Counting Dollars or Measuring Value: Defense Expenditure as a Share of GDP
NATO: Counting Dollars or Measuring Value Series
The official 2 percent threshold, while mandated at the 2014 Wales Summit, has long been understood as an unofficial spending target for NATO members. At the 2002 Prague Summit, member states made a “gentleman’s agreement” to meet the 2 percent spending threshold for defense. Yet by 2005, NATO Supreme Allied Commander General James Jones found that the “2 percent floor [was] becoming a ceiling.” One year later at the 2006 meeting of NATO defense ministers, member states again “committed to endeavor, to meet the 2% target.” Yet at the concluding press briefing, the NATO spokesman was keen to stress that it was “not a hard commitment that they [would] do it,” but rather “a commitment to work towards it.”
The 2014 Wales Summit marked the first official endorsement by heads of state/government of the 2 percent target. The summit declaration states: “Allies currently meeting the NATO guideline to spend a minimum of 2% of their Gross Domestic Product (GDP) on defence will aim to continue to do so.” Allies currently spending below the 2 percent level will:
- “halt any decline in defence expenditure;
- aim to increase defence expenditure in real terms as GDP grows;
- aim to move toward the 2% guideline within a decade with a view to meeting their NATO Capability Targets and filling NATO’s capability shortfalls.”
According to 2017 estimates illustrated in the graphic, only four (the United States, Greece, United Kingdom, and Estonia) of the 28 NATO member states meet the 2 percent spending level. Ukraine, the only NATO partner to exceed 2 percent, spends the second greatest percentage on defense in 2017 at 3.57 percent after the United States. Georgia and Poland both narrowly miss out on the 2 percent level with spending levels of 1.99 percent of GDP. It is worth noting that some allies that had been expected to meet the 2 percent target in 2017 have fallen short because of faster-than-expected growth in GDP, rather than a decline in defense spending.
Eight NATO members (and one partner) fall between the 1.5 percent and 2 percent of GDP spending levels. Notably, a majority of allies (sixteen) and four of the six included partners fall under the 1.5 percent level.
Allies also have agreed to present plans for how they will reach the 2 percent target by the year 2024 (ten years from the Wales Summit); to date 15 of 29 NATO members have developed such plans.
As a metric for assessing and comparing the contribution of NATO members and partners, the 2 percent threshold is perhaps most useful as an indicator of political willingness. States that meet or demonstrate a willingness to meet their 2 percent obligation are seen as willing contributors to the collective defense effort, while those that fail to meet it, or show little intention of meeting it, are perceived as free riders. The seeming simplicity of the metric makes it useful for public communications. President Trump’s focus on the 2 percent measure demonstrates the resonance and ease of its strategic messaging. Countries are forced to demonstrate their accountability by either increasing their investment in the alliance or explaining how else they are contributing to the collective defense effort.
However, there are weaknesses in using the 2 percent threshold for evaluating members’ contributions to the alliance. A country’s defense expenditure expressed as a percentage of GDP may be unduly influenced by fluctuations in that country’s economy. For example, if a member state’s defense expenditure remains constant from one year to the next while its GDP decreases, its defense spending as a percentage of GDP increases even as its defense output stays constant.
Similarly, the funding allocated towards defense by countries with weak or small economies may appear greater than the allocations of countries with a strong or growing economies. Germany’s defense budget is almost identical to that of France and amounted to $45.47 billion in 2017. Germany’s defense spending grew by 9.3 percent in 2017 compared to 2016, but the rapid growth in GDP at a rate of 2.5 percent meant that Berlin’s defense spending ratio increased only slightly, from 1.20 percent of GDP to 1.24 percent.
Assessing NATO members’ defense expenditures as a single year, percent of GDP snapshot fails to take into consideration this economic context as well as countries’ efforts to increase their defense spending. Figure 2 demonstrates that allies are largely increasing defense expenditures across the board with only six countries (Albania, Belgium, Croatia, Italy, Portugal, and the United States) seeing a decrease in their spending between 2013 and 2017. Of the 22 countries that increased spending over that time, the majority saw real growth in defense expenditures above the growth in their economies (all countries’ economies grew between 2013 and 2017).
Another major criticism of the 2 percent threshold is that it represents a measure of inputs rather than outputs. Assessing the financial contribution of a member state relative to its economy fails to take into consideration how the money is spent and what it adds to the collective defense effort. It similarly does not assess the efficiency with which it is spent. Analyzing defense spending as a percentage of total government expenditure would more directly measure how much a country is willing to allocate to defense under a particular government or ruling party.
For more information on transatlantic security investment, see the authors’ full report Counting Dollars or Measuring Value: Assessing NATO and Partner Burden Sharing here or download the PDF version below.
 Philip Gordon, NATO’s Growing Role in the Greater Middle East, Emirates Lecture Series 63 (Abu Dhabi: The Emirates Center for Strategic Studies and Research, 2006), 31, https://www.brookings.edu/wp-content/uploads/2016/06/emirates20060530.pdf.
 James Appathurai, Press Briefing by NATO Spokesman, James Appathurai, After the Meeting of the North Atlantic Council at the Level of Defence Ministers, June 8, 2005, https://www.nato.int/docu/speech/2006/s060608m.htm.
 NATO Heads of State, “Wales Summit Declaration.”
 Iceland is not represented on any figures in this report as it has no armed forces.
 Jan Techau, The Politics of 2 Percent: NATO and the Security Vacuum in Europe (Brussels: Carnegie Europe, 2015), 8, https://carnegieendowment.org/files/CP_252_Techau_NATO_Final.pdf.
 Rene Wagner and Michael Nienaber, “IMF, Economic Institutes Raise their Forecast for German Growth,” Reuters, April 17, 2018, https://www.reuters.com/article/us-germany-economy-gdp/imf-economic-institutes-raise-their-forecasts-for-german-growth-idUSKBN1HO0YY.
 Jan Techau, The Politics of 2 Percent: NATO and the Security Vacuum in Europe.
Photo Credit: NATO