Counting Dollars or Measuring Value: Distribution of Defense Expenditure by Main Category
NATO: Counting Dollars or Measuring Value Series
In addition to the commitment to spend 2 percent of GDP on defense, NATO heads of state pledged at the 2014 Wales Summit to spend 20 percent of their defense budgets on major equipment. The declaration states:
Allies spending more than 20% of their defence budgets on major equipment, including Research & Development, will continue to do so… Allies who currently spend less than 20% of their annual defence spending on major new equipment, including related Research & Development, will aim, within a decade, to increase their annual investments to 20% or more of total defence expenditures.
NATO breaks defense expenditure into four main categories: equipment, personnel, infrastructure, and other. The equipment category includes procurement spending on major equipment in eleven different areas and the associated research and development spending on that equipment.
Personnel costs include pay and allowances, retirement benefits, and pensions for military and civilian employees. Infrastructure costs comprise national military construction and support for NATO common infrastructure, including payments to and receipts from allies for hosting personnel and bases. Operations and maintenance costs largely make up the “other” category.
On average, allies and select partners spend approximately 19 percent of their defense budgets on equipment. This figure pales in comparison to the 52 percent that is spent on average on personnel costs. Unsurprisingly, there tends to be a negative correlation between the percentage of defense spending allocated towards equipment and the percentage allocated toward personnel costs; countries allocating the least towards equipment tend to direct the greatest share of their budgets to personnel. For example, Slovenia and Belgium, at the bottom of the list with 4 and 5 percent dedicated to equipment, respectively, spend over 75 percent of their defense expenditures on personnel.
Measuring security contributions using the 20 percent equipment threshold has drawbacks. As with the 2 percent of GDP metric, it is a measure of inputs rather than outputs. More generally, the 20 percent equipment measure does not assess whether the equipment investments nations are making correspond to the capability targets established by NATO. In some cases, allies may pursue costly procurements or upgrades of fighter aircraft that have not been identified for that nation as part of their NATO responsibility. The alliance collects this data but does not make it publicly available, which leaves a gap in public understanding of whether NATO members are spending their defense resources in ways that contribute to agreed transatlantic security goals.
The 20 percent equipment threshold remains an important indicator of NATO members’ and partners’ defense priorities. The data collected by the CSIS study team suggests that countries should be allocating a greater percentage of their defense budgets towards acquisition. Yet the shortcomings of the metric should caution politicians and analysts from using it to compare capability among nations. A preferable measure would be one that provides insight to security output: the ready capabilities of a nation within the context of transatlantic security challenges.
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.
 NATO Heads of State, “Wales Summit Declaration.”
 Major equipment areas include: missile systems; missiles (conventional weapons); nuclear weapons; aircraft; artillery; combat vehicles; engineering equipment; weapons and small arms; transport vehicles; ships and harbor craft; and electronic and communications equipment.
 NATO Public Diplomacy Division, “Defence Expenditure of NATO Countries (2010-2017),” June 29, 2017, https://www.nato.int/nato_static_fl2014/assets/pdf/pdf_2017_06/20170629_170629-pr2017-111-en.pdf.
Photo Credit: NATO