NATO is resourced through the direct and indirect contributions of its members. NATO’s common funds are direct contributions to collective budgets, capabilities and programmes, which equate to only 0.3% of total Allied defence spending (approximately EUR 2.5 billion per year until 2022) to develop capabilities and run the entirety of the Organization, and its military commands, capabilities and infrastructure.
- National (or indirect) contributions are the largest and are borne by individual member countries. These include the forces and capabilities held by each member country, which can be provided to NATO for deterrence and defence activities and military operations.
- Direct contributions finance NATO’s budgets, programmes and capabilities in support of objectives, priorities and activities that serve the interests of the Alliance as a whole – and cannot reasonably be borne by any single member – such as Alliance operations and missions or NATO-wide air defence or command and control systems.
- All 30 Allies fund NATO using an agreed cost-share formula derived from the Gross National Income of member countries. This is the principle of common funding and demonstrates burden-sharing in action.
- NATO has three principal common-funded budgets: the civil budget (funding NATO Headquarters), the military budget (funding the integrated command structure) and the NATO Security Investment Programme (funding military infrastructure and capabilities).
- Programmes and initiatives can also be jointly funded, which means that the participating countries can identify the priorities and the funding arrangements, while NATO provides political oversight.
- NATO common funding is underpinned by strong governance mechanisms, with Allies collectively deciding what is eligible for common funding and how much can be spent each year. They also collectively decide on the resource planning figures for the medium term.
- The North Atlantic Council oversees the common funding processes, which are governed by the Resource Policy and Planning Board, the Budget Committee and the Investment Committee.
Indirect funding of NATO
When the North Atlantic Council – 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, is almost equal to 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. The volume of US defence expenditure represents approximately 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 approximately 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 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 nine Allies in the first half of 2022. Moreover, 2022 is the eighth consecutive year of rising defence spending across European Allies and Canada, amounting to a rise of 1.2% in real terms compared to 2021.
The Defence Investment Pledge endorsed in 2014 calls for Allies to meet the 2% of GDP guideline for defence spending and the 20% of annual defence expenditure on major new equipment by 2024. Since Russia’s full-scale attack against Ukraine in February 2022, a majority of Allies have committed to investing more, and more quickly, in defence.
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 2022, 23 of the 30 Allies met this guideline and 24 Allies spent more in real terms on major equipment than they did in 2021.
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.
Direct funding of NATO
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.
The principle of common funding
Since NATO was founded, common funding has played a strategic role in supporting the Alliance’s objectives, priorities and core tasks. Allies pool their collective resources in order to provide and deliver key NATO programmes and capabilities.
When a certain priority or initiative has been identified, the Resource Policy and Planning Board (RPPB) assesses whether the principle of common funding applies – in other words whether the provision of a capability or conduct of an activity serves the interests of the Alliance as a whole and should therefore be resourced from common funding.
The criteria for common funding are reviewed regularly and adjusted to keep up with NATO’s evolving political-military objectives and needs, most recently at the 2021 Brussels Summit when NATO Leaders agreed to broaden and adjust the use of common funding.
Common funding arrangements apply to the NATO civil and military budgets, and the NATO Security Investment Programme (NSIP). Together, these common-funded budgets reinforce the Alliance, providing major capabilities, enabling deterrence, defence and interoperability, and supporting consultation and decision-making at the highest levels. These are the only funds where NATO authorities identify their funding needs in accordance with the Alliance’s overarching objectives and priorities. Allied common funding contributions to NATO are established using an agreed cost-sharing formula derived from the Gross National Income of NATO member countries. Where military common funding is concerned – the military budget and the NSIP – the ‘over and above’ principle guides Allies’ decisions. In essence, it focuses on the provision of requirements that would not be reasonable for an Ally to bear individually.
