Defence Spending: How Much is Enough? Dr Teri McConville Cranfield Defence and Security
Jan 03, 2016
Some Basic Economics
To understand debates about defence spending and its impact, we need some idea of what happens in an economy
04/20/23Capability-focused mgt - finance
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Division of labour enables greater output through specialisation
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Farmer
Shoemaker
Taxi driver
Teacher
Carpetmaker
Miner
Doctor
Tailor
Theeconomy
Each contributes to the economy
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And (in the cash economy)gets back cash
National Income =total of all incomes
or total of all production for cash
Impact of Government
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Farmer
Shoemaker
Taxi driver
Teacher
Carpetmaker
Miner
Doctor
Tailor
Theeconomy
Governmentcollects taxes
and payspeople to
provide someservices,
including defence and security
Trade = goods in & goods out
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Farmer
Shoemaker
Taxi driver
Teacher
Carpetmaker
Miner
Doctor
Tailor
Theeconomy
Trade balance
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
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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
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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
Takes government resources away from other priorities
Government over-spending can cause excessive taxation and/or inflation
Absorbs good brains in non-productive activity
Arms imports and foreign exchange (contentious)
Can cause neighbours to spend more on defence
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Contrasting starting points
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What’s needed to make the
country secure?
How much can the country afford to spend
on defence?
What is needed to make a country secure?
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Dam
age
leve
l
Risk level
Invasionby neighbour
Act of piracy
Incursionby neighbour
High
LowHigh
Cheap to deter aneighbour
Expensive toprevent piracy
Costs of meeting a threatmay not be proportionalto the damage or risk level of the threat
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
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Areas of Ambiguity
• Gendarmerie costs• search & rescue
services• aid to civil powers• military pensions• military housing costs• military and schools
costs
• Accounting system– cash– resource-based system
• Departmental cross charging for marginal costs of services from defence forces - disaster relief etc
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Czech Republic
Defence Spending comparedUSA
UKGreece Hungary
Turkey
Legend: Personnel Equipment Infrastructure Other
USA
UK
Turkey Czech Republic
HungaryGreece
Source: NATO
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
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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
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