Defence-specific inflation – the Swedish perspective

Abstract

This article uses a Swedish perspective and context to illustrate general, theoretical and applied, discussions on defense-specific inflation, productivity in defense, cost escalation of defense equipment, absolute and relative defense capability plus the construction and use of defense price indices. Sweden uses a Defense Price Index (FPI) which is a composite index of different civilan, non-defense, indices to “automatically” adjust the defense budget for price changes. This should ideally allow decision makers to concentrate on incremental decisions and their economic consequences when deciding on a new defense budget. This approach requires a high precision from FPI in targeting defense inflation. The problems with achieving such a precise index are illustrated in the article. Critical points, in particular, are defining and measuring productivity in defense and price and/or cost escalation of defense equipment. Another complication is that defense, and not only defense equipment, is a “tournament good” where the most important capability is the relative capability compared mainly with potential opponents in military conflicts and not the absolute capability. Since Sweden recently abolished conscription there are reflections on opportunity costs of conscription in the article as well as results from Swedish and other studies on cost escalation of defense equipment.