Many requirements, little structure. (Complete Guide).

The purpose of this survey is to review the current state of the major defence equipment markets across the world and describe how they might evolve in the future. This provides a broad canvas on which to draw the defence budget environment in a global context. However, a word of caution is also necessary. Events drive trends, and it is often the case that the assumptions of today can be obsolete tomorrow. Therefore, our prognosis for the future is based on the state of the world in early 2002.

The statement that events drive trends becomes a truism when the impact of the September 11th terrorist attack on America is taken into account. According to figures released by the International Institute of Strategic Studies (IISS) in their respected reference work, The Military Balance 2001-2002, real measures of defence spending in the United States, such as defence expenditure per capita and defence expenditure as a percentage of the Gross Domestic Product (GDP), have been in decline since 1985.

Using 1999 US Dollars as the basis for analysis, the 1985 US defence budget amounted to $382,548 million, a per capita expenditure of $1599, with defence spending accounting for 6.5 per cent of the GDP. In 1999 the US defence budget amounted to $292,147 million, a per capita expenditure of $1061, with defence spending accounting for 3.2 per cent of the GDP. In 2000 the US defence budget amounted to $294,695 million, a per capita expenditure of $1059, with defence spending amounting to 3.0 per cent of the GDP. Another hallmark of declining defence spending is the reduction in force numbers. In 1985, there were 2.15 million people in the US military, by 2000 that had declined to 1.37 million, according to the IISS.

In the political and strategic environment post-September 11th 2001, the administration of President George W. Bush was able to push through a significant increase in defence expenditure. However, trends had already been pointing to increases in the defence budget prior to that time. With the National Defense Budget Authority for Financial Year (FY) 1999 being used as a base year, the Budget Authority for FY2000 had a real growth rate of 0.9 per cent, the Budget Authority for FY2001 had a real growth rate of 1.2 per cent and the FY2002 requested Budget Authority had a real growth rate of 8.4 per cent. Real budget figures will be very different and significantly higher, due to the costs of ongoing military operations and related deployments. In reality, though the trends are clear, after nearly a decade where real defence spending declined, the US is now reverting to a period of sustained defence expenditure with year-on-year increases. Should President Bush win a second term in 2004, it would be fair to assume that this defence budget growth will continue.

Of course, the increased funding available to the US military does not immediately translate into the purchase of more systems and equipment. The Pentagon sees itself as having to recover from a period of decline that coincided with the two terms of the Clinton presidency. The areas where the new funding is being directed include increased military pay and benefits to raise morale, increasing the operation and maintenance budget to boost readiness, transformation of military capabilities through `leap-ahead' technologies and upgrading ageing military facilities.

These areas of transformation are key to the future of the US military, but this concept is extremely broad. It includes the upgrade of existing systems to extend their service lives until next generation systems are available. The Research Development Test and Evaluation (RDT&E) component of transformation remains critically important, it is this funding that is supposed to provide the leap-ahead technologies that will change the future shape of the US military. Another area within the transformation heading is missile defence, in the original FY2002 budget request this received the largest allocation of transformation funding. Missile defence is a priority for the Bush administration and it is an issue that resonates well with the supporters in the Republican Party.

The vast sums allocated annually to sustain and support the US military over the past decade have been unable to arrest the perceived decline in its capabilities. Hence, the Bush administration has a major task on its hands. It must rebuild the confidence and capabilities of the military, make good the shortfalls in current generation systems and equipment and then prepare the ground for the policy of transformation. These are testing missions, but there is a political commitment to improving US defence capabilities and funding is available.

The increasing defence budget also has a major impact on the US defence industry, over the past two years their market capitalisation has risen dramatically. This translates into an ability to raise cash far more easily, meaning they can finance acquisitions and R&D.