Comparative Defence Budgets: Navigating Definitions, Exchange Rates, and Purchasing Power

In an era of heightened geopolitical tensions, understanding global defence spending provides critical insights into national priorities and military capabilities. However, direct comparisons of defence budgets across countries are fraught with challenges. Variations in what nations include or exclude from their reported figures, coupled with fluctuations in exchange rates and differences in purchasing power, can distort perceptions. This article examines these factors, drawing on data from the Stockholm International Peace Research Institute (SIPRI) for 2024 - the latest comprehensive dataset available as of December 2025. It focuses on leading NATO members (the United States, United Kingdom, Germany, France, Italy, and Poland) alongside Russia, China, and Iran. To illustrate purchasing power adjustments, it incorporates the Big Mac index, a light-hearted yet informative proxy from The Economist.

SIPRI's standardised methodology offers a reliable basis for comparison. It defines military expenditure as all current and capital spending on armed forces, defence ministries, paramilitary units equipped for military roles, and related activities such as procurement, research and development (R&D), operations, and military aid. Importantly, it includes salaries, retirement pensions for military personnel, and social services for serving staff. Exclusions cover civil defence, veterans' benefits (seen as post-military costs), demobilisation, and weapon destruction. This framework aims for consistency, but national reporting practices introduce variations.

For instance, the United States includes comprehensive personnel costs, such as pensions and housing allowances, within its defence budget, aligning closely with SIPRI's definition. The UK's figures similarly encompass pensions and military housing under operations and maintenance. Germany, France, and Italy follow NATO-aligned reporting, which includes pensions for retired military personnel but excludes broader veterans' welfare programmes managed by social ministries. Poland's budget incorporates pensions and paramilitary elements, reflecting its rapid military expansion. Russia's official data requires SIPRI adjustments to capture full spending, including pensions and housing for troops, though transparency is limited.

China presents a notable case: SIPRI estimates exceed official figures by about 40 per cent to account for unreported items like additional R&D funding, military construction, and costs for the People's Armed Police - a paramilitary force. Retirement payments for soldiers are included, but broader veterans' benefits are partially captured as demobilisation costs. Iran's reporting is opaque; SIPRI's $7.9 billion estimate for 2024 likely understates actual spending due to exclusions of certain paramilitary forces like the Islamic Revolutionary Guard Corps' economic activities, though pensions are generally included. Iranian sources claim a 2025 budget of $23.1 billion, highlighting discrepancies possibly tied to subsidised exchange rates or hidden allocations.

These inclusions and exclusions matter. Pensions and housing can inflate budgets in wealthier nations with ageing militaries, like the US and UK, where personnel costs consume over 50 per cent of spending. In contrast, Russia and China allocate more to procurement, potentially yielding greater hardware output for similar nominal sums. Paramilitary inclusions boost figures for China and Iran, reflecting their internal security emphases.

Turning to nominal figures in US dollars - converted at market exchange rates—SIPRI data reveals stark hierarchies. The US led in 2024 with $997 billion, dwarfing others and accounting for 37 per cent of global military spending ($2,718 billion total). China followed at $314 billion, Russia at $149 billion, and Germany at $88.5 billion. The UK spent $81.8 billion, France $61.7 billion, Italy $41.3 billion, and Poland approximately $31 billion (based on NATO estimates scaled to SIPRI methodology). Iran's $7.9 billion placed it outside the top 20, though domestic claims suggest higher.

NATO allies show commitment variations. The US's 3.4 per cent of GDP far exceeds the alliance's 2 per cent target. Poland, at over 4 per cent, leads Europe amid Ukraine-related threats. Germany reached 2 per cent in 2024 via a special fund, while the UK hovered at 2.3 per cent. France and Italy lagged at around 2 per cent each. Russia devoted 7.1 per cent of GDP, China 1.6 per cent, and Iran about 2.5 per cent - figures that understate impact given economic contexts.

Exchange rates add another layer. Market rates fluctuate with economic conditions, often overvaluing wealthy currencies. For example, a strong US dollar in 2024 made European budgets appear smaller when converted. This leads to underestimating capabilities in lower-cost economies.

Purchasing power parity (PPP) addresses this by adjusting for what money buys domestically. PPP accounts for cheaper labour, materials, and services in developing nations, providing a better gauge of real military output. The International Institute for Strategic Studies (IISS) estimates Russia's 2024 spending at $462 billion in PPP terms - over three times its nominal $149 billion - surpassing Europe's collective total. China's nominal $314 billion balloons to around $650 billion PPP, based on similar multipliers from sources like Visual Capitalist, closing the gap with the US.

For NATO countries, PPP adjustments are modest. The US remains at $997 billion, as it's the base currency. European allies see slight uplifts; Poland's undervalued zloty (per Big Mac data) boosts its effective spending by about 3-5 per cent. Iran, with a heavily undervalued rial, could see its $7.9 billion nominal rise to $20-30 billion PPP, aligning closer to domestic claims.

The Big Mac index offers a relatable illustration of PPP. Published by The Economist in July 2025, it compares burger prices to reveal currency valuations against the US dollar. A Big Mac costs $6.01 in the US. In the UK, at £5.09, the pound is 13.5 per cent overvalued - meaning £1 buys less domestically than expected, slightly reducing the UK's budget efficiency. The euro area (Germany, France, Italy) is 15.2 per cent overvalued, implying similar dynamics. Poland's zloty is 3.4 per cent undervalued, enhancing purchasing power. China's yuan is 40.9 per cent undervalued - a Big Mac costs about $3.55 in dollar terms - suggesting its $314 billion buys far more tanks or missiles than equivalent US spending. Russia and Iran lack recent index data due to sanctions and market distortions, but both currencies are deeply undervalued (Russia's rouble historically 50-60 per cent), amplifying their budgets' real impact.

These adjustments reshape comparisons. Nominally, the US outspends China and Russia combined. In PPP terms, the trio's totals approach parity, with China and Russia gaining ground through cost advantages in personnel and manufacturing. Among NATO Europeans, Germany's $88.5 billion edges the UK's, but Poland's high GDP share and undervalued currency make it a rising force. France and Italy trail, focusing on quality over quantity. Iran's modest nominal outlay belies potential PPP strength in asymmetric warfare.

Yet PPP isn't perfect. It overlooks qualitative factors like technology sophistication - the US excels in R&D - or supply chain dependencies. The Big Mac index, while fun, simplifies; military-specific PPP (factoring defence-sector costs) might differ, as seen in IISS data.

In conclusion, comparative defence budgets demand nuance. Nominal figures highlight US dominance, but PPP reveals a multipolar reality where Russia and China punch above their weight. As NATO pushes for 5 per cent targets amid threats from Moscow and Beijing, and Iran sustains regional influence on a shoestring, policymakers must look beyond dollars. True security stems from efficient, innovative spending - lessons the UK, as a NATO pillar, should heed in its post-Brexit strategy.