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 10/24/2015 Capability-focused mgt - finance 2

Division of labour enables greater output through specialisation 3 Farmer Shoe maker Taxi driver Teacher Carpet maker Miner Doctor Tailor The economy

Each contributes to the economy 4 Farmer Shoe maker Taxi driver Teacher Carpet maker Miner Doctor Tailor The economy And (in the cash economy) gets back cash National Income = total of all incomes or total of all production for cash

Impact of Government 5 Farmer Shoe maker Taxi driver Teacher Carpet maker Miner Doctor Tailor The economy Government collects taxes and pays people to provide some services, including defence and security

Trade = goods in & goods out 6 Farmer Shoe maker Taxi driver Teacher Carpet maker Miner Doctor Tailor The economy Trade balance

Trade in Moldova 10/24/20157

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 10/24/20159

Azerbaijan Annual Trends /10 10/24/201510

Everything has a price 10/24/ less more product price less more supply demand

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  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 13

Contrasting starting points 14 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? 15 Damage level Risk level Invasion by neighbour Act of piracy Incursion by neighbour High Low High Cheap to deter a neighbour Expensive to prevent piracy Costs of meeting a threat may not be proportional to 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 16

10/24/ Source: SIPRI

10/24/ Source: SIPRI

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 19

Defence Spending compared Legend: Personnel Equipment Infrastructure Other USA UK TurkeyCzech 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 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

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? 10/24/ Let’s put away the money, and take a break!