Is it worth spending 5% of GDP on National Defense?

The Russian invasion of Ukraine and Trump's stance demanding that other NATO countries dedicate more resources to defense should result in a substantial increase in spending on the armed forces of European countries.

In response to Trump's demands during his first presidency, several NATO countries began planning defense spending increases to reach 2% of GDP. The starting point was set in 2014, when NATO countries faced the Russian invasion and occupation of Crimea. NATO countries then committed to adopting an increasing trajectory for military spending, until it reached 2% of Gross Domestic Product (GDP) by 2024. NATO's average defense spending in 2024 is expected to have risen to 2%, but this target has not been achieved in many countries, including Portugal. According to NATO itself, in Portugal, and in more recent years, the proportion of GDP spent on defense has been around 1.6%.

Unfortunately, the true situation may be even worse. The criteria NATO adopted to measure national defense expenditures are relatively undemanding, as they allow items to be recorded as defense expenditures that initially have little relation to defense functions. To give two Portuguese examples, expenditures on pensions paid to retired military personnel and part of the expenditures on the National Republican Guard are included in these statistics. An assessment of actual defense expenditures points to lower figures. To illustrate how NATO estimates are excessive, we can compare them with EU statistics. Eurostat data are more specific and point to lower estimates of national defense expenditure. In 2023, according to Eurostat, Portugal spent only 0.8% of GDP on defense, about half the amount reported by NATO.

Meanwhile, the objectives have changed. Trump demanded that defense spending as a percentage of GDP rise to 5%. Why 5%? There appears to be no explanation based on a careful analysis of the defense needs of NATO and its member countries. Nothing is said about the opportunity costs of losing government services and benefits that will no longer be funded. It's quite possible that the 5% figure is simply a "spontaneous" idea on Trump's part, lacking empirical or analytical justification. The 5% figure is a round number, chosen to impact the international media. It's reasonable to assume that the 5% figure was not the result of a serious assessment of needs and correction of potential shortcomings in the various countries' armed forces.

The NATO countries' reaction was to accommodate Trump and reach 5% within 10 years. In practice, countries will adopt various subterfuges and a great deal of accounting creativity to reach 5%. In June, the official declaration of the NATO summit in The Hague began this path. By 2035, NATO countries will spend 3.5% of GDP annually on defense, with the remaining 1.5% of GDP earmarked for defense-related expenditures. With some skepticism, these figures could be interpreted as redefining the target for specific defense expenditures from 2% to 3.5% of GDP.

A first problem comes from Trump himself, as his negotiating strategy is to start by demanding exaggerated amounts and then end up accepting lower amounts, but above the starting point. Nothing tells us that Trump won't change his objectives in the near future. The United States itself is spending less. Estimates for 2024 indicated that American defense spending would be close to 3.3% of GDP. In this context, NATO countries can claim to agree with Trump, but in reality increase actual defense spending less than proclaimed.

Creative accounting and other similar strategies, such as reclassifying civilian public expenditures as defense expenditures, will hinder effective defense spending management. Diverting resources allegedly for defense is a complex, time-consuming process that can be hijacked by vested interests. For example, it's a known fact that if defense funding increases, corporate efforts will be made to seize these resources and increase compensation, without contributing to a better defense.

These difficulties should not distract us from the real problems. Even if 5% is an exaggerated goal, it makes perfect sense to increase the resources dedicated to national defense. Portugal has been experiencing a process of degrading equipment stocks and military capabilities due to the long-standing accumulation of deficits in defensive capacity, infrastructure, and human resources. To ensure that the additional resources dedicated to national defense in the coming years are well spent, it is important to have a clear and transparent definition of the interventions to be carried out and that their prioritization takes into account cost-effectiveness.