in both dollar terms and as a share of GDP.
U.S. defense spending amounted to 3.5% of GDP. Chinese defense spending was 1.7% of GDP. In dollar terms (at market exchange rates), U.S. spending is three times larger than China’s ($880 billion vs $300 billion). However, faster Chinese economic growth will allow it to increase spending faster, even without raising spending levels as a share of GDP. Under reasonable economic and financial assumption, U.S. defense expenditure could reach $1.3 trillion by 2030, up from less than $900 today (in current dollars). Chinese expenditure is set to increase from $300 billion today to $500 billion. 2030 defense expenditure would be equivalent to 3.5% of GDP in the United States and 2.2% of GDP in China.
The post-Cold War era generated the so-called peace dividend; the “post-post” Cold War era will be characterized by greater unproductivity defense expenditure, which will prove a drag on medium-to long-term, if not necessarily so in the short term. The acceleration of economic growth and global prosperity after the end of the Cold War was underpinned by globalization, the integration of China into the world economy, supply-side reforms and economic liberalization and technological innovation. Investment and economic growth also benefitted from the significant reduction of military spending made possible by the end of the Cold Car. Downsizing he armed forces and reducing relatively unproductive defense spending helped generate fiscal savings, lowered interest rates, increased non-defense investment and boost the civilian labor force. Going forward, increased military expenditure, like most deficit-financed government spending, may help boost short-term economic growth, particularly in the presence of spare capacity. But longer-term, the diminished availability of savings, higher interest rates and more limited productivity-enhancing investment will weigh on long-term growth outlook.
To the extent that an economy benefits from excess savings, like China, the scope to raise defense spending without unduly reducing the growth potential is far greater than in more savings-constrained advanced countries characterized, additionally, by more challenging medium-term budget and debt dynamics. To the extent that China’s economic problems are related to excess domestic savings, increased defense spending, sometimes referred to as “military Keynesianism” affords it far greater financial scope than more slowly-growing, more savings-constrained advanced economies in Europe and East Asia. China is the least savings-constrained economy with savings amounting to almost 50% of GDP, compared to Japan with 23% of GDP. and the United States with 17% of GDP.