2025 Defence Budgets Annual Report

Transcript

Hello and welcome to this Janes online intelligence briefing, which today presents our annual global defence budgets report. After the unprecedented expansion in global defence budgets that we saw in 2023 following Russia's full-scale invasion of Ukraine the year prior, 2024's increase was one of the slowest we've seen in recent years. Although, as we'll see, this total obscures a wide degree of regional variation. Annual expansion in military funding dropped from 11.8% in real terms in 2023 to just 1.1% last year, raising the global total by just over 26 billion USD to 2.48 trillion USD. This means that in dollar terms, funding growth last year was just one-tenth of what it was the year prior. Excluding the post-pandemic cut, this was the lowest rate of expansion that we've seen since 2013. We'll examine the sources of this slowdown over the course of the presentation, but it's worth noting that these metrics are on their own far from a fair assessment of the state of the global defence market in 2024, driven as they are by very large changes in a few very large budgets.

Based on the numerous budget releases already available for the 2025 financial year, already underway in many countries, this year we'll see an acceleration to rates which, though well below the recent peak in 2023, are a return to a level above recent averages. Defence budgets can be expected to expand by 3.6% globally, adding 88 billion USD to take the world's total to 2.56 trillion USD, more than 420 billion USD higher than the level before the outbreak of the war in Ukraine. Although 2025's return to fairly swift growth suggests that the impact of Russia's war on the global defence funding environment is not quite over yet, our medium-term forecast shows a return to a slower pace of expansion at a five-year compound annual growth rate of 1.46%. As soon as 2026, with another slight deceleration in growth occurring as we Russia's extremely large budget expansion this year was big enough that it makes its region, which includes several low-spending ex-Soviet states, the fastest growing in the world in the past five years. This position would otherwise be held by Eastern Europe, whose military funding has grown steadily since Russia's previous invasion of Ukraine in 2014, but especially quickly from 2018 onwards. Were there to have been no expansionist Russian military activities in Europe, it's likely that Asia would have added the most defence expenditure since 2018. Although China's growth trajectory is gradually slowing, this has recently been increasingly balanced by a broader collection of countries which are significantly increasing spending.

Western European defence policy took longer to react to the 2014 invasion of Ukraine, but it did eventually have a marked impact. The major policy announcements made in Europe following the 2022 invasion have similarly brought changes more to the expected growth path of these countries than to 2023's allocations, whose expansion was actually slightly slower than in the previous year. When looking at the growth figures of North America, it's worth remembering the sheer scale of the absolute funding it spends, of course, primarily in the US. Here a real increase of 4.2% from 2018 to 2023 added 37 billion USD in spending across the period, similar to that of all of Eastern Europe combined. The five-year growth figure for the last of the major regional defence markets, the Middle East and North Africa, is this year a little misleading because it contains within it a major change in direction, which was brought about by the recovery in oil prices which occurred from late 2021 to mid-2022. After six consecutive years of real-terms cuts to defence budgets, funding for the region's armed forces jumped back to considerable expansion of more than 13% this year, with a nominal expansion of more than 20%, which is its highest growth rate in our records on that metric by some margin. A similar turnaround in Latin America has not yet been achieved, but is expected to take place next year. While our smallest regional market by value, Sub-Saharan Africa, is expected to witness a more gradual acceleration of growth in the short to medium term.

