Defense cost July 23 (1)

Is the Swiss army a financial burden? Professor of economics Graduate institute Geneva No. The upcoming vote on buying (or not) fighter jets has put the cost of defense back on the table. A common perception is that the military costs a lot and that this comes at the expense other categories of expenditure. It is not so. It is true that the defense budget is set to increase in the coming years, but this follows a long period of decline. Defence is the only category of expenditure that has gone through a decline, while the others have increased significantly. Whatever one thinks of the merits of buying of aircrafts, it will not be a burden at the expense of other needs. The decline of military spending since 1990 The figure below shows the evolution of military spending since 1990 in billions of francs (blue line). In 2018 it amounted to 4.7 billion francs (SFP data). The budget of the financial administration shows that spending will increase in the coming years to reach 5.4 billion francs in 2023. In the Swiss militia system, the cost of military service is also reflected in the salary compensation paid by the APG (this is a social insurance that ensures that workers receive their full salary when on military duty). If we include these benefits, the cost rises to $5.5 billion in 2018 (red line). Defense spending (CHF bls) 7 1995 2000 2005 2010 2015 2020 6 5 4 3 2 1 0 1990 Military spending without salary compensation Military spending including salary compensation There has clearly been an increase in spending in recent years, and it set to continue. However, we are very far from the 50% increase between 2014 and 2023 mentioned in the media (the increase is actually 23% over this period). 1

It is important to bear in mind that the current increase follows years of tightening budgets, with defence spending having fallen substantially between 1990 and 2007. In 2023 it will still be slightly below its 1990 level. The cost of defence is not going up dramatically. Putting defence spending in perspective Public finances and the economic situation have substantially evolved since 1990, and therefore we should put the cost of defence into perspective. One way of doing this is to compare it with total expenditure by the Swiss Confederation (national level of government) of 69.6 billion in 2018 (SF data). The figure below shows that defence will account for 6.8% of the Confederation's expenditure in 2018 (blue line), or 7.8% if we take into account salary compensation (red line). This share has fallen sharply since 1990 and will increase only slightly in the coming years. Defense spending (% of total Confederation spending) 20% 1995 2000 2005 2010 2015 2020 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 1990 Military spending without salary compensation Military spending including salary compensation Defence spending can also be compared to GDP. In 2018, it represents only 0.7% of GDP as shown in the figure below (0.8% if we include the compensation). This is less than half the weight of defence in 1990. While the ratio is expected to increase in the coming years, partly due to the fall in GDP in the current crisis, it will remain at a moderate level. 2

Defense spending (% GDP) 2.0% 1995 2000 2005 2010 2015 2020 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 1990 Military spending without salary compensation Military spending including salary compensation The effective weight of military expenditure, as a proportion of the total budget or GDP, is moderate and has fallen sharply since the end of the Cold War. While it people often think of the military as an institution narrowly set in its ways, these figures show that this is not the case and that it has undergone a substantial resizing. Comparison with other expenditure items It is interesting to recall the composition of public spending in Switzerland. Let's start with the Confederation: in 2018 the army represented 7.8% of expenditure (including salary compensation in defence spending and in the total). This is less than education (10.1%), traffic and communications (13.3%) and social spending (31.9%). 3

Confederation spending 2018 (total 70.3 billion) 8.9% General administration 31.9% 15.1% 7.8% Military defense 2.0% Public order and safety Education 8.2% 1.5% Culture, sports, leisure 10.1% Health 13.3% 0.8% Social security 0.4% Traffic and communication Environment protection and land planning Economics Finance and taxes The Confederation is only one level of government in Switzerland, and the cantons, municipalities and social insurance play an important role, particularly in health, education and social benefits. It is therefore appropriate to consider the expenditure of all the layers of governments, which is done below for 2017 (the last year with consolidated figures). Defence is only a small item, accounting for 2.6% of expenditure. In fact, public services consist mainly of social spending (40%), education (17.6%) and health (7.2%). The low share of health may be surprising, but it should be remembered that these figures do not include health costs financed through the health insurance companies, which are private entities. 4

Spending of all government levels 2017 (total 216.1 billion) 3.9% 2.6% 7.4% General administration 2.8% Military defense 7.7% 2.6% Public order and safety 5.5% 40.0% Education Culture, sports, leisure 17.6% Health Social security Traffic and communication 2.6% Environment protection and 7.2% land planning Economics Finance and taxes How has this composition changed over time? The graph below shows the average annual growth rate between 1990 and 2018 for GDP (purple bar), Confederation expenditure (blue bars) and expenditure of all levels of government (green bars, up to 2017). Defence (including salary compensation) is the only categories where spending has declined. All others have increased, often faster than GDP. This is particularly the case for education and social spending. 5

Average annual growth rate (1990-2018) -1% 0% 1% 2% 3% 4% 5% GDP Total spending General administration Military defense Public order and safety Education Culture, sports, leisure Health Social security Traffic and communication Environment protection and land planning Economics Finance and taxes Confederation All government levels (1990-2017) Our analysis clearly shows that defence has not siphoned off resources away from other needs. On the contrary, it was the only category of public spending that had to tighten its belt while the other categories showed sustained growth. A longer-term international view World Bank data allow us to undertake a long-term international comparison of military expenditure relative to GDP. In the case of Switzerland, this ratio has been falling sharply since 1960, whether or not salary compensation are included. Although the decline has been particularly marked since the end of the Cold War, the trend was already present before. The army of the 1960s and 1970s, which costed more than 2% of GDP, is long gone. 6

Defense spending (% GDP) 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Military spending without salary compensation Military spending including salary compensation If we compare Switzerland to other countries, we see that it spends little on defence. The United States, unsurprisingly, spends a higher proportion of its GDP on its armed forces, and the same is true - to a lesser extent - for France and the United Kingdom, reflecting the global presence of these countries. The downward trend is widely observed. It is marked in the United States with the end of the Vietnam War, as well as in Europe with the end of the Cold War. The peace dividends have been cashed several years ago. 7

Defense spending (% GDP) 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Switzerland United States France United Kingdom Germany Italy 8