How NATO funds its defence

Founded in 1949 in the early years of the Cold War, the North Atlantic Treaty Organization (NATO) was established as a collective defence alliance. Its core purpose was deterrence, aimed at preventing conflict in Europe through shared military strength and political solidarity. Collective defence remains NATO’s central principle: Article 5 of the North Atlantic Treaty states that an attack against one member is to be regarded as an attack against all.

Since its creation, NATO has expanded both geographically and functionally. It has grown from 12 founding members to 32 today, while adapting to new security challenges ranging from crisis management and cooperative security to cyber defence and resilience.

Despite its prominence as a military alliance, NATO’s organizational and funding structure is often misunderstood. It is frequently assumed that NATO operates as a centrally funded body with its own standing armed forces. In reality, the Alliance’s military power depends overwhelmingly on national defence spending by its members, rather than on a large central NATO budget. Understanding the distinction between indirect and direct funding is therefore essential to understanding how NATO operates in practice.

Indirect funding: The backbone of NATO’s military power

Although NATO draws on both indirect and direct funding, it relies primarily on indirect funding, under which member states finance NATO-related activities through their own national defence budgets.

Because NATO does not have its own military forces, it depends on its members to provide troops, equipment, platforms and capabilities for operations, missions, exercises and defence planning. Each country bears the cost of its own contributions.

Indirect funding represents the largest component of NATO’s financial base, accounting for around 99 per cent of all NATO-related defence spending. It covers the full range of investments nations make in their armed forces for Alliance purposes.

In recent years, total Allied defence expenditure defined as payments made by national governments to meet the needs of their armed forces or the Alliance as a whole has been in the range of $1.3 trillion to $1.5 trillion a year. This includes personnel costs, equipment procurement, operations, maintenance and readiness.

The 5% commitment

Following years of controversy over many member states failing to meet NATO’s two-per-cent-of-GDP defence spending target, Allies agreed at the 2025 NATO summit in The Hague to raise spending to five per cent of GDP annually by 2035.

At least 3.5 per cent of GDP must be spent under NATO’s existing definition of defence expenditure, covering the core military elements of armed forces, personnel, training, readiness and major weapons systems, as well as NATO capability targets.

Up to 1.5 per cent of GDP can be counted for defence- and security-related spending beyond traditional military categories. This includes protecting critical infrastructure such as energy grids, ports and undersea cables; cybersecurity; civil preparedness and resilience; investment in innovation and emerging technologies; and strengthening the defence industrial base, including production capacity and supply chains.

Imbalances in Indirect Spending

Within indirect funding, several patterns stand out. The United States accounts for roughly two-thirds of total Allied defence spending, reflecting the size of its economy and its global military posture. This does not mean it pays two-thirds of NATO’s operating budget, which is shared among all Allies through common funding. US defence spending also includes commitments beyond the Euro-Atlantic area.

Nevertheless, NATO depends heavily on the United States for critical capabilities such as intelligence, surveillance and reconnaissance, air-to-air refuelling, ballistic missile defence and airborne electromagnetic warfare. Among non-US Allies, France, Germany and the United Kingdom together account for around half of defence spending.

European Allies and Canada have increased their investment significantly over the past decade, rising from 1.43 per cent of combined GDP in 2014 to 2.02 per cent in 2024, amounting to more than $482 billion in defence spending in 2021 prices.

The highest defence spending as a share of GDP is recorded by Poland at 4.8 per cent, followed by Lithuania at 4.0 per cent and Latvia at 3.73 per cent. These increases reflect heightened threat perceptions following Russia’s 2022 invasion of Ukraine, particularly among NATO’s eastern members.

Direct funding: NATO’s shared budget

Direct funding refers to money paid directly by NATO members into collective budgets and programmes. These funds support requirements that benefit all 32 Allies and cannot be assigned to individual countries.

Direct funding is divided into common funding, which is mandatory and based on cost-sharing formulas linked to gross national income, and joint funding, which is voluntary and limited to those Allies participating in specific programmes.

NATO’s common-funded budget is relatively small. It is estimated at about €4.6bn in 2025, equivalent to around 0.3 per cent of total Allied defence spending and is expected to rise to as much as €5.3bn in 2026.

Despite its size, it plays a critical role, financing NATO’s permanent military command structure, supporting operations and missions, and providing essential infrastructure such as air and naval bases, satellite communications, fuel pipelines and command-and-control systems.

Common funding is divided into the civil budget, the military budget and the NATO Security Investment Programme, which supports shared infrastructure and major capability projects.

Joint funding allows smaller groups of Allies to finance specialised or capability-specific initiatives. A recent example is the Defence Innovation Accelerator for the North Atlantic (DIANA), which focuses on innovation and emerging technologies.

Who pays

Contributions to NATO’s common budget are based on a cost-sharing formula tied to gross national income. The largest contributors through 2025 are the United States and Germany, followed by the United Kingdom, France and Italy. From 2026 to 2027, cost shares adjust to reflect changes in relative economic size, with Türkiye and Poland seeing notable increases

NATO’s funding model reflects its nature as a political-military alliance rather than a centralised military power. National defence spending remains the dominant source of resources, while direct funding, though small, enables the Alliance to plan, command and operate collectively.

The move toward a five-per-cent-of-GDP benchmark highlights how NATO is adapting to a more demanding security environment, in which military strength, resilience, infrastructure and industrial capacity are increasingly linked. Understanding these funding mechanisms is key to understanding how NATO intends to sustain deterrence in the years ahead.