As long as they go back to spending on defense, governments could, at least, do it in such a way that it serves the rest of the economy a little more, recommends the OECD.
For decades, countries have been able to reduce military spending and redirect freed financial resources to other priorities, such as health, education and economic development. Called “the peace dividend”, this gradual reduction in defense budgets began gradually towards the end of the 1960s, only to be briefly reversed during the Reagan years in the United States, then to resume its downward trajectory thanks to particularly from the end of the Cold War.
Equivalent to 3.8% of their gross domestic product (GDP) in the 1970s, the military spending of G20 countries was reduced to 2.4% at the turn of the century, recalls the Organization for Economic Cooperation and Development (OECD) in the update of its economic forecasts which was to be unveiled on Tuesday. The country with the largest defense budget in the world, the United States has reduced this proportion from 6% of its GDP to 3.9%. Other OECD NATO countries made proportionally larger reductions, from an average of 2.8% to 1.6%.
Now the second country in terms of defense budget, China remains below the average of G20 countries in proportion to the size of its economy, at less than 2% of its GDP, or half the average maintained by Russia since the beginning of the 2000s (around 4%).
But in recent years, and particularly since Russia’s invasion of Ukraine, the downward trend has been reversed. Several countries have announced an increase in their military spending. This is particularly the case in Central and Eastern Europe, but also in Western countries, such as the United Kingdom, Germany and Japan, where the promised medium-term increases range from 0.4% of GDP (France) to almost 1% (Japan).
More modest in this regard, THE Canada should increase its effort from just under 1.4% to 1.5% of its GDP by 2027.
If at least this military spending had a greater positive effect on economic activity, their increase would be a little less damaging to government budgets, argues the OECD in a report. Currently, all this money goes mainly to the salaries of the military (48%), to the purchase of equipment (20%) and to the maintenance of that which we already have or to the purchase of goods which will not be used only once (29%).
With the exception of the United States, a tiny portion of budgets are devoted to research and development. However, an increase in spending in this area would have the advantage of offering possibilities for technological transfers to the private civil sector. Better cooperation between countries on military procurement and research policies would also help reduce their fragmentation and duplication in addition to increasing their interoperability.
Economic slowdown and budgetary headache
This increase in military spending is part of the additional budgetary constraints with which several governments will have to deal in the coming years, with the effect of the aging of their populations and the necessary green transition, observes the OECD. The challenge will be all the greater as the stronger-than-expected economic growth in 2023 will now give way to a slowdown caused by the central banks’ war against inflation by increasing their interest rates.
From 3.3% last year, global economic growth should rise this year, not to 2.7%, as the OECD still believed in June, but to 3%, before slow down next year to 2.7% (-0.2 points).
The United States should do much better than expected, with 2.2% this year (+0.6 points) and 1.3% next year (+0.3 points), while it will be the opposite for the euro zone countries, with growth of 0.6% (-0.3 points) and 1.1% (-0.4 points) respectively. Canada, for its part, is expected to fall somewhere in between, with its growth rate falling from 3.4% last year to just 1.2% (-0.2 points) this year and 1. 4% next year.
Watch out for China
One of the causes of the global slowdown because faced with an over-indebted real estate market, declining exports, high youth unemployment and the threat of deflation, the Chinese economy will rebound much less strongly than previously thought still at the end of spring. Its growth, of only 3% last year, is now projected at 5.1% (-0.3 points) this year, and 4.6% (-0.5 points) in 2023.
However, it could be even worse for China and the rest of the world, warns the OECD, which has carried out simulations. If, in fact, its domestic demand were to decline by 3% in one year – as has already happened in 2014 and 2017 – and this encourages financial markets to be more wary of the global economic outlook , this could subtract 1.1% from global growth and almost 3% from international trade.