At the 2021 Brussels Summit, NATO Leaders agreed to increase NATO resourcing, including as necessary NATO common funding, taking into account sustainability, affordability and accountability. At the 2022 Summit in Madrid, NATO Leaders committed to a concrete financial trajectory for all three NATO budgets starting in 2023. As a result, increased national defence expenditures and NATO common funding will be commensurate with the challenges of a more contested security order. Investments in collective defence and key capabilities are essential.
The civil budget
The civil budget supports Allies’ consultation and decision-making. It 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); its implementation is overseen by the Budget Committee. The civil budget for 2022 was EUR 289.1 million. The NATO Secretary General is the budget holder of the civil budget.
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 five frontline objectives which encompass support for: crisis management and operations, collective defence, cooperative security, public relations and the consultation process amongst Allies. There are also three enabling objectives which consist of: supporting the operational environment of the NATO Headquarters; governance and regulation through the monitoring of business policies, processes and procedures; and NATO Headquarters’ security.
The military budget
The military budget supports and contributes to strengthening NATO’s deterrence and defence posture, and fostering interoperability across the Alliance. It funds the operating of selected common-funded capabilities, the integrated command structure, Alliance operations and missions, and to some extent, training and exercises. It is composed of separate sub-budgets, which are financed with contributions from Allies’ national defence budgets (in most countries) according to agreed cost-shares. Its implementation is overseen by the Budget Committee. The primary military budget holders are the Supreme Allied Commander Europe (SACEUR), the Supreme Allied Commander Transformation (SACT), and the Director General of the International Military Staff (DGIMS).
Inter alia, the military budget provides funds for the integrated command structure, the International Military Staff, the NATO Strategic Commands, the NATO Airborne Early Warning and Control (NAEW&C) Force, and Alliance operations and missions. However, in all cases, the provision of military staff to the integrated command structure or to operations and missions remains a nationally funded responsibility. The military budget for 2022 was EUR 1.56 billion.
The NATO Security Investment Programme
The NATO Security Investment Programme (NSIP) supports and contributes to deterrence, defence and security. It funds major construction and command and control systems under the ‘over and above’ principle described above. It provides installations and facilities such as air defence communication and information systems, military headquarters for the integrated 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 NATO member. Its implementation is overseen by the Investment Committee. Capabilities are delivered either by individual host nations or user nations, by NATO agencies or Strategic Commands. The 2022 ceiling for the NSIP was EUR 790 million.
Joint funding arrangements are established within the terms of an agreed NATO charter. The participating countries identify the priorities and the funding arrangements, while NATO has visibility and provides political oversight. Jointly funded programmes vary in the number of participating countries, cost-share arrangements and management structures.
Joint funding is appropriate when there is a need for a long-term, subject-specific framework to implement large-scale requirements or specific initiatives. The most recent joint funding initiative is the establishment of the Defence Innovation Accelerator for the North Atlantic (DIANA). Joint funding arrangements can lead to the set-up of a management organisation or agency within NATO.
Jointly funded 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. These include agencies for NATO’s Airborne Early Warning and Control capability (NAPMA), the NH90 Helicopter programme (NAHEMA) and the Eurofighter-Typhoon and Tornado fighter jet programmes (NETMA). NATO agencies also coordinate research and development activities or are active in the fields of standardization and intelligence-sharing.
Other forms of funding
In addition to common funding and joint funding, some projects can take the form of contributions in kind or trust fund arrangements.
Financial management, accountability and transparency
There is a strong governance structure through which Allies decide what is eligible for common funding, how much can be spent each year, and what it may be spent on. Decision-making by consensus and well-established governance frameworks are fundamental to the way that common funding is managed at NATO. One of NATO’s main objectives is to be an effective and efficient steward of public resources.
Financial management of NATO’s common-funded budgets
The civil and military budgets and the NSIP contribution ceilings are annual, coinciding with the calendar year. Each budget is prepared under the authority of the head of the respective NATO body. The funding ceilings are set by the Resource Policy and Planning Board and agreed by the North Atlantic Council. When the annual budget has been approved, the heads of the relevant NATO bodies have discretion to execute it through the expenditure of funds for the purposes authorised. The administrative support for this task is largely entrusted to the financial controller of the relevant NATO body. 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. They may also, in response to internal auditing, institute such additional controls and procedures as they deem necessary for maintaining accountability.
