Off-budget military expenditure is more widespread than is generally recognised. It is a significant problem for both developing countries and the donor community as it undermines macro-economic stability and efforts to promote poverty reduction, and is also an indicator that there are accountability problems with the military.
This Conflict Security and Development Group paper looks at the issue of off-budget military expenditure, with special reference to Cambodia, Indonesia, Sierra Leone and Uganda. Off-budget military expenditure involves outlays which do not appear within the state budget or are disguised in the budget. Extra-budgetary sources of military revenue include: Parastatals; military-owned businesses and extraction of natural resources; special funds; barter trade; war levies; foreign military assistance and criminal activities. Items are disguised in the budget through: Contingency funds; supplementary budgets; spending under non-defense budget lines; non-transparent or highly aggregated budget categories; diversion of resources from non-defense budget lines and procurement of military material funded through non-defence budget lines.
Off-budget military spending is primarily a governance problem. The main findings were that:
- There are several factors that may encourage off budget military spending: A strong executive decision-making culture; the role played by the military in the social and economic sectors; security problems; institutional fragility and military involvement in protecting or selling natural resources
- Governments may lack the political will or legal or financial management capacity to address off-budget military expenditure. Donors are also reluctant to address the issue because of their relationship with the host government
- A ‘business-as-usual’ approach in the area of public expenditure management will not address this problem adequately
- It is possible to retain a level of confidentiality in highly sensitive areas of the security sector without compromising the principle of public accountability
- A donor focus on levels of expenditure creates an incentive for governments to resort to ‘creative accounting’ measures to conceal expenditure
- The use of ‘offsets’ (the requirement by the purchaser of defence equipment that the seller makes an investment in their country or accepts commodities as part payment) can distort military budgeting.
Donors should adopt a governance approach to the security sector so that transparency problems can be properly addressed. The main recommendations were that:
- Donors need to focus on the unequal division of political power, and institutional and human resource weakness rather than the level of expenditure per se
- Donors should pay due attention to public expenditure management principles when administering aid
- Incentives need to be created for the military and governments to curb off-budget military spending
- Operational procedures need to be created to strengthen the financial management of the defence sector and they should be incorporated into anticorruption programmes
- Major donors, such as the IMF and the World Bank should be encouraged to incorporate these initiatives into their operations
- The issue needs to be ‘mainstreamed’ and included in the dialogue with host governments.