China’s Inflation-Adjusted Defense Budget Up 7.5%

This article first appeared in Aviation Week & Space Technology.

In public finances, double-digit growth eventually has to stop. Even in China.

The expansion of Beijing's defense spending appears to be moderating in line with the national economy, even though that has not been immediately obvious from the brief announcement this month that the 2013 defense budget would be 10.7% higher than last year's -- nor from the international news reports that consistently presented the allocation as underlining Beijing's expanding military capabilities.

China's defense expenditure is not adjusted for inflation, as budget data for developed economies usually is. Since Chinese consumer prices are expected to rise by about 3% between 2012 and 2013, the real rise in the defense budget will be close to 7.5% -- or less, if military cost inflation is higher than civilian inflation.

A 7.5% real increase in defense spending would exactly match the government's forecast for economic growth, so the military budget would remain steady as a fraction of gross domestic product. Moreover, expansion of defense spending has slowed from the inflation-adjusted increases averaging 10% a year in 1990-2009. Those historical figures have been calculated by scholars Adam Liff of Princeton University and Andrew Erickson of the U.S. Naval War College for a forthcoming paper to be published in the journal China Quarterly.

The official defense budget, 720 billion yuan ($115 billion) for 2013, does not encompass all of the country's spending on military and other national security activities. But the estimated gap between China's official and full defense spending -- a concept hard to define in any country -- appears to have shrunk in recent years, say Liff and Erickson. If that gap is still narrowing this year, then Beijing's spending on its military is growing more slowly than the economy, which itself has slowed notably from the average growth rate of 10% a year enjoyed for three decades after economic reforms begun in 1978.

The average 10% rises in defense spending from 1990-2009 were not at all steady (see table). Last decade, real annual rises were routinely well above that rate, making up for parsimony in the 1980s and 1990s. And in the past few years, there have been smaller increases, reinforcing the impression that the trend is moderating. Richard Bitzinger, of Nanyang Technological University in Singapore, cautions against assuming that the trend is permanently lower, though. "Next year, defense spending may roar back up to 15% or so," he says.

Government revenue and spending have been growing faster than the economy, so defense has been trending down as a fraction of the budget, although for this year it is rising slightly to 5.4% of spending, from 5.3% last year. Those figures understate the commitment to defense, however, points out John Lee of the Center for International Security Studies at the University of Sydney. Excluding lower levels of administration from the calculation, as they are elsewhere, the defense burden on Chinese public finances is about 10%, he says.

Writing before publication of the 2013 budget, Liff and Erickson note that China's defense spending is three times that of India and ranks second only to that of the U.S. As alarming as that may be to China's neighbors -- especially when coupled with Beijing's increasingly aggressive diplomatic stance -- the objectives in China's military buildup are increasingly clear and, indeed, unsurprising, they argue.

Like many developing Asian countries, China reveals few military spending details, but Liff and Erickson write: "Especially when it comes to future defense spending priorities, Beijing's leaders have boosted military spending for precisely the reasons that they have stated consistently: to compensate for inflation and past neglect, consolidate funding into a unified budget and improve capabilities to address outstanding territorial and maritime claims."

Analyst Tim Huxley of the International Institute for Strategic Studies in Singapore agrees. "China's defense budget figures may not be transparent, but the intentions are fairly clear," he says.

Lee is not much reassured by the mere clarity of intentions, however. China's strengthening of its ability to address territorial disputes is the very point, he says. "China has every right to do this and to play some catch-up on past relative neglect of its military, but the region has every right to be concerned -- and they are, given China's size and stated ambitions."

He adds that while "a country like Malaysia can get away with poor military transparency because it cannot reshape the region," China "has to be judged differently" since it could potentially do so.

To Bitzinger, the real question about the budget is its impact. "How much has all this spending affected the war-fighting capabilities of the People's Liberation Army? . . . The PLA is still incredibly backward in so many areas. . . . It's the old saw: they've come a long way, but they still have a long way to go."

China's total military spending in 2010, including items off the defense budget, was 2.1% of gross domestic product (GDP), according to the Stockholm Institute for Peace Research. It has been steady at or just above 2% of GDP since the beginning of the last decade, after climbing from a low of 1.6% in 1997, the institute says. At the end of the 1980s, China was spending 2.5% of its then much smaller economy on defense.

The U.S. spent 4.8% of GDP on defense in 2010, Japan 1.0%, the U.K. 2.6%, France 2.3% and Russia 3.9%, the institute estimates.

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