NATO FUNDING FOR DUMMIES

NATO is resourced through the direct and indirect contributions of its members. NATO’s common funds are composed of direct contributions to collective budgets and programs, which equate to only 0.3% of total Allied defense spending (around EUR 3.3 billion for 2023). These funds enable NATO to deliver capabilities and run the entirety of the Organization and its military commands.

• National (or indirect) contributions are the largest component of NATO funding 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 defense activities and military operations.
• Direct contributions finance NATO’s budgets, programs 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 of NATO-wide air defense or command and control systems.
• All Allies contribute to funding NATO using an agreed cost share formula derived from the Gross National Income of member countries. This is the principle of common funding and it demonstrates burden-sharing in action.
• NATO has three principal common-funded budgets: the civil budget (funding NATO headquarters), the military budget (funding the NATO Command Structure) and the NATO Security Investment Program (funding military infrastructure and capabilities).
• Programs and initiatives can also be jointly funded, which means that the participating countries can identify the priorities and 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 Boad, 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 defense operation, in which case expectations are different. In all cases, NATO (as an organization) does not have its own armed forces, so Allies commit troops and equipment on a voluntary basis. Contributions vary in form and scale. For example, Allies can choose to contribute a few soldiers or thousands of troops to a NATO operation or mission. Contributions can also include any kind of materiel, from armored 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 defense capability to form a combined Alliance capability, with each covering the costs associated with their deployments.  

The 2% defense investment guideline

In 2006, NATO Defense Ministers agreed to commit a minimum of 2% of their Gross Domestic Product (GDP) to defense 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 defense efforts since the defense capacity of each member has an impact on the overall perception of the Alliance's credibility as a politico-military organization.

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 defense. This imbalance has been a constant, with variations, throughout the history of the Alliance and has grown more pronounced since the tragic events of 11 September 2001, after which the United States significantly increased its defense spending. The volume of US defense expenditure represents approximately two thirds of the defense spending of the Alliance as a whole. However, this is not the amount that 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 defense 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 refueling; ballistic missile defense; and airborne electromagnetic warfare.

The effects of the 2007-2008 financial crisis and the declining share of resources devoted to defense 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 defense spending by the non-US Allies. 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 defense budgets and decided:

• Allies currently meeting the 2% guideline on defense spending will aim to continue to do so;
• Allies whose current proportion of GDP spent on defense is below this level will: halt any decline; aim to increase defense 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 defense a relatively small but still significant level of resources. In 2014, three Allies spent 2% of GDP or more on defense; this increased to seven Allies in 2022. Moreover, 2022 was the eighth consecutive year of rising defense spending across European Allies and Canada, amounting to a rise of 2.2% in real terms compared to 2021.

The Defense Investment Pledge endorsed in 2014 called for Allies to meet the 2% of GDP guideline for defense spending and the 20% of annual defense expenditure guideline on major new equipment by 2024. Since Russia's full-scale invasion of Ukraine in February 2022, a majority of Allies have committed to investing more, and more quickly, in defense.

At the 2023 Vilnius Summit, NATO Leaders agreed a new Defense Investment Pledge, making an enduring commitment to investing at least 2% of (GDP annually on defense. They also affirmed that in many cases, expenditure beyond 2% of GDP will be needed in order to remedy existing shortfalls and meet the requirements across all domains arising from a more contested security order. The new Defense Investment Pledge also calls for Allies to meet the 20% of annual defense expenditure guideline on major new equipment, including research and development. 

The major equipment spending guideline

National defense budgets cover essentially three categories of expenditures: personnel expenses including pensions; research, development and procurement of defense equipment; and, lastly, operations, exercises and maintenance. Budget allocation is a national, sovereign decision, but NATO Allies have agreed that at least 20% of defense 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 modernization. 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 defense 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 defense spending on major equipment will aim to increase their annual investments to 20% or more of total defense expenditures. In 2022, 24 Allies met the NATO-agreed 20% guideline compared to seven in 2014; and 24 Allies spent more in real terms on major equipment than they did in 2021.

At the 2023 Vilnius Summit, Allied Leaders pledged to invest at least 20% of their defense budgets on major equipment and related research and development.  

Allies will also ensure that their forces meet NATO-agreed guidelines for deploy ability 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 programs worth around EUR 3.3 billion, which inter alia support its permanent military command structure, enable 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 defense 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 programs 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.

Common funding arrangements apply to the NATO civil and military budgets, and the NATO Security Investment Program (NSIP). Together, these common-funded budgets reinforce the Alliance, providing major capabilities, enabling deterrence, defense and interoperability, and supporting consultation and decision-making at the highest levels. These are the only funds for which 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.  

The criteria for common funding are reviewed regularly and adjusted to keep up with NATO's evolving political-military objectives and needs. 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 Madrid Summit, NATO Leaders committed to a concrete financial trajectory for all three NATO budgets starting in 2023. As a result, increased national defense expenditures and NATO common funding will be commensurate with the challenges of a more contested security order. Investments in collective defense and key capabilities are essential.

Cost share arrangements for civil budget, military budget and NATO Security Investment Program

Cost share at 31 following the accession of Finland

Valid as from 4 April 2023 until 31 December 2024

1. United States: 16.1964
2. Germany: 16.1964
3. United Kingdom: 11.1801
4. France: 10.3963
5. Italy: 8.7017
6. Spain: 5.9365
7. Canada: 6.8166
8. Türkiye: 4.6838  
9. Netherlands: 3.4193
10. Poland: 2.9591
11. Belgium: 2.0852
12. Norway: 1.7610
13. Denmark: 1.2997
14. Romania: 1.2168
15. Greece: 1.0477
16. Czechia: 1.0462
17. Portugal: 1.0396
18. Finland: 0.9057
19. Hungary: 0.7526
20. Slovakia: 0.5113
21. Bulgaria: 0.3623
22. Croatia: 0.2968
23. Lithuania: 0.2543
24. Slovenia: 0.2255
25. Luxembourg: 0.1678
26. Latvia: 0.1581
27. Estonia: 0.1237
28. Albania: 0.0900
29. North Macedonia: 0.0771
30. Iceland: 0.0636
31. Montenegro: 0.0288

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 2023 is EUR 370.8 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 defense, cooperative security, public relations and the consultation process among 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 defense posture and to 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 defense 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 2023 is EUR 1.96 billion.

The NATO Security Investment Program

The NATO Security Investment Program (NSIP) supports and contributes to deterrence, defense 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 defense 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 defense 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 2023 ceiling for the NSIP is EUR 1 billion.

Joint funding

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 programs 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 Defense Innovation Accelerator for the North Atlantic (DIANA). Joint funding arrangements can lead to the set-up of a management organization 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 defense communication and information systems. These include agencies for NATO's Airborne Early Warning and Control capability (NAPMA), the NH90 Helicopter program (NAHEMA) and the Eurofighter-Typhoon and Tornado fighter jet programs (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.