With defence spending a priority, can Nato members balance their budgets?

Donald Trump’s threat to encourage Russia to attack alliance members which are failing to ‘pay their bills’ has horrified leaders across the West
As the need for increased defence spending rises, pressure is being piled on national budgets that are already stretched thin

David Dodwell

Published: 7:30pm, 16 Feb 2024

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Even as a ghost in the corridors of global power, Donald Trump retains an unnerving capacity to make the windows rattle. His attack last weekend on Nato powers which he claimed are failing to “pay their bills” – suggesting he would welcome Russian President Vladimir Putin attacking them – had Europe’s leaders horrified and their defence ministers anxiously scrutinising how to increase their defence budgets.

US President Joe Biden weighed in, saying “it’s dumb, it’s shameful, it’s dangerous, it’s un-American”. European Union foreign policy chief Josep Borrell called Trump’s blurt a “silly idea”. But the “silly idea” was not that Europeans must raise their military spending. It was that Trump is playing with fire to offer any kind of encouragement to Putin.

There are any number of reasons Trump’s stream-of-consciousness jibberish should be ignored, not least that with any luck he will not be re-elected. But the terrible possibility that he and his acolytes could return to power at the end of the year, with fast-forming plans to reset the nature of US relations with the rest of the world, has allowed Trump’s thoughts to hit a raw nerve.

Defence spending has now formally joined a long and growing queue of impossible budgetary imperatives facing governments worldwide, and among Nato’s 31 members in particular.

How to reconcile depleted coffers and diminished revenues – following the punishing pandemic years with record levels of debt, rising debt service costs, increasing healthcare, education, social security and pensions costs and the daunting costs linked with mitigating climate change and getting to “net zero” by 2050 – has already pushed many governments into what the Financial Times’ Chris Giles calls “fiscal fantasies”.

02:12

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Demands for more military spending have many political leaders blinking in the headlights, but they make the imperative for action no less pressing. Even a pacifist like me needs to concede that Russia’s invasion of Ukraine and Israel’s brutal assault on Palestinians have together transformed the defence-funding debate.

The need to be prepared to defend against armed assault is no longer a remote “poor country” problem and instead is now everyone’s urgent budgetary priority. Nato Secretary General Jens Stoltenberg was prompt to call out the reckless unrealism of Trump’s comments, but in the same breath he said that, by this year, the defence budgets of 18 of Nato’s 31 members would rise above the 2 per cent of GDP level required.

In 2016, only five members spent at this level. Today, Poland spends 3.9 per cent of its GDP on defence – even higher than the 3.5 per cent spent by the US itself. Perhaps not surprisingly, many of the Nato states that share a border with Russia are now spending above the 2 per cent threshold.

At the same time, German Chancellor Olaf Scholz reiterated commitments to lift his country’s defence budget above 2 per cent of GDP for the first time, up from 1.57 per cent. Since his Zeitenwende (“watershed moment”) speech shortly after Russia’s invasion of Ukraine, he has steered German defence spending sharply upwards. Germany is expected to spend almost €72 billion (US$77.5 billion) on defence this year, compared with a regular budget provision of €52 billion.

Polish Prime Minister Donald Tusk (left) and German Chancellor Olaf Scholz leave a news conference at the Chancellery in Berlin on February 12. Under Scholz’s chancellorship, Germany is committed to raising its defence spending to the 2 per cent of GDP expected of Nato members. Photo: Bloomberg

But Scholz’s dilemma is similar to that faced by many other Western leaders. How can he meet these new defence obligations on a sustainable basis when there are so many other pressing demands on his budget?

A study by the German Economic Institute calculated that the army had been “underfunded relative to Nato standards” by at least €394 billion. Today, it is even less well funded than it was before Russia’s invasion of Ukraine, in part because of support for Kyiv.

The task of rebuilding the German military is likely to be daunting and uncomfortably expensive. Israel is reportedly spending US$269 million a day on its war in Gaza. According to the Rand Corporation, Russia spent over US$40 billion in the first seven months of its war on Ukraine, with gross losses to GDP of between US$80 billion and US$100 billion.

With global debt estimated by the Institute of International Finance at about US$307 trillion – amounting to more than 330 per cent of global GDP – and debt service costs soaring to record levels, the immediate pressure facing most governments is not to add to the fiscal burden but to cut spending and find new ways of raising revenue.

This applies even to the United States, where the Congressional Budget Office last week complained that government finances were on an unsustainable path, with public debt likely to rise from 97.3 per cent last year to an all-time record in 2028 and to 116 per cent in 2034. Presumably, that will not greatly trouble Trump, where a surge in military spending would probably converge with his call to bolster national security.

But, for many leaders worldwide, this surge must be deeply unsettling. The need for higher military spending simply joins a long queue of budgetary imperatives. Worse, the defence imperative is likely to jump straight to the head of that queue, adding further to the fiscal challenges leaders face.

In response, the International Monetary Fund and World Bank, concerned that prospects for global growth are at the lowest level in decades, are calling for reinvigoration of inclusive and sustainable growth, building resilience, supporting reforms focused on the climate challenge, pandemic preparedness, skills development, and rebuilding multilateral institutions and international cooperation. I admire their sense of focus but fear they are moving deckchairs on the Titanic.

David Dodwell is CEO of the trade policy and international relations consultancy Strategic Access, focused on developments and challenges facing the Asia-Pacific over the past four decades