Defence Budgets

Aerospace, Defence & Security

Taiwan Defence Budget

Date Posted: 26-Jan-2017

Publication: Jane's Defence Budgets

Contents
EXECUTIVE SUMMARY | ECONOMY | NATIONAL DEFENCE | SUMMARY - DEFENCE BUDGET |
DEFENCE BUDGET TRENDS | MILITARY ASSISTANCE | DEFENCE BUDGET BY CATEGORY |
NATIONAL DEFENCE BY SERVICE | ARMY BUDGET | ARMY BUDGET BY CATEGORY | NAVY BUDGET |
NAVY BUDGET BY CATEGORY | AIR FORCE BUDGET | AIR FORCE BUDGET BY CATEGORY |
DEFENCE-WIDE BUDGET | METHODOLOGY - SOURCES AND ASSUMPTIONS |
PLEASE NOTE: All figures quoted are in Constant 2017 USD billions unless otherwise stated.

Lead Analyst: Craig Caffrey , Principal Analyst (craig.caffrey@ihs.com)

EXECUTIVE SUMMARY
Title 2014 2015 2016 2017 2018 2019 2020 2021

GDP 539.7 543.6 549.8 559.6 570.6 584.2 599.8 615.9

Defence Budget 14.612 14.221 14.245 14.043 14.333 14.639 14.956 15.300

Total Defence Procurement 2.297 2.457 2.726 2.710 2.667 2.724 2.867 2.920

Army Budget 6.650 6.143 5.983 5.898 6.020 6.148 6.282 6.426

Navy Budget 2.363 2.114 2.279 2.247 2.437 2.489 2.393 2.448

Air Force Budget 2.800 2.982 2.991 2.949 2.867 2.928 3.141 3.213

Defence-Wide Budget 2.800 2.982 2.991 2.949 3.010 3.074 3.141 3.213

ECONOMY
Title 2014 2015 2016 2017 2018 2019 2020 2021

GDP 539.71 543.60 549.82 559.56 570.64 584.17 599.77 615.85

GDP Growth (%/yr) 4.030 0.721 1.145 1.770 1.980 2.371 2.671 2.681

Inflation (%/yr) 1.3 -0.3 1.2 1.3 1.4 1.5 1.5 1.6
Taiwan's economic momentum remains threatened by lingering external factors as policy uncertainties and
fiscal troubles in the advanced economies continue to weigh on the global outlook,  while a troubled real estate
market continues to cloud China's economic prospects. As one of the world's leading exporters of electronic and
IT goods, demand for high-tech products has been supporting the island's export-reliant economy in recent years.
Nevertheless, given the imbalanced nature of the economy tilting heavily toward exports, the economy will remain
victimised by any external shocks, as the economy's earlier downturns had highlighted its heavy exposure to the
global economic crisis. In the longer term, the economic base must once again evolve to counter the effects of
current de-industrialisation, and the eventual challenge posed from indigenous mainland Chinese industries to the
island's hi-tech industries. The economy now needs to move up the value-added supply chain. Greater emphasis
should be placed on research and development and on developing knowledge-based industries, which can then be
bolted onto mainland China's huge industrial resources. The development of a more fluid, entrepreneurial
environment will require the needed strengthening of the financial system, the tackling of the chronic budget
deficit, the enhancement of government efficiency, the state's further retrenchment from direct market
intervention, more cohesive and long-term economic policies, and a concomitant diversion of resources into
physical and human capital. In addition, despite the encouraging launch of the Economic Cooperation Framework
Agreement, further relaxation of the restrictions on trade and investment with China and a more stable political
atmosphere and cross-Strait relations are still needed to help the island weather any external shocks and are
crucial to the island's long-term development.

Taiwan's economic momentum falters.  The economy contracted again in the first quarter of 2016, extending the
fall posted in the second half of 2015 as exports continued to slump, while domestic demand stalled. Real GDP
fell 0.84% year on year (y/y) in the first quarter, following a 0.89% decline in the fourth quarter of 2015. However, in
seasonally adjusted terms, the economy increased 3.1% quarter on quarter (q/q, annualized rate) after rising by
0.78% in the fourth quarter. Net exports have been the main drag in recent quarters, subtracting 2.1 percentage
points from GDP growth during the first quarter. Goods exports dropped 7.9% y/y in the first quarter on the back of
waning overseas demand, still-low international oil and other commodity prices, increasing competition from
China, as well as continued inventory adjustment in the electronics sector. In addition, imports contracted as well
for the third straight quarter, as a drop in goods imports amid lower commodity prices more than counterbalanced
an increase in services imports caused by strong outbound tourism. Domestic demand, on the other hand,
recorded a slight improvement as an acceleration in private consumption and a strong turnaround in government
spending more than offset a fall in gross investment.

