Opinion / Budget, Strategy

Bad Idea: Demanding Allies Spend Two Percent of GDP on Defense

For decades, the United States has lamented the fact that its allies around the world, from Europe to the Pacific, spend too little of their own resources on defense. NATO has long encouraged member states—both officially and unofficially—to spend a minimum of two percent of their gross domestic product (GDP) on defense—a standard that has been flagrantly disregarded. According to 2018 estimates, only five NATO members including the United States (3.50 percent) spend 2 percent of their GDP on defense, while major allies in Germany (1.24 percent) and France (1.81 percent) fall short of the threshold. And some of our main allies in the Pacific aren’t doing any better by this metric. Australia spends approximately 1.8 percent of its GDP on defense while Japanese defense expenditures fail to account for even one percent of its GDP according to 2017 estimates from the Military Balance 2018.

Don’t get us wrong—our allies and partners should be doing much more to provide for their own security and contribute more equitably to collective defense efforts. But demanding that they spend an arbitrary ratio of defense to GDP is ridiculous and counterproductive. Defense spending as a percentage of GDP is a fundamentally flawed metric that does not fully capture the contribution of allies and does little to incentivize them to do what we actually want them to do—build a sizable, capable, and well-trained military that is designed and prepared to operate in coalitions when called upon.

To understand why two percent of GDP is a flawed metric, consider the case of Greece.  It spends more as a percentage of GDP (2.27 percent) than any other NATO country except the United States. But Greece is far from being a major European military power. Why does it rank so high in terms of spending as a percentage of GDP? It is because the Greek economy contracted by more than 25 percent in real terms from 2007 to 2017. When the denominator (GDP) declines, the ratio of defense spending to GDP goes up. In reality, Greek defense expenditures have decreased by almost 1.2 percent in real terms between 2011 and 2018. This is not a sign of progress or strength, but the flawed metric we are using makes Greece look like a shining example for other NATO allies. Conversely, the United States has seen its percentage of GDP spent on defense fall from an average of 7.4 percent during the Cold War to under four percent today. This is not because U.S. defense spending has declined in real terms—the U.S. defense budget today is higher than it was at the peak of the Reagan buildup—it is because the U.S. economy has grown.

Another complicating factor with this metric is that the numerator (defense spending) is difficult to compare across nations. NATO has a set of standards for what should and should not count as defense spending, but even this does not fully capture all the differences in how countries fund and categorize defense-related spending, such as unfunded liabilities in pension funds and veterans benefits. And even in instances where NATO has clearly specified benchmarks for specific types of spending, member states still consistently fail to meet them. In an effort to enhance capabilities and modernize, the alliance has mandated that countries spend 20 percent of their defense budget on equipment. Yet only 15 of the 28 NATO states meet that threshold, while on average, members spend 52 percent of their defense expenditures on personnel.

Defense spending as a percentage of GDP also fails to capture the numerous other ways in which countries contribute to the alliance. As CSIS expertly detailed in a report earlier this year, allies contribute to our collective security in many ways, both militarily and economically. For example, if you look at member states’ troop contributions to NATO operations in places such as Afghanistan and Kosovo, countries like Canada, Denmark, and Germany—which all spend less than two percent on GDP—stand out. From 2002 to 2011, Canada contributed a greater percentage of its active duty force to operations in Afghanistan than even the United States. In the Pacific, meanwhile, South Korea and Japan pay billions to host forward-deployed U.S. forces.

More defense spending should not simply be our end goal in asking more from our allies. Rather, we need to measure allies’ contributions according to outputs rather than inputs. What we want is for our partners to field sizable, well-equipped and trained forces with modern capabilities suitable to the threats we are likely to face as an alliance. Moreover, we want them to have complimentary capabilities wherever possible to help minimize redundancies and capability gaps across the alliance. What’s important is not how much they spend but how they spend it.

Instead of setting an arbitrary target for defense spending as a share of economic output, we should be sitting down with allies and developing force structure and modernization targets. For example, Japan could double its defense spending, but if it uses those extra resources to grow its ground forces, that’s not exactly the help we need to deter China and North Korea. Instead we should be working with Japan to set targets for how many fifth-generation fighter squadrons, aerial refueling tankers, and Aegis destroyers it should have (just to name a few). For our NATO allies, a major deficiency that we have repeatedly encountered in coalition operations is a lack of magazine depth in precision-guided munitions. Perhaps building up greater inventories of Tomahawk cruise missiles and GPS-guided bombs should be an explicit target for some of our transatlantic partners. And just as important, we should set higher targets for joint training exercises to ensure our capabilities are interoperable and our personnel have ample experience working together.

It’s time we ditch the two percent (or any percent) of GDP metric for allied defense spending and focus on what really matters—capability, capacity, readiness, and interoperability. In the end, it’s not about how much of our allies’ economic output is directed to defense, and this metric does little to incentivize the results we want to see. Let’s stop arguing over percentages and focus on what matters: building allied forces that are sized, trained, and equipped for the threats we face and the adversaries we want to deter.

(Photo courtesy USNATO).

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Todd Harrison, Seamus P. Daniels and sdaniels, "Bad Idea: Demanding Allies Spend Two Percent of GDP on Defense," Center for Strategic and International Studies, December 21, 2018, last modified December 21, 2018, https://defense360.csis.org/bad-idea-demanding-allies-spend-two-percent-of-gdp-on-defense/.