Financial management and reform
In September 2014, NATO Leaders decided, inter alia, to reform governance, transparency and accountability, especially in the management of NATO’s financial resources. This drive for transparency and accountability strove to improve insight into how NATO manages, spends and reports on the use of taxpayer funds.
As part of these measures, the NATO Financial Regulations (NFRs) became publicly available. They govern the financial administration of all NATO bodies and provide key policy guidance for ensuring effective and economical budgetary and financial administration. In 2015, a major review of these NFRs was conducted to strengthen financial management and accountability, and to reflect best practice in public finance.
Additional transparency steps were taken to declassify International Board of Auditors for NATO (IBAN) reports and make them available to the public. These IBAN reports include financial audits and statements, performance audits or other special reports. NATO Allies’ agreement of the civil and military budgets is also published on the NATO website every year.
Reform of NATO’s common-funded capabilities delivery process
A reform was introduced in 2018 to accelerate the delivery of common-funded capabilities across NATO. Founded on the key principles of accountability and separating the governance and management of projects, a standardized model covering the entire capability life cycle has been established. It reduces the number of times consensus decision-making is required throughout implementation; it introduces a single project-level authorisation; and it holds the management authorities accountable for handling the delivery of programmes and projects, within agreed tolerances, making the need for governance decisions an exception. It also introduces the incremental delivery of complex capabilities that are highly dependent on technology by delivering individual components within months.
Bodies and stakeholders involved
North Atlantic Council
The North Atlantic Council approves NATO budgets and investments and exercises oversight over NATO’s financial management. The Resource Policy and Planning Board (RPPB) advises the Council on resource policy and allocation. The Council seeks resource advice from the RPPB when deciding on new initiatives, activities, operations or missions.
Resource Policy and Planning Board
The Resource Policy and Planning Board (RPPB) is the senior advisory body to the Council on NATO resources. It has responsibility for the overall governance of NATO’s civil and military budgets, as well as the NATO Security Investment Programme (NSIP) and the budgetary implications of common-funded personnel. Both the Budget Committee and the Investment Committee report to the RPPB.
Budget Committee and Investment Committee
The Budget Committee is responsible to the RPPB for the implementation of NATO’s civil and military budgets. The Investment Committee is responsible to the RPPB for the implementation of the NSIP.
NATO Office of Resources
The NATO Office of Resources (NOR) provides independent and integrated expert advice to the Secretary General, NATO resource committees, Allies and other stakeholders on the planning, allocation and utilisation of military common funding made available to achieve NATO’s goals and objectives. Advice from the NOR is based on sound judgement underpinned by facts, figures expertise and knowledge. It follows NATO policies, procedures and standards, and is independent of external stakeholders’ viewpoints. It supports efficient and effective use of public funds by assessing the policy compliance, eligibility, affordability, technical viability and lifecycle implications of military requirements and proposed solutions. Furthermore, the NOR facilitates resource-informed political decision-making.
The Secretary General, the Supreme Commanders and the other heads of NATO bodies are responsible and accountable for sound financial management, as well as for providing the requirements for common funding. This includes the establishment and maintenance of financial governance, resource management practices, internal controls and financial information systems to achieve the efficient and effective use of resources.
International Board of Auditors for NATO
The International Board of Auditors for NATO (IBAN) is the independent, external audit body for NATO. Through its audits, it provides the North Atlantic Council and the governments of member states with assurance that financial reporting is true and fair and funds have been properly used for the settlement of authorised expenditure. In addition, the IBAN reviews the operations of NATO bodies to determine if they are being carried out effectively and economically.
The IBAN conducts three types of audits: financial statements audits of NATO Reporting Entities, performance audits of NATO and audits of the NATO Security Investment Programme. As such, it contributes to the strengthening of accountability and corporate governance within NATO.