US Remains the World Leader in Defense Spending, IHS Markit

After a lackluster 2015, global defense spending rose in 2016 to $1.57 trillion, kicking off what is forecast to be a decade of stronger global defense expenditure, according to the annual Jane’s Defence Budgets Report released today by IHS Markit, a world leader in critical information, analytics and solutions.

“Defense spending returned to a healthy rate of growth in 2016, kicking off what we expect to be a decade of stronger global defense spending,” said Fenella McGerty, principal analyst, IHS Jane’s. “Defense spending should recover to pre-financial crisis levels by 2018.”

The  IHS Jane’s Defence Budgets team produces the annual Jane’s Defense Budgets Report every December. The report examines and forecasts defense expenditure for 105 countries and captures 99 percent of global defense spending.

Key findings from the 2016 IHS Jane’s Defence Budgets Report

Asia Pacific (APAC):

• The gradual shift in focus from territorial defense to power projection could prompt even faster budget growth in APAC in the medium term.

China:

• China’s defense budget will almost double within 10 years — from $123 billion in 2010 to $233 billion in 2020.  By 2020, China’s defense budget will be about four times bigger than the UK’s and more than the entire Western European regional defense spend combined.

India:

• In 2016, India overtook Saudi Arabia and Russia to become one of the top five defense spenders globally for the first time.

Middle East:

• Instability has ensured that defense spending continues to be protected from significant cuts, despite the budgetary constraints caused by low oil prices.

NATO:

• NATO defense expenditure increased for the first time since 2010 in response to growing strategic challenges posed by the Islamic State and Russia.

Western Europe:

• Security concerns add approximately $10 billion to defense budgets across the region over the next five years. A weak pound could see India overtake the UK by 2018.

Baltics:

• Tensions with their neighbor Russia boosted defense spending from $981 million in 2014 to $2.1 billion by 2020. The region is starting from a small number, but is growing faster than any other.

US:

• The US defense budget represents about 40 percent of the total global defense budget. Since 9/11 over $9.35 trillion has been allocated to the US defense budget. 

APAC – Shift to power projection

Defense spending in APAC has boomed in recent years, driven by economic expansion in the region. Rising tensions around the South China Sea could see growth accelerate further.

Between 2011 and 2015, the key states surrounding the South China Sea spent $166 billion on the procurement of defense equipment. Between 2016 and 2020 that number is expected to increase to $250 billion, with priorities shifting towards air and naval capabilities.

“A key trend in APAC is the shift from a traditional focus on territorial defense towards power projection,” said Craig Caffrey, principal analyst, IHS Jane’s.

“This is new for the region and is likely to increase military-to-military contact between states. Rising defense spending could therefore be indirectly responsible for increased tension within the region which in turn could spur faster budget growth.”

China’s defense budget will almost double within 10 years — from $123 billion in 2010 to $233 billion in 2020.  By 2020, China’s defense budget will be about four times bigger than the UK’s and more than the combined spending of Western Europe. By 2025, China is expected to outspend all other states in APAC combined.

Japan’s defense budget will hover around the $41 billion mark between now and 2020.  “Although the Abe administration has started to increase defense spending after a decade of cuts, there are still severe budgetary constraints in place in Japan,” said Paul Burton, director, IHS Jane’s.

“Japan cannot realistically match the kind of budget growth we continue to see in China, so the government is focusing upon spending its defense budget more efficiently and trying to provide more capability for the same amount of money.”

India – Modernization drive forces India above Saudi Arabia, Russia and eventually the UK

In 2016, India passed Saudi Arabia and Russia to become the country with the fourth biggest defense budget in the world. With growth expected to accelerate over the next two years, India will become the third largest defense budget globally in 2018, surpassing the UK.

“Procurement spending has been constrained in India over the last three years as personnel costs have increased,” Caffrey said. “However, what we expect to see from 2017 onwards is a military focused on modernization. India needs new equipment to fulfill its modernization drive. Over the next  three years, India will re-emerge as a key growth market for defense suppliers.”

Middle East – Down, but not out

Despite fiscal concerns and a lower oil price, defense budgets in the Middle East are forecast to recover to the spending highs of 2014 by 2019 at the latest.

The Middle East was the fastest growing region in terms of defense spending between 2012 and 2014. Spending dipped due to the dramatic drop in oil prices. However, even at the ‘low point’, regional defense spending in 2015 and 2016 will still be higher than 2013 figures.

