Spain Tops-Up Defense Budget as Legacy Program Costs Linger

by Dan Darling, International Military Markets Analyst,  Forecast International.

Spain’s government signed off on an additional EUR856.6 million ($975+ million) in defense spending at a convening of the ruling cabinet on May 14. The top-up funding has become an annual rite as Spain continues to pay off the lingering costs of 19 major defense programs – collectively referred to as the Special Armaments Program – that date back to a previous People’s Party (PP) government led by Jose Maria Aznar (1996-2004). Of the extra funding provided, 99 percent – EUR845 million ($948+ million) – will be allocated toward payments for the Special Armaments Program.

The practice of the current Mariano Rajoy-led PP government of relying on supplemental funding outside the core defense budget to cover such legacy costs has earned criticism from the political opposition. But without the additional funding, the Spanish Defense Ministry would struggle to make payment obligations covering the acquisitions of equipment platforms such as the Eurofighter Typhoon combat aircraft, A400M tactical airlifter, Tiger attack helicopter, Leopard 2A5 main battle tank, and Buques de Acción Maritima (BAM) corvette. The total price tag of the Special Armaments Program falls in the area of EUR32-EUR37 billion ($36-$42 billion). The way the payment plans were outlined when originally designed, the Special Armaments Program was to push larger remuneration toward the back end; thus each annual installment has gradually escalated – and will continue to do so – through the final payoff in 2025.

Having to pay today and into the future for past procurements has come at a financial premium for Spain’s Defense Ministry, which, like most ministries, suffered tremendously from the economic downturn that began in 2008. The ensuing post-bubble and deficit crises resulted in six consecutive years of defense budget cutbacks totaling a 30 percent decline from the baseline budget of 2008. Put in starker terms, by 2014 the years of defense austerity had had a cumulative year-on-year effect of eroding funding by 101 percent from its high-water earmark of EUR8.223 billion in fiscal 2008.

As a means of confronting the significant financial hurdle before it, the Defense Ministry opted to revisit existing contracts where possible, with an eye on reducing or canceling existing orders or selling off surplus hardware upon delivery from the vendor.

Ultimately, however, such solutions merely chipped away at the surface of the fiscal iceberg. Regardless of debt repayment, much of the equipment was still needed to meet the modernization requirements of the Spanish armed forces. Further, many of the programs aided Spain’s defense establishment not only by re-equipping the military, but by providing a steady infusion of work for the country’s defense industry.

So, much to the chagrin of the leading opposition Socialists and the far-left populist Podemos Party, for now the government maintains its ongoing off-budget process in order to pay down the Special Armaments Program debt.

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