NATO’s Direct Funding Arrangements: Who Decides And Who Pays? – Analysis

By Dr Ian Davis

Former United States President and leading 2024 Republican presidential candidate Donald J. Trump made headlines earlier this year by claiming to have told the leader of a North Atlantic Treaty Organization (NATO) member state that the USA would not come to its defence against a Russian attack if the state had not met its NATO military spending targets. This was not a complete surprise, however, since Trump had said similar things in 2020, and the complaint that the USA protects its European allies at the US taxpayers’ expense has been a frequent refrain of most recent US presidents.

Yet pressure to boost European military spending has not only come from across the Atlantic. Since the invasion of Ukraine, many European leaders have called for spending increases. In February, for example, European Commission President Ursula von der Leyen urged European countries to bolster their arms industries: facing a world ‘that has got rougher’, ‘we have to spend more, we have to spend better, and we have to spend European’. 

To inform public discussion, this topical backgrounder aims to shed more light on how NATO and its activities are directly funded. Debates on how to share the burden of paying for the military capabilities to maintain and strengthen NATO’s deterrence and defence posture nearly always focus on what individual member states spend on their own militaries. However, there are at least three major categories of shared direct costs: (a) the NATO common budgets, which are used to run the organization and for implementing certain policies and activities; (b) joint funding of specific programmes and initiatives by groups of NATO members; and (c) costs associated with NATO-led operations and missions. Although NATO treats the latter as indirect costs, they are discussed here alongside common and joint funding, since they are established within an agreed NATO framework, which includes operational command and political oversight. Moreover, some of the costs for missions and operations are eligible for common funding.

This backgrounder looks at the principles and sharing mechanisms for these direct funding arrangements, with a focus on transparency and accountability. 

The NATO common budgets

NATO requirements that serve the interests of all 32 members, such as NATO-wide air defence or command and control systems, are funded through direct contributions by the member states. The headline budgets announced for these common funding arrangements in 2024 total just under €3.8 billion (US$4.1 billion), equivalent to around 0.3 per cent of the $1341 billion that NATO member spent on their own militaries in 2023. The costs of the common budgets are borne collectively by the member states according to an agreed cost-share formula, based on gross national income and several other factors. 

In 2019, a new cost-share formula was agreed for the period 2021–24, resulting in an increase in the shares from most European allies and Canada and a decrease in the US share. This commitment reflected US pressure for fairer ‘burden-sharing’ and was a particular pacifier for President Trump, who had hosted a lunch at the 2019 NATO leaders’ meeting, but only for the so-called 2 percenters: the nine NATO member states that at that time were meeting NATO’s military spending target of 2 per cent of GDP. Under the new arrangements, the US contribution has been reduced from around 22 per cent to around 16 per cent of the total—the same share as Germany. 

Common funding arrangements are used to finance NATO’s three principal budgets: the civil budget (running costs of NATO Headquarters), the military budget (costs of the NATO command structure) and the NATO Security Investment Programme (military capabilities). Since 2015, the NATO website and the NATO Secretary General’s Annual Report have provided headline figures for each of these (see box 1). 

At the NATO Madrid Summit in 2022, members agreed to increase common funding in response to rising global competition and threats to Euro-Atlantic security caused by the Russia–Ukraine war. For example, the NATO Security Investment Programme partly funded a new $285 million storage and maintenance facility in Powidz, Poland, which allows the pre-positioning of munitions and equipment on NATO’s eastern flank.

The three NATO common budgets

These descriptions of the three common budgets are based on information from the NATO website.

Civil budget: Provides funds for expenses, operating costs, and capital and programme expenditure of the international staff at NATO Headquarters. It is approved by the North Atlantic Council, NATO’s highest decision-making authority, and is financed from national foreign ministry budgets (in most countries). The civil budget for 2024 is €438.1 million (around US$473 million; an increase of 18.2 per cent from 2023).

Military budget: Covers the operating and maintenance costs of the NATO command structure, which includes the International Military Staff, the NATO Airborne Early Warning and Control Force, and alliance operations and missions. These are financed with contributions from national defence budgets (in most countries). In all cases, the provision of military staff remains a nationally funded responsibility. The military budget for 2024 is €2.03 billion (around $2.2 billion; an increase of 12 per cent from 2023). 

NATO Security Investment Programme: Covers major construction and command and control system investments that are beyond the national defence requirements of individual NATO members. It provides installations and facilities, such as air defence communication and information systems; military headquarters for the integrated structure and for deployed operations; and critical airfield, fuel systems and harbour facilities needed in support of deployed forces. The programme is financed through members’ national defence budgets. Projects are implemented either by individual host countries or by NATO agencies and strategic commands according to their area of expertise. The 2024 ceiling for the programme is €1.3 billion (around $1.4 billion; a 30 per cent increase from 2023).