Our forecast growth rates for each region show European growth slowing significantly over the coming decade, but still producing the second fastest expansion in terms of its compound annual growth rate, with Asia Pacific's steadier increases likely to see it add more in percentage and dollar terms by 2033. The United States 2025 budget of 920 billion USD including Department of Energy and mandatory defence spending, was a nominal annual increase of just over 1.2%. But this is likely to result in a real contraction of almost the same figure, leaving spending more than 5 billion USD lower. And while two of the largest contributors to 2024's positive growth figures, Western Europe and Northeast Asia, are still close to the top of the table of regional increases this year, both will add less to their budgets than they did last year. Aside from Eastern Europe, where Ukraine's budget is expected to regain funding lost last year, only Russia and Central Asia and the Middle East and Persian Gulf, all regions where spending is reliant on hydrocarbon revenues, will add significantly more to their defence budgets this year than they did in 2024. Despite being the second smallest of our regions in dollar terms, Latin America is expected to be responsible for the largest reduction this year, as the majority of Mexico's largest ever increase in 2024 is reversed. With membership of NATO representing the focus of almost every Western European country's defence and security activities, it's worth assessing the change in their funding policies through the lens of the alliance's own metrics and commitments. Before the NATO funding pledges made in 2014 for alliance members to move towards spending the equivalent of 2% of GDP on defence and 20% of their defence budget on investment activities, only France, the UK, and intermittently Greece fulfilled both criteria.

Here, by the way, I'm showing NATO members from across the whole of Europe. As we've seen already, a bigger change than the increase in overall defence spending in Western and Southern Europe has occurred in the functional makeup of that spending. If I click forward to show these metrics as they are now, you'll see not only some rightward movement on the x-axis indicating higher percentages of GDP, but a much more visible upward movement on the y-axis, showing the growth of the share of defence budgets spent on an investment activity rather than personnel or operations maintenance. Compared to the three in 2011, in 2025, 15 European NATO members meet the 2% of GDP target, and three more come close. But every country excluding Portugal, and only just, meets or significantly exceeds the goal of spending 20% of their defence budget on equipment acquisition or research and development. Whether driven by the war in the alliance's east or by a desire to hedge against the return of a US administration vocal about Europe's need to provide its own security, NATO members have collectively produced a meaningful shift in their investment in the alliance's capabilities. Thanks very much, Thomas. Now let's take a look at the United States, a budget of sufficient size that minor fluctuations in its growth rate can drive major shifts in total global spending. With the 2025 National Defence Authorization Act agreed in December, we now know that the US will spend up to 920 billion USD on its military this year, including mandatory funding and Department of Energy defence expenditure. Although Congress made several amendments reducing ONM allocations by just over 3 billion USD and increasing procurement by just under 1.5 billion USD, the total NDAA figure was just 100 million USD less than proposed in the president's budget request. With no major departure from the request in the budget year, our forecast follows the policy projections set out in that document. A path of slowish, mostly 2% nominal growth out to 2029, with slower sub-1% annual expansion from 2030 onwards. Taking into account the effects of inflation, as our numbers do, this produces a slow decline at a negative compound annual growth rate of 0.5% to 2035.

While the new presidential administration will have to work with the same Congress to pass future budgets, at least initially, the change in government introduces a large degree of uncertainty around the future budgetary environment. The Biden administration's final budget forecasts fall well below the 1.5% historic 10-year CAGR and even slightly below the 20-year rate of 0.8%. If budget expansion instead reached rates seen during the previous Trump administration, the annual allocation could exceed 1.2 trillion USD by the early 2030s. Or if instead growth was closer to the 10-year historic rate, then spending would likely remain static as a percentage of GDP at close to the current 3%, taking the total just above 1 trillion USD by 2035. That takes us just about to the end of this year's presentation, but as usual, we'll end with some rapid-fire statistics which will hopefully help to summarize what to expect in the year ahead and further out into our forecast to 2035. Looking at the fastest changes we'll see in 2025, in proportional terms, there are 22 countries that are likely to raise their defence spend by 10% or more in real terms, and 10 which are due to implement an increase of 20% or more. Of these, European and Central Asian countries feature heavily, with Israel and Iran standing out as the major increases in the Middle East. Indonesia aside, large budget increases in Asia Pacific are notable by their absence this year. At the opposite end of the scale, there are far fewer very large reductions, just six of more than 10% and four of more than 20%. As is often the case, several of these countries have suffered regime change, civil war, or economic crisis. Although Mexico's budget cut of more than one-third is the result of a reversal of last year's large but short-lived spike.