Transcript Defence Spending

Defence Spending:
How Much is Enough?
Dr Teri McConville
Cranfield Defence and Security
Some Basic Economics
To understand debates about defence
spending and its impact, we need some idea
of what happens in an economy
4/12/2016
Capability-focused mgt -
2
Division of labour enables greater output
through specialisation
Taxi
driver
Shoe
maker
Teacher
Doctor
The
economy
Carpet
maker
Farmer
Miner
Tailor
3
Each contributes to the economy
Taxi
driver
Shoe
maker
And (in the
cash economy)
gets back cash
Teacher
Doctor
The
economy
Carpet
maker
Farmer
Miner
Tailor
4
National Income =
total of all incomes
or total of all production
for cash
Impact of Government
Taxi
driver
Shoe
maker
Teacher
Doctor
Government
The
economy
Carpet
maker
Farmer
collects taxes
and pays
people to
provide some
services,
Miner
Tailor
5
including
defence and
security
Trade = goods in & goods out
Trade balance
Taxi
driver
Shoe
maker
Teacher
Doctor
The
economy
Carpet
maker
Farmer
Miner
Tailor
6
Trade in Moldova
4/12/2016
7
Balance of Trade Ukraine 2008
Inflation
• Things cost more and money is worth less because
• The supply or flow of money grows faster than the
growth in the production of goods and services
• The government spends more than receives;
• Full employment raises cost of labour
4/12/2016
9
Azerbaijan
Annual Trends 2004-2009/10
4/12/2016
10
Everything has a price
supply
price
more
demand
less
less
4/12/2016
product
more
11
Defence Spending:
How Much is Enough?
• Defence is like an umbrella
• Defence sector can have power as a single
customer, but
– It has the capacity to absorb infinite
resources
• Defence industries might have a monopoly
12
Impact of Defence Spending
 Provides security: which
encourages investment
 Provides employment
 Stimulates technological
advance that might be
applied in civil sector
 Can train soldiers with
skills that are useful in
civil the sector
13
 Takes government resources
away from other priorities
 Government over-spending
can cause excessive taxation
and/or inflation
 Absorbs good brains in nonproductive activity
 Arms imports and foreign
exchange (contentious)
 Can cause neighbours to spend
more on defence
Contrasting starting points
What’s needed
to make the
country secure?
14
How much
can the country
afford to spend
on defence?
What is needed to make
a country secure?
Damage level
High
Low
15
Invasion
by neighbour
Cheap to deter a
neighbour
Incursion
by neighbour
Costs of meeting a threat
may not be proportional
to the damage or risk level
of the threat
Risk level
Expensive to
prevent piracy
Act of piracy
High
How to measure the defence effort?
•
•
•
•
Defence spending per head of population
Total defence spending
Defence spending as share of GDP
Armed forces as a percentage of the
population
16
Regional Defence Spending
(UD$ constant)
Source: SIPRI
6000
5000
US$ Millions
4000
Armenia
Azebaijan
3000
Georgia
Moldova
Ukraine
2000
1000
0
2003
2004
2005
2006
2007
2008
2009
Year
4/12/2016
17
Regional Defence Spending
Source: SIPRI
(Share of GDP)
10
9
8
7
% GDP
6
Armenia
Azebaijan
5
Georgia
Moldova
4
Ukraine
3
2
1
0
2003
2004
2005
2006
2007
2008
Year
4/12/2016
18
Areas of Ambiguity
• Gendarmerie costs
• search & rescue
services
• aid to civil powers
• military pensions
• military housing costs
• military and schools
costs
19
• Accounting system
– cash
– resource-based system
• Departmental cross
charging for marginal
costs of services from
defence forces - disaster
relief etc
Source: NATO
Defence Spending compared
Czech Republic
Turkey
Turkey
Greece
Greece
USA
USA
UK
UK
Legend: Personnel Equipment Infrastructure Other
Czech Republic
Hungary
Hungary
The legislative dimension
• Government proposes how much is enough
• Legislature decides in the budget for raising taxes
and allocating expenditure
• Legislatures vary in detail of defence budget that can
see and in detail that they approve
• Legislatures entitled to know how effectively and
efficiently money spent
– approve the policy that guides
expenditure
– approve the spending of funds in pursuit
– of policy
21
Accountability
Military ‘entrepreneurs’
• In some states, the military raise some of their
own funds through commercial activities:
– legality?
– Outside the control of the legislature
– Dilutes the ethos of the professional soldier
• UK practice:
– military can sell goods/services when there is an
‘irreducible spare capacity’
– Tight financial records of what occurs
• 2001 UK MoD received £40 million in rent and £915 million
in other income in 2000-1
How much is enough?
• No easy answers
• Defence & security spending should not
damage the society it is supposed to protect.
• IMF and the 2% of GDP norm/ceiling
• No final answer
23
The End
Well done for
staying
with me.
Any questions?
Let’s put away the money, and take a break!
4/12/2016
24