China’s Defense Budget Could Exceed America’s By End Of Decade

Yesterday, the Obama Administration submitted its Fiscal Year 2013 federal budget that proposes spending $525 billion for the Pentagon plus another $88 billion on war costs. Overall, defense spending will decline by six percent relative to last year. More significantly, the FY 2013 budget marks the first time in a decade that actual defense spending — instead of the rate of increase — actually declines in real terms. As part of the Budget Control Act (BCA), defense spending is scheduled to decline over the next decade by almost $500 billion relative to spending plans projected just last year. War spending is expected to decline sharply in the next several years and constitute a negligible amount following the U.S. withdrawal from Afghanistan in 2014.

One of the reasons administration officials are relatively sanguine about planned cuts to the U.S. defense budget is because our budget is so much larger than that of any other nation. Former Defense Secretary Robert Gates once dismissed the threat from U.S. rivals with the comment that our defense budget was the equal of the next seventeen countries taken together, and most of them were our allies. The U.S. position relative to its allies is likely to continue because many of these countries in Europe and Asia are facing economic troubles of their own and likely to cut their defense budgets.

Enter the People’s Republic of China. Reflecting its growing economic success but also a desire to increase its position as a global power, China has been increasing its official defense budget by double digits for years. Now, according to the authoritative IHS Jane’s defense information institution, China’s defense budget is on track to double by 2015, rising to an equivalent in U.S. dollars of $238 billion. This figure would be equal to the defense spending of the rest of the region combined. Because a portion of China’s defense expenditures is hidden in other parts of the budget or in classified activities, actual defense spending is assessed to be significantly greater than official government figures. Whatever number one uses, it is clear that Chinese defense spending increases are fueling an explosion of armaments programs including hundreds of long-range ballistic missiles, a fifth-generation fighter program, a Chinese equivalent to the U.S. GPS systems and Beijing’s first operational aircraft carrier.

When one performs the simple exercise of extending current projections for the growth of China’s defense budget through the end of the decade and overlay on that the expected decline in U.S. defense budgets, one conclusion emerges: China’s defense budget will equal that of the United States by the end of the decade. Now consider the prospect that U.S. defense spending will decline more steeply than projected in the new defense budget as a result of the requirement to cut another $500 billion from defense over the next ten years due to sequestration. In that event, China’s defense budget could exceed ours in absolute terms.

If one recalculates the Chinese defense budget to reflect purchasing power parity (PPP) which adjusts national budget figures to reflect what things actually cost in individual countries, the situation looks even more serious. According to the CIA, China’s gross domestic product in 2011 using PPP was nearly double the official figure ($11.2 trillion versus $6.9 trillion). Use the same PPP calculation for the Chinese defense budget and you get a figure for 2015 that is some sixty percent higher than the number provided by Jane’s or $381 billion. This means that China’s effective defense budget will eclipse that of the United States before the end of the decade.

Equally important, the composition of the two defense budgets is quite different and in some ways further favors China’s military rise. A substantial portion of the U.S. defense budget goes to compensation for the All-Volunteer military. It should not come as a surprise that the U.S. pays its service personnel better than their Chinese counterparts. But other personnel costs such as health care and military pensions are rising at an unsustainable rate. The Chinese defense budget reflects the conscription nature of that country’s military but also its general lack of attention to creation of a social safety net. The Pentagon maintains a large contingent of military lawyers; the profession of military lawyer is virtually nonexistent in China. China does not fund breast cancer research in its defense budget. As a result of the differences in the demands on defense dollars in the two countries, China can afford to spend a much larger fraction of its defense budget on hardware, stocks of spare parts and munitions and training.

The new U.S. defense strategy calls for a “pivot” towards the Asia-Pacific region. Given current Chinese and U.S. defense budget trends, the pivot seems more like turning into a head-on collision. Unfortunately, when the collision occurs, it may be the U.S. military driving the Yugo.