Allies make direct and indirect contributions to the costs of running NATO and implementing its policies and activities. NATO common-funded budgets and programmes are funded by direct contributions and equate to only 0.3% of total Allied defence spending, an equivalent of around EUR 2.5 billion to run the entirety of the Organization, its commands and military infrastructure.
- Indirect – or national – contributions are the largest and come, for instance, when a member commits capabilities and/or troops to a military operation and bears the costs of the decision to do so.
- Direct contributions are made to finance the NATO budgets and programmes for requirements that serve the interests of all 30 members – and cannot reasonably be borne by any single member – such as NATO-wide air defence or command and control systems.
- All 30 Allies contribute to the NATO budget on an agreed cost-share formula based on Gross National Income, which represents a small percentage of each member’s defence budget. This is the principle of common funding, and demonstrates burden-sharing in action.
- Common funding arrangements are used to finance NATO’s principal budgets: the civil budget (NATO HQ running costs), the military budget (costs of the integrated Command Structure) and the NATO Security Investment Programme (military infrastructure and certain capabilities).
- Projects can also be jointly funded, which means that the participating countries can identify the requirements, the priorities and the funding arrangements, while NATO provides political oversight.
- NATO’s budget has strong governance and oversight mechanisms, with Allies deciding together what is eligible for common funding, deciding how much is spent each year, and setting planning figures for the medium term.
- The funding process is overseen by the North Atlantic Council, managed by the Resource Policy and Planning Board, and implemented by the Budget Committee and the Investment Committee.
When the North Atlantic Council (NAC) – NATO’s top political decision-making body –unanimously decides to engage in an operation or mission, there is no obligation for each and every member to contribute unless it is an Article 5 collective defence operation, in which case expectations are different. In all cases, NATO (as an organisation) does not have its own armed forces, so Allies commit troops and equipment. Contributions vary in form and scale from, for instance, a few soldiers to thousands of troops, and from armoured vehicles, naval vessels or helicopters to all forms of equipment or support, medical or other. These contributions are offered by individual Allies and are taken from their overall defence capability to form a combined Alliance capability, with each covering the costs associated with their deployments.
The 2% defence investment guideline
In 2006, NATO Defence Ministers agreed to commit a minimum of 2% of their Gross Domestic Product (GDP) to defence spending to continue to ensure the Alliance’s military readiness. This guideline also serves as an indicator of a country’s political will to contribute to NATO’s common defence efforts since the defence capacity of each member has an impact on the overall perception of the Alliance’s credibility as a politico-military organisation.
The combined wealth of the non-US Allies, measured in GDP, exceeds that of the United States. However, non-US Allies together spend less than half of what the United States spends on defence. This imbalance has been a constant, with variations, throughout the history of the Alliance and more so since the tragic events of 11 September 2001, after which the United States significantly increased its defence spending. Today, the volume of US defence expenditure represents more than two thirds of the defence spending of the Alliance as a whole. However, this is not the amount the United States contributes to the operational running of NATO, which is shared with all Allies according to the principle of common funding. Moreover, US defence spending also covers commitments outside the Euro-Atlantic area. It should be noted, nonetheless, that the Alliance relies on the United States for the provision of some essential capabilities, regarding for instance, intelligence, surveillance and reconnaissance; air-to-air refuelling; ballistic missile defence; and airborne electronic warfare.
The effects of the 2007-2008 financial crisis and the declining share of resources devoted to defence in many Allied countries, up to 2014, have exacerbated this imbalance and also revealed growing asymmetries in capability among European Allies. France, Germany and the United Kingdom together represent more than 50% of the non-US Allies defence spending. At the Wales Summit in 2014, in response to Russia’s illegal annexation of Crimea and the turmoil in the Middle East, NATO Leaders agreed to reverse the trend of declining defence budgets and decided:
- Allies currently meeting the 2% guideline on defence spending will aim to continue to do so;
- Allies whose current proportion of GDP spent on defence is below this level will: halt any decline; aim to increase defence expenditure in real terms as GDP grows; and aim to move towards the 2% guideline within a decade with a view to meeting their NATO Capability Targets and filling NATO’s capability shortfalls.
While the 2% of GDP guideline alone is no guarantee that money will be spent in the most effective and efficient way to acquire and deploy modern capabilities, it remains, nonetheless, an important indicator of the political resolve of individual Allies to devote to defence a relatively small but still significant level of resources. In 2014, three Allies spent 2% of GDP or more on defence; this went up to 11 Allies in 2020 and a majority of Allies have national plans in place to meet this target by 2024.
