Despite Inflation’s Bite, China Set Record for Defense Spending in 2022

While most of the world lost ground in defense spending in 2022—mainly due to inflation—both China and many nations in Europe achieved real growth, and China’s spending level set a record, according to analysis by the independent, London-based International Institute for Strategic Studies.

China’s spending and “military modernization remains the principal area of concern for Washington,” the IISS said in a summary of its findings.

The seven percent increase in China’s defense spending from 2021 to 2022 is its largest in “absolute terms” going back 30 years, according to the report. In real terms—accounting for inflation—China spent $16 billion more in 2022 than 2021. China’s neighbors, particularly Japan and South Korea, significantly increased their own defense budgets in response.

Those numbers still don’t take into account the fact that China spends far less on pay and amenities for its troops than other countries, with more of its funds going toward procuring hardware and conducting research and development.

At $766.6 billion, the U.S. still outspent the next 10 countries combined on military accounts, but its relatively lavish spending on pay and amenities and its higher costs of goods, relative to command economies like China’s, accounts for some of that imbalance.

Russia’s military spending in 2022 was self-reported at $87.9 billion, but the IISS said its true spending is likely well more than double that figure, at $192 billion, and again, its spending on pay and benefits for its mostly-conscript forces is well below that of other countries.

Inflation’s Bite Inflation dominated any discussion of defense budgets in 2022, IISS said, noting that although many countries announced new investments and increases in spending based on absolute amounts, global defense spending as a whole declined in real terms for the second consecutive year.

“Soaring inflation has wiped billions from the real value of these investments and caused global defense spending to contract in real terms for the second consecutive year in 2022,” the report noted.

Using 2015 as a base year, “the effective purchasing power of global defense spending has been eroded by almost $850 billion, cumulatively, since 2017,” and by about $66 billion just in the last year, the IISS reported. “As inflation abates, policymakers will have greater scope to pursue procurement priorities, but will still need to balance threat drivers against lingering fiscal challenges.”

Globally, the nations of the world are spending more on defense and getting less. While they laid out $2 trillion for defense in 2022, that bought only $1.69 trillion worth of military goods and services measured in 2015 constant dollars.

The IISS also noted an increase in the use “off budget … special funds” as countries seek to rapidly increase their military spending. Such measures “reduce accountability and transparency” and complicate efforts like the IISS’s to collect comprehensive information, it noted.

On a regional level, “European defense spending increased in real terms for the eighth consecutive year, although the rate of growth has slowed markedly from 3.5 percent in 2021 to 0.8 percent in 2022, again because of inflation effects,” the IISS said, noting the response to Russia’s invasion of Ukraine.

In Asia, China’s new aircraft carrier generated headlines, and “its investments in additional and more complex naval vessels continues apace, while its air force is also improving its capabilities: numbers of J-20A combat aircraft have increased further and China has begun to field advanced military aircraft with domestically produced jet-engines,” the IISS said.

In response, Japan is increasing spending while also seeking “new partnerships, including with the U.K.; and Australia continues to work with the U.S. and U.K.” to obtain nuclear-powered submarines.

In the Middle East, where countries are typically high-spenders on defense, budgets collectively shrank about two percent per year, in real terms, for the last three years. Saudi Arabia and Turkey, for example, spent 8.7 percent and 6.9 percent less, respectively, on defense in 2022 than in 2021.

As Lincon said in the 1838 Lyceum Address, in his speech about preserving our Country's institutions and who would be the villain :

How then shall we perform it? At what point shall we expect the approach of danger? By what means shall we fortify against it? Shall we expect some transatlantic military giant to step the ocean and crush us at a blow? Never! All the armies of Europe, Asia, and Africa combined, with all the treasure of the earth (our own excepted) in their military chest, with a Bonaparte for a commander, could not by force take a drink from the Ohio or make a track on the Blue Ridge in a trial of a thousand years.

At what point then is the approach of danger to be expected? I answer. If it ever reach us it must spring up amongst us; it cannot come from abroad. If destruction be our lot we must ourselves be its author and finisher. As a nation of freemen we must live through all time or die by suicide.