Jointly funded programmes and initiatives

Jointly funded programmes and initiatives range from the development and production of fighter aircraft and helicopters to the provision of logistical support or air-defence communication and information systems to the alliance, to venture capital funds. While such programmes are funded directly by the member states who choose to participate, often they lead to the creation of a management organization or agency within NATO, such as the NATO Airborne Early Warning and Control Programme Management Agency (NAPMA), the NATO Helicopter Management Agency (NAHEMA), or the NATO Eurofighter and Tornado Management Agency (NETMA). These separate NATO reporting entities are audited by the International Board of Auditors for NATO (IBAN). However, while NATO publishes headline budgets for common funding, it makes no comparable information available on jointly funded programmes—at least not in a format that allows the overall spending picture to emerge. 

The degree of financial transparency varies between these programmes and is often limited to occasional spending announcements. In January this year, for example, NATO’s Support and Procurement Agency announced that a coalition of four NATO members would procure 1000 Patriot missiles from a German–US joint venture under a $5.5 billion contract. 

Two of the most recent joint funding initiatives are the Defence Innovation Accelerator for the North Atlantic (DIANA), which aims to foster transatlantic cooperation on critical technologies, and the NATO Innovation Fund, a €1 billion ($1.08 billion) venture capital fund to develop critical dual-use emerging and disruptive technologies, such as artificial intelligence, autonomous systems and quantum technologies. Both of these initiatives are aimed at harnessing civilian technologies for military purposes.

In November 2023, DIANA announced the first 44 companies selected to tackle NATO’s specific challenges on energy resilience, undersea sensing and surveillance, and secure information sharing. The 44 companies were chosen from over 1300 applicants after an evaluation process. More recently, DIANA announced a major expansion of its transatlantic network of accelerator sites and test centres. These were nominated by the host member states to be part of the DIANA network, which will now comprise 23 accelerator sites (up from 11) and 182 test centres (up from 90) in 28 member states.

Potentially dwarfing all the existing joint funding initiatives, however, is the recent proposal by NATO Secretary General Jens Stoltenberg for an unprecedented five-year, €100 billion ($108 billion) package of military aid to Ukraine. Designed to address the uncertainty over US military aid, the initiative would shift more responsibility to NATO for coordinating military support for Ukraine. Yet it is unclear how the plan would be financed or even whether it can gain the required consensus, with Hungary already voicingopposition. Currently, most NATO member states provide weapons to Ukraine on a bilateral basis (coordinated through the ad hoc, US-led Ramstein process), while NATO has been sending only non-lethal aid out of fears that a more direct role could lead to an escalation with Russia. Non-lethal NATO assistance is provided through a 2016 Comprehensive Assistance Package for Ukraine, the scope of which has been enhanced and broadened since Russia’s full-scale invasion in 2022. Member states and partner countries fund this assistance through voluntary contributions to an associated NATO trust fund. 

Participation in NATO-led operations and missions 

When the North Atlantic Council (NAC) unanimously agrees that NATO should mount an operation or mission, there is no obligation for member states to contribute (even when it is an Article 5 collective defence operation); they commit troops, equipment or other services on a voluntary basis. Contributions differ widely in form and scale, and besides troops they can also include any kind of military equipment (such as armoured vehicles, helicopters and naval vessels) or support services (such as medical services). These contributions are taken from the member’s national miliary capabilities to form a combined NATO capability. Member states cover the costs associated with their own deployments. 

NATO’s current operations and missions include the NATO Response Force (which was activated for a military mission for the first time in February 2022), a peacekeeping force in Kosovo (KFOR), three maritime security operations (the Standing Naval Forces, Operation Sea Guardian and Aegean Activity), an advisory and capacity-building mission in Iraq (which was expanded in February 2021 following a request by the Iraqi government), cooperation with the African Union, and air policing (a peacetime mission that aims to preserve the security of the airspace of NATO members). The costs of the KFOR deployment, for example, will fall on the 28 troop-contributing countries that make up the total force strength of around 4600 troops. Establishing the running costs for these ongoing missions is difficult, however, since NATO rarely publishes headline figures and the costs are spread among the contributing countries.