The major equipment spending guideline
National defence budgets cover essentially three categories of expenditures: personnel expenses and pensions; research, development and procurement of defence equipment; and, lastly, operations, exercises and maintenance. Budget allocation is a national, sovereign decision, but NATO Allies have agreed that at least 20% of defence expenditures should be devoted to major equipment spending, including the associated research and development, perceived as a crucial indicator for the scale and pace of modernisation. Where expenditures fail to meet the 20% guideline, there is an increasing risk of equipment becoming obsolete, growing capability and interoperability gaps among Allies, and a weakening of Europe’s defence industrial and technological base.
At the Wales Summit in 2014, NATO Leaders agreed that, within a decade, Allies who are spending less than 20% of their annual defence spending on major equipment will aim to increase their annual investments to 20% or more of total defence expenditures. In 2021, 24 of the 30 Allies will meet this guideline.
All Allies will also ensure that their forces meet NATO-agreed guidelines for deployability and sustainability and other agreed output metrics; and they will see to it that their armed forces can operate together effectively, including through the implementation of agreed NATO standards and doctrines.
NATO has annual budgets and programmes worth around EUR 2.5 billion, which inter alia support its permanent military command structure, its current operations and missions, and provide essential military infrastructure (including air and naval basing facilities, satellite communications, fuel pipelines, and command and control systems). This represents 0.3% of total Allied defence spending. This direct funding comes principally in two forms: common funding and joint funding. It can also come in the form of trust funds, contributions in kind, ad hoc sharing arrangements and donations.
Several factors influence the choice of funding source to address a given priority. These include the required level of integration or interoperability, affordability at the national level, the complexity of the system involved, and the potential for economies of scale. Often, a combination of funding sources is used.
The principle of common funding
When a need for expenditure has been identified, the Resource Policy and Planning Board (RPPB) discusses whether the principle of common funding should be applied – in other words whether the requirement serves the interests of all member countries and should therefore be borne collectively.
The criteria for common funding are reviewed regularly and adjusted when needed to reflect changes in the political or military landscape.
Common funding arrangements include the NATO civil and military budgets, and the NATO Security Investment Programme (NSIP). These are the only funds where NATO authorities identify the requirements and set the priorities in line with overarching Alliance objectives and priorities.
Where military common funding is concerned – the military budget and the NSIP – the guiding principle for eligibility is the “over and above” rule:
“Common funding will focus on the provision of requirements which are over and above those which could reasonably be expected to be made available from national resources.”
Member countries contribute to NATO in accordance with an agreed cost-sharing formula based on Gross National Income.
The civil budget
The civil budget provides funds for personnel expenses, operating costs, and capital and programme expenditure of the International Staff at NATO Headquarters in Belgium. It is financed from national foreign ministry budgets (in most countries), supervised by the Budget Committee and implemented by the International Staff. The civil budget for 2021 is EUR 258.9 million.
The civil budget is formulated in line with an objectives-based framework, which establishes clear links between NATO’s strategic objectives and the resources required to achieve them. There are four frontline objectives and four support objectives. The frontline objectives comprise support for: active operations; Alliance capabilities; consultation and cooperation with partners; and public relations. The four support objectives consist in: providing support to the consultation process with Allies; maintaining the facilities and site of NATO Headquarters; governance and regulation through the monitoring of business policies, processes and procedures; and NATO Headquarters security.
The military budget
This budget covers the operating and maintenance costs of the NATO Command Structure. It is composed of over 35 separate sub-budgets, which are financed with contributions from Allies’ national defence budgets (in most countries) according to agreed cost-shares. It is supervised by the Budget Committee and implemented by the individual budget holders. In all cases, the provision of military staff remains a nationally funded responsibility. The military budget for 2021 is EUR 1.61 billion.
The military budget provides funds for the International Military Staff, the Strategic Commands, the NATO Airborne Early Warning and Control (NAEW&C) Force, the common-funded portions of the Alliance’s operations and missions, and more specifically for:
- the Military Committee, the International Military Staff and military agencies;
- the two Strategic Commands and associated command, control and information systems;
- theatre headquarters for deployed operations;
- the NATO static and deployable Combined Air Operations Centres, deployable radar systems and deployable HQ communication systems;
- the Joint Warfare Centre (Norway), the Joint Force Training Centre (Poland), the Joint Analysis & Lessons Learned Centre (Portugal), the NATO Defense College (Italy) and the NATO Communications and Information Systems School (Italy);
- the NATO Standardization Office (Belgium), the NATO Communications and Information (NCI) Agency (Belgium) via its customers, the NATO Science and Technology Organization (Belgium) and the Centre for Maritime Research and Experimentation (Italy); and
- some partnership support activities and part of the Military Liaison Offices in Moscow and Kyiv.