He's right. And right now, we are destroying ourselves.

China’s reported spending is also significantly less than its actual spending, because it does not count many expenditures, such as certain kinds of research and development, space, and civil/military investments as being defense-related. The country’s self-reported defense spending was $242.4 billion in 2022, but the IISS estimates its actual military outlays were closer to $360 billion. Those numbers still don’t take into account the fact that China spends far less on pay and amenities for its troops than other countries, with more of its funds going toward procuring hardware and conducting research and development. At $766.6 billion, the U.S. still outspent the next 10 countries combined on military accounts, but its relatively lavish spending on pay and amenities and its higher costs of goods, relative to command economies like China’s, accounts for some of that imbalance. Russia’s military spending in 2022 was self-reported at $87.9 billion, but the IISS said its true spending is likely well more than double that figure, at $192 billion, and again, its spending on pay and benefits for its mostly-conscript forces is well below that of other countries.

Good to see procurement costs being somewhat factored in (relatively lavish spending on pay and amenities and its higher costs of goods, relative to command economies like China’s, accounts for some of that imbalance).

Old post:

If you account for differences in reporting structure, purchasing power, and labor costs, you find that China’s 2017 defense budget provided 87 percent of the purchasing power of American’s 2017 defense budget. This runs counter to the conventional wisdom that the United States spends more on its military than the next 12 countries combined or that China lags annual U.S. military spending by close to $400 billion. Those misleading comparisons are based on simply converting Beijing’s reported defense budget from yuan to dollars by applying a market exchange rate. That produces a distorted picture. - https://www.heritage.org/defense/commentary/chinas-defense-spending-larger-it-looks

Even Politio cites research by LTSG, a defense consultancy, that

Research into Chinese defense investments since 2000 reveals that, compared with the United States, China has prioritized purchasing weapons and equipment over spending on personnel salaries or on operations and maintenance. As a result, the U.S. military is on track to be outgunned — potentially in quantity and quality of armaments — by the end of President Joe Biden’s first term. The lack of data on Chinese defense spending reflects the notorious unreliability of official releases from Beijing. Annual People’s Republic of China Finance Ministry announcements of the defense budget diverge from Defense Ministry disclosures, and have historically omitted cost categories that other countries include, such as weapons imports.

To address this challenge, LTSG research group conducted a multiyear, open-source effort to estimate Chinese defense spending since 2000 by service across different categories such as personnel, operations and maintenance, and procurement...For procurement, U.S. dollar estimates were converted to renminbi. The results showed consistent annual inflation-adjusted growth of roughly 10 percent for the past 20 years..If, as projected, by 2024 the PLA’s annual procurement value exceeds that of the U.S. military, then by about 2030 the United States will no longer boast the world’s most advanced fighting force in total inventory value.

- https://www.politico.com/newsletters/politico-china-watcher/2021/05/27/china-could-soon-outgun-the-us-493014

And besides procurement costs,

The official defense budget does not account for all of China’s military-related activities. For example, many defense-related outlays fall directly under the Central Military Commission (CMC), China’s highest military authority, chaired by Xi Jinping. For instance, the People’s Armed Police (PAP), a paramilitary force charged with maintaining internal security and supporting the military in times of war, is under the command of the CMC but not included in the budget. The Chinese Coast Guard, which plays a key role in asserting China’s maritime claims and was placed under the control of the PAP in 2018, is likewise excluded from the official budget.

According to SIPRI, China’s military spending far exceeds that of its neighbors and was greater than the combined expenditure of India, Russia, Japan, South Korea, and Taiwan in 2019. Cross-national comparisons are insightful, but accounting for variations in prices is difficult. For example, the current annual pay for an entry-level active-duty U.S. soldier (about $39,600) would likely cover the cost of several PLA soldiers due to price differences. When adjusted for purchasing power parity (PPP), China’s 2019 defense expenditure rises by well over $100 billion. - https://www.csis.org/analysis/understanding-chinas-2021-defense-budget

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