The costs associated with NATO’s largest ever operation—the nearly 20-year deployment to Afghanistan(2001–21) under a UN Security Council mandate—were even less clear cut than those of NATO’s current operations and significantly larger than the common budgets and joint funding arrangements. Assessing the total costs for participating nations in Afghanistan is a complex exercise, not least because of different views on what should be included. According to the US Department of Defense, total US military expenditure in Afghanistan (October 2001–December 2020) was $825 billion, with another approximately $130 billion spent on reconstruction projects. A study by Brown University, however, suggested that the total US spend was around $2.3 trillion, including interest on debt used to finance the war and other expenses such as veterans’ care and spending in neighbouring Pakistan. Similar uncertainty surrounds spending by other contributors to NATO’s Afghanistan mission: estimates of the United Kingdom’s spending, for example, range from £22.2 billion ($28.2 billion, at 2024 exchange rates) to over £40 billion ($40 billion).

Transparency and accountability

The complexity of the NATO funding arrangements further complicates transparency and accountability, which are crucial to understanding who pays what and why. At the NATO Wales Summit in 2014, following criticism in particular from the official auditing body of the Dutch government, NATO was instructed to improve its financial transparency and accountability and to report back on progress at the next summit. 

Since 2015 the headline budget figures have been available for the common funding budgets and the independent IBAN, which was created in 1953, now regularly publishes financial and performance audits. Another small but tangible change is that for the first time NATO’s Resource Policy and Planning Board—a subsidiary body of the NAC—publicly released a five-page executive summary of its 2015 Annual Report and did so again for the 2017 Annual Report (but has not done so since). The annual reports assess the performance of military common funding within NATO and review the financial situation of the NATO Security Investment Programme and the civil and military budgets. 

However, there has been little if any public reporting back on financial transparency at subsequent NATO summits. The communiqué released after the 2016 Warsaw Summit effectively restated the commitment made in Wales, but no progress reports on financial transparency and accountability have been presented at the six summits since then.

Transparency of the funding arrangements for operations and missions—and the growing number of ad hoc, jointly funded projects by ‘coalitions of the willing’—is also weak. With many of these projects, the participating countries identify the requirements, priorities and funding arrangements and NATO provides political and financial oversight. Some projects can also take the form of contributions in kind or trust fund arrangements. However, the oversight of many of these arrangements seems to fall in the grey area between national sovereignty and intergovernmentalism. Since these types of projects are only likely to increase in the coming years, greater transparency and oversight mechanisms for them are needed within member states. 

One of the risks of weak oversight of such programmes is the potential for ‘unwarranted influence’ by the military–industrial complex. More than six decades after US President Dwight D. Eisenhower’s well-known warning in his 1961 farewell address, the military–industrial complex’s influence over policy is, according to some, stronger than ever in the USA, with potentially significant knock-on effects throughout NATO. 

The military–industrial complex certainly played an influential role in the development of NATO’s European land-based ballistic missile defence system, which includes radars and ships across Europe. A key decision to develop a capability to protect NATO’s forces from ballistic missile threats was taken at the NATO Riga Summit in November 2006. This decision was based on a four-year, 10 000-page feasibility study funded by NATO (i.e. by Canadian, European and US taxpayers) on the missile threat to Europe and how to defend against it, completed in May 2006. The classified study was carried out by an international consortium of industries led by the US firm Science Applications International Corporation (SAIC), which then successfully bid for a NATO missile-defence contract worth €75 million ($94 million at 2006 exchange rates). The contract with SAIC was agreed behind closed doors at the Riga Summit, with no prior independent scrutiny of the feasibility study or parliamentary debates in the then 26 NATO member states. 

At the NATO Lisbon Summit in 2010, it was agreed that NATO’s Active Layered Theatre Ballistic Missile Defence programme should be expanded to cover not just deployed NATO forces but to ‘also protect NATO European populations, territory and forces’. Implementation of that programme continues today, requiring a mix of commonly funded assets and voluntary contributions provided by several NATO member states, including Germany, Romania, Spain, Turkey and the USA. None of the NATO-funded feasibility studies and missile proliferation threat assessments over the past 15 or so years used to justify deployment of territorial missile defences has been declassified and made available to the public. 

The right of access to information is a key principle in democracies. While intergovernmental organizations have been slow to adopt relevant measures compared to states, the European Union (EU) has had clearly defined rules on public access to documents since 2007 and the World Bank introduced a disclosure policy in 2010. NATO is one of the few major intergovernmental organizations not to have done so. Neither does NATO publish an annual budget or financial report, as is routinely done by the EU and the World Bank. 

Transparency weaknesses in NATO include a lack of basic information on the organization, making it hard to know even who is involved in policy development; a lack of information about what the intergovernmental working groups are doing as they develop the policy commitments leaders will endorse at summits; and weak measurement of member states’ progress in fulfilling their policy commitments. Even when the NATO policy development process agrees a course of action, the default position remains to withhold information—largely as a result of NATO’s long-standing secrecy and classification rules.