The NATO Security Investment Programme
The NATO Security Investment Programme (NSIP) covers major construction and command and control systems under the “over and above” principle described earlier. It provides installations and facilities such as air defence communication and information systems, military headquarters for the integrated military command structure and for deployed operations, as well as critical airfield, fuel systems and maritime infrastructure.
The NSIP is financed by the ministries of defence of each member country and is supervised by the Investment Committee. Projects are implemented either by individual host countries or by NATO agencies or Strategic Commands, according to their area of expertise. The 2021 ceiling for the NSIP is EUR 710 million.
Joint funding arrangements are structured forms of multinational funding within the terms of an agreed NATO charter. The participating countries identify the requirements, the priorities and the funding arrangements, while NATO has visibility and provides political oversight.
Joint funding arrangements typically lead to the setting up of a management organisation within a NATO agency. NATO agency activities range from the development and production of fighter aircraft or helicopters to the provision of logistics support or air defence communication and information systems. NATO agencies also coordinate research and development activities or are active in the fields of standardization and intelligence-sharing.
Jointly funded programmes vary in the number of participating countries, cost-share arrangements and management structures.
Other forms of funding
In addition to common funding and joint funding, some projects can take the form of trust fund arrangements, contributions in kind, ad hoc sharing arrangements and donations.
Allocation and control of common-funded resources are decided by consensus among Allies. Under the overall authority of the North Atlantic Council (or NAC), various bodies exercise managerial control over the four principal elements of the Organization’s financial structure:
- the International Staff, financed by the civil budget;
- the international military structure, financed by the military budget;
- the NSIP; and
- NATO agencies.
When cooperative activities do not involve all member countries, they are for the most part managed by NATO production and logistics programmes within NATO agencies. They have their own supervisory boards and boards of directors, as well as finance committees and distinct sources of financing within national treasuries.
With respect to the military and civil budgets, the head of the NATO body is ultimately responsible for the correct preparation and execution of the budget. The administrative support for this task is largely entrusted to the financial controller of the agency or NATO body.
Each financial controller has final recourse to the Budget Committee in case of persistent disagreement with the head of the respective NATO body regarding an intended transaction. The financial controller is charged with ensuring that all aspects of execution of the budget conform to expenditure authorisations, to any special controls imposed by the Budget Committee, and to the financial regulations and their associated implementing rules and procedures. He may also, in response to internal auditing, institute such additional controls and procedures as he deems necessary for maintaining accountability.
International Board of Auditors for NATO
The independent International Board of Auditors for NATO (IBAN) is responsible for auditing the accounts of the different NATO bodies. Its principal task is to provide the NAC and member governments with the assurance that joint and common funds are properly used for the settlement of authorised expenditure and that expenditure is within the financial authorisations granted.
The Board’s mandate includes not only financial but also performance audits, which extend its role beyond safeguarding accountability to the review of management practices in general. IBAN is composed of officials normally drawn from the national audit bodies of member countries. These officials are appointed by and responsible to the NAC.
The NAC approves NATO budgets and investments, and exercises oversight over NATO financial management. It takes into account resource considerations in its decision-making. The Resource Policy and Planning Board (or RPPB) advises the NAC on resource policy and allocation. The NAC requires an assessment from the RPPB whenever it is asked to decide on significant policy or operational issues, so as to ensure that political and military decisions take into account any resource implications. The Budget Committee and the Investment Committee provide governance and oversight of the military and civil budgets, and NSIP, respectively.
The NATO Office of Resources brings together all members of the NATO International Staff working on resource issues. The office provides integrated policy and technical advice to the NAC and the Secretary General, NATO resource committees and other NATO bodies. The office facilitates agreements on resource matters among member countries.
Resource Policy and Planning Board
The Resource Policy and Planning Board (RPPB) is the senior advisory body to the NAC on the management of all NATO resources. It has responsibility for the overall management of NATO’s civil and military budgets, as well as the NSIP and manpower. Both the Budget Committee and the Investment Committee report to the RPPB.
The Budget Committee is responsible to the RPPB for NATO’s civil and military budgets. The civil budget covers all costs related to NATO’s International Staff at NATO Headquarters in Brussels; the military budget covers all costs related to the International Military Staff at NATO Headquarters, the Strategic Commands and the NATO Airborne Early Warning and Control (NAEW&C) Force and the common-funded portions of the Alliance’s operations and missions.
The Investment Committee is responsible to the RPPB for the implementation of the NSIP.
The NSIP finances the provision of the installations and facilities needed to support the roles of the two Strategic Commands – Allied Command Operations and Allied Command Transformation – recognised as exceeding the national defence requirements of individual member countries.