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James Bryant

Is Global Defense Spending Poised for Growth?

by James Bryant | Dun & Bradstreet Editor

June 17, 2015 | No Comments »

F35-Navy-Jet_110211-O-XX000-001_1100px-02In 2010, during the surge in Afghanistan, US defense spending peaked at about $750 billion, but has since fallen to about $570 billion. Last week the US House passed a new Pentagon budget for 2016 that would set base defense spending at $579 billion plus another $38 billion for the Overseas Contingency Operations (OCO) fund. The OCO was originally conceived as a supplemental rainy-day fund of sorts to pay for pop-up missions and respond rapidly to new threats or offer military support in the wake of natural disasters or other humanitarian crises. While the two portions of the defense budget theoretically serve different purposes, the theoretical line became increasingly blurred by the fog of war in Afghanistan and Iraq, and by bureaucratic and political bickering.

Estimates suggest US troop deployments in Iraq and Afghanistan have fallen from a peak of about 187,000 in 2008 to a projected 13,500 by 2016. The level of OCO spending has fallen during this time, but not at a rate that is proportional to the level of troop drawdowns.

The US defense budget began to shrink in 2011 in the wake of the recession and as the wars in Iraq and Afghanistan continued winding down. Europe also curtailed military spending amid its debt crisis, and several national governments applied austerity measures and budget cuts to stabilize their economies. In the last five years, some European countries reduced their military budgets by as much as 20%. During the same time, Russia increased its defense spending by 50% as it attempts to modernize its military.

The conflict in Crimea and Ukraine caught Europe by surprise and revealed the need for a renewed effort to improve military readiness. The rise of the Islamic State in Syria and Iraq is also expected to drive increased military spending in the US and its regional allies like Saudi Arabia, and among NATO-member states in Europe. The emerging conflict in Yemen may also drive military spending in the Middle East.

These emerging threats are prompting several European countries to rethink their recent military cutbacks and allocate more resources for defense. Many NATO countries are renewing efforts to return to the agreed-upon target of spending 2% of annual GDP on defense. In many cases, this standard of spending was de-emphasized during the European debt crisis. Germany recently said it would increase its military budget 6% over the next five years, and the UK and France are making similar moves to invest in military readiness. Russia’s posturing has also prompted NATO to deploy troops and modern Western military hardware to Eastern Europe and the Baltics.

This week the rhetoric from Russia intensified as it claimed it would put 40 new nuclear intercontinental ballistic missiles into service this year. US Secretary of State John Kerry said Russia’s claims are likely the result of NATO movements in Eastern Europe.

So how will all these new conflicts and saber-rattling affect defense budgets in the coming years? A recent Moody’s forecast pegs US base DoD spending to rise 2%-4% over the next 12-18 months. It further expects base US military-spending growth to remain in the single digits through 2020. But base spending doesn’t include the OCO fund’s budget, which could rise relatively easily if geopolitical tensions suddenly go from bad to worse.

James Bryant is a writer and editor for the First Research team at Hoover’s.

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Photo courtesy of the US Navy.

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