Armed Forces

How to spend 2 % of GDP on the Polish Defence?

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Head of the Polish National Security Bureau, prof. Stanisław Koziej, criticized the bill which is to raise the Polish defence spending up to the level of 2% of the GDP. He claimed, among his other arguments, that if it could be assumed that the defence spending is going to be at the level which is “no lower tham 2% of GDP”, no additional adjustment mechanism would be needed in the project.

The statement sent to the Polish MoD by professor Koziej reminds us that aim of the bill which would introduce changes in the Act on transformation, technical modernization and financing of the Armed Forces was to create conditions, in which the technical modernization of the army would proceed at a quicker pace. Chief of the National Security Bureau is doubtful about an entry,  according to which defence spending is to be increased. The current status - “no less than 1.95% of GDP” - is to be redefined to the form of “2% of GDP on average annually, within 10 years”.

According to the opinion by Stanisław Koziej, such entry is “indeed aimed at setting the maximum level of spending”.  Head of the National Security Bureau has proposed, that the defence spending “shall not be lower than 2% of GDP”, which would increase the level at which the Armed Forces are being financed. In a statement made for the Polish Press Agency, Tomasz Siemoniak, Minister of Defence, stated that no maximum limit of defence spending would be set in the end.

Doubts have been also raised by the “adjustment mechanism” defined by the bill. It is to be used to remove the deviations in the defence spending from the base GDP level in a longer run (10 years). Mr. Koziej suggested that the period of calculating annual budgets should be shorter – it should be cut down to 4 years, which would be equal to the period between the parliamentary elections. He stressed that should a rule allocation of no less than 2% GDP to the defence spending be implemented in the first place, then the adjustment procedure would not be necessary.

Stanisław Koziej additionally pointed out the fact that there is a great need of creating solutions which will make it possible to fully use the funds planned within the budget of the Ministry of Defence. He stressed the fact that in the past “significant amounts" in the budgets have not been used. This was visible in an analysis carried out by, according to which MoD used, in total, PLN 10 billion less that it should have been planned, in accordance with the rule of allocating 1.95% GDP to the defence spending.

“Adjustment Mechanism” – is the 2% of GDP rule thinned?

Project aimed at amending the Act on transformation, technical modernization and financing of the Armed Forces (on 18th November 2014) assumed that the defence needs are to be financed in the given financial (n) year at the level of 2% of GDP from the preceding year (defined as n-1). At the same time, article 7, section 2 makes it possible to plan the spending in a different amount, however that amount cannot be smaller than 1.95% of GDP.

The “adjustment mechanism” described in the further part of the document requires a comparison of the planned defence spending to the amount of 2% of GDP for the preceding year and rounding it to the degree of 1/1000 of one percent. If total amount of the annual difference is less than -0,2 %, then the spending for the given year is to be no less than 2% of GDP of the preceding year. In cases when the amount would be higher than 0.2% of the n-2 year, then the defence spending in the “n” year shall not exceed 2% of the GDP in the preceding year.

According to article 7, section 6, defence spending is planned in a way which would make it possible to create a total difference amount for 10 year period which is equal to zero, which in turn means that average indicator of contribution of the defence spending in the GDP is to be, in every subsequent 10-year period, as much as 2% of GDP from the preceding years (no more, no less).

Introduction of the adjustment mechanism which, in some cases, determines the top limit of the defence spending at the level of 2% of GDP (article 7 sec. 5, if the sum of the annual differences is higher than 0.2 % in the n-2 year) may lead to over-complication of the defence funding procedures, which in effect would pose a question to the potential of any acceleration of the armed forces technical modernization process. Justification states that the bill assumes that, depending on the defensive needs of the country and status of the budget, making the subject solution more flexible would be ultimately possible, should such need arise [this is connected directly to the 2% of GDP rule].

Considering the experiences collected throughout the last couple of years, when the Ministry of Defence did not use some of the assets that should have been allocated in accordance with the 1.95% rule to the fullest, a risk of defence budget cuts will be present, should the status of the overall public finances deteriorate, and this may happen as early as in the planning phase. The current geopolitical situation not only does require actions which would secure the funding at the level of 2% of GDP, but also actions that would reverse the effect of cuts that have been implemented in the preceding years, at least partially. It is hard to comprehend then, why – under certain conditions – the bill assumes that mechanisms which would set the maximum value of the defence spending would be required.

Return of the funds to the budget – a threat

According to the professor Koziej’s analysis, there is also a risk that the funds which have not been used will be returned to the budget. Introduction of a mechanism which would retain, at least part of, the funds that are allocated to the MoD, that have not been spent throughout the fiscal year within the Armed Forces Modernization Fund, has been criticized by the Ministry of Finances. Such regulation is already, according to the Ministry, contained in the 18th November bill, which defines the funds for the technical modernization within the scope of the prioritized programmes  (art. 11. sec. 3. subsec. 7). According to the Ministry of Finances it would be not compliant with the Public Finances Act.

The experience collected throughout the recent years show that there is a need of legally securing the assets which are to be allocated to the defence spending, particularly in an environment in which the national security is directly tied to the Ukrainian crisis. Additional defence funds should be considered, including changes in other legal regulations, also in the Public Finances Act.

2% of GDP should be effectively and unambiguously defined as a  non-breachable lower limit of the Polish defence funds. Modernization of the armed forces must gain more impetus, mainly due to the need of reversing the cuts which took place in the preceding years.

Considering the fact that the international situation places Poland at worse position within the scope of security, maintaining defence spending at levels slightly above 2% of GDP would be even more of a benefit. Such solution would make it possible to reconstruct the capabilities, of the army, also in case of the lower-readiness units (along with the technical  modernization).