“We’ve seen a pause in growth in the Gulf States as a result of the collapse in oil prices,” Caffrey said. “However, generally speaking, defense has been protected from cuts due to regional instability. In the cases of Kuwait and Qatar, we’ve actually seen significant increases in defense spending.”

Saudi Arabia’s defense budget dipped slightly from $50.5 billion in 2015 to $48.7 billion in 2016. Algeria’s defense budget increases since 2010 pushed the country into the top 20 this year.

NATO and Western Europe – Security concerns boost growth

NATO defense expenditure increased for the first time since 2010 as a result of an end to cuts in the US and stronger growth in Europe.

A deteriorating security situation has caused Western European defense budgets to rise for the first time in six years. Approximately $10 billion will be added to Western European defense budgets across the next five years.

“Fueled by an increasingly uncertain security environment and growing international pressure, Western European defense spending increased for the first time since 2009 and we expect growth to continue to strengthen over the next decade,” McGerty said. ”However, growth could be set back if the region’s economic recovery is derailed by the ongoing difficulties in Southern Europe as well as uncertainty surrounding the UK’s negotiations to leave the EU.”

The combined defense budget for the European Union in 2016 is $219 billion. In 2020, the combined defense budget will be $230.4 billion. China’s defense budget will be bigger than the European Union’s in 2020.

If a weaker pound persists, India will spend more on defense than the UK by 2018 – pushing the UK out of the top three. In 2015, the UK’s defense budget was $53.5 billion. It slightly increased to $53.8 billion in 2016 and will rise to $55.1 billion by 2020.

Baltics – Fastest growing region

Since the Ukraine crisis began, defense investment in the Baltics has doubled and will double again in the next two years.

“The profile of defense spending in the Baltics has changed dramatically in the past two years,” McGerty said. In 2005, the region’s total defense spending came to $930 million in real terms. By 2014, this had grown marginally to $981 million but by 2016, it had soared to $1.45 billion.

 “Their defense budgets will all be over 2 percent of GDP by 2018, and each country will have doubled or tripled their budgets from 10 years ago. Annual growth in the region reached 27 percent in 2016 and by 2020, the region’s defense spending will reach $2.1 billion. This growth is faster than any other region globally,” McGerty said.

Russia – Out of the top five

2015 is expected to represent the zenith of Russian defense expenditures for the foreseeable future. The 2016 budget included the first reduction in Russian defense expenditures seen since the late 1990s and this year saw Russia drop to the number six position – the first time it has been out of the top five in years.

“The surge in Indian defense spending pushed Russia below Saudi Arabia and down into the number six slot,” Caffrey said. “We expect the Russian defense budget to fall again next year and it will sit below France in the number seven position by 2020, based on current plans, with a total defense budget of $41.4 billion.”

US – Still the world leader

In 2016, the US defense budget rose to $622 billion from $615.7 billion in 2015. The 2016 US figure represents about 40 percent of the year’s global defense spend.

“Since 9/11, over $9.35 trillion has been allocated to the US defence budget, with the Overseas Contingency Operations (OCO) accounting for $1.62 trillion or 17.3 percent of the total US Department of Defense budget,” said Guy Eastman, senior analyst, IHS Jane’s.

After 9/11 a buildup took place through 2010 to support operations in the Middle East and elsewhere, followed by decreasing OCO budgets and troop reductions, bringing the US Department of Defense (DoD) budget to the 2016 value of $622 billion.

“US DoD investment levels going forward were to decrease by 1.1 percent in real terms, but with the election of Donald Trump, the expectation is that both investment and readiness will receive injections of much needed funds,” Eastman said.

About 45 percent of investment funding will go toward procurement and modification of aircraft, ship, submarine and military ground vehicle platforms. When the new administration takes office in January 2017, actions toward the proposed goals to increase ground forces, increased ship and tactical aircraft numbers and readiness levels will commence along with RDT&E investment in innovation, according to the IHS Jane’s report. 

The IHS Jane’s Annual Defense Budgets Report is the world’s most comprehensive, forward-looking study of government’s defense budgets.

Tracking 99 percent of the global defense expenditure from 105 of the world’s largest defense budgets, data is compiled from IHS Jane’s Defense Budgets online solution platform. It includes five-year forecasts, historical data, budget charting, trend evaluation and in-depth analysis by country. In this study, values are based on constant 2016 US dollars. The intelligence cut off for this report is 6 December 2016.

Data

Top 20 defence budgets for 2015 and 2016 (in millions US dollars). For this study, values based on constant 2016 US dollars.

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