Taiwan's medium- to longer-term growth will remain constrained by structural difficulties seen in the past years.
 The Taiwan economy is expected to grow an average of 2.9% in 2018-22, similar to the rates seen in recent years,
which are significantly below those recorded in the 1990s and early 2000s. It is estimated to slow to 2-3% in the
long term. Relocation of manufacturing bases to mainland China and the dissolution of old, heavy industry has
resulted in a sharp increase in long-term unemployment. In tandem, reflecting the growth of service sectors, the
incidence of part-time employment has also grown substantially. Structural unemployment and competition from
China have curtailed wage growth and will continue to keep average wages from rising substantially. These, in
turn, have resulted in a structural weakness in domestic demand, and will remain a restraint to economic growth.
Domestic demand is projected to grow at 3-5% in the medium term, nearly half the above-8% rate in the 1980s and
early 1990s.

NATIONAL DEFENCE
The security environment in Taiwan is generally sound, but periodic military threats from China - particularly
around Taiwanese elections - have in the past tended to raise tensions. Nevertheless, the prospect of all-out war
remains slim, not least after the accession of President Ma Ying-jeou to power in 2008 which ended a protracted
period of strained relations between China and Taiwan following the more independence-leaning rule of former
president Chen Shui-bian. While progress has been made on functional issues, contentious issues such as the
definition of "One China", questions pertaining to sovereignty, and military deployments on both sides of the Strait
continue to loom in the background.
Taiwan's foreign and defence policies are dominated by the perceived threat from China. Since the 1950s, the
cross-strait relationship has been characterised by rhetorical exchanges and occasional military brinkmanship.
Although economic links between the two entities are growing and Taipei has attempted to follow a policy of
'constructive engagement' with Beijing, Taiwan has also developed a powerful, although ageing and somewhat
demoralised, military specifically to deter any Chinese military aggression.

The election of Ma Ying-jeou - leader of the 'Beijing-friendly' Kuomintang Party (KMT) - in March 2008 eight years
of pro-independent Democratic Progressive Party (DPP) rule came to an end. The new President stated in March
2008 that he wished to re-open peace negotiations with China under the '1992 Consensus', and a year of thawing
relations began: direct flights to and from the island were resumed soon after the election in 2008, and
assurances were made by China at the beginning of 2009 that the number of missiles aimed at Taiwan will be
reduced. Taiwan remains wary of such assurances however: an MND spokeswoman said to IHS Jane's  in January
2009 that, while the withdrawal of missiles would be a positive step on China's part, the "overture may not be the
goodwill gesture it seems", given the ease with which China could redeploy the mostly mobile systems.
Nevertheless, Ma's re-election in 2012 should serve to prolong this period of relative easing of tensions.

In the short-term, these factors, combined with US support and improving cross-strait ties under the Ma Ying-jeou
government, will provide enough deterrent to prevent Chinese intervention. Nonetheless, as China's economy has
grown, its military capacity has increasingly outstripped Taiwan's ability to match it. The island is already within
range of approximately 1,600 short- and medium-range ballistic missiles, as well as a growing fleet of
indigenously manufactured SAC J-11 and J-11B combat aircraft in addition to Russian made Sukhoi Su-27 and Su-
30 multirole fighter aircraft and bombers based in China. The Chinese acquisition of Russian Kilo-class
submarines, new indigenous submarine platforms (Type 093 and 094) and Sovremenny-class destroyers with
powerful anti-ship missiles give the People's Liberation Army Navy (PLAN) a greater capacity to enforce a
blockade against the island, perhaps the best way of forcing it to capitulate.

Whether these forces will be deployed against Taiwan in the long-term depends on a variety of factors: Taiwan's
emphasis on independence, the pace of development towards the unification coveted by Beijing, internal stability
within China, energy security and regional or extra-regional power balances, specifically involving the US' security
guarantee. While in the short-term the likelihood of armed conflict in the Taiwan Strait is minimal, in the medium
term it is more difficult to gauge.

Taiwan has grown increasingly dependent on maintaining good relations with mainland China, as it has grown to
be the country's largest trading partner. Tension between China and Taipei has been significantly reduced since
the KMT victory in both presidential and legislative elections in 2008 and 2012. Under his rule, restrictions on
Chinese investments have been loosened and landmark direct flights have been launched, but key questions
regarding Taiwan's legal status remain an impediment to a comprehensive rapprochement. China maintains its
territorial claim over Taiwan, which it continues to regard as a "renegade province", despite the fact that China has
remained split from Taiwan since the end of the Chinese civil war in 1949. It has also refused to renounce the
possibility that it may use force to reunify the island with the mainland in the event of outright moves towards
independence - a position codified in the 2005 Anti-Secession Law. Although Chinese aggression against Taiwan
would involve a reversal of the gains that China has made recently in international relations, thereby making it an
international pariah, the possibility of some sort of offensive cannot be ruled out entirely.

As a result while the threat of attack from China is the main security issue in Taiwan, any such attack remains
highly improbable in the near-to-medium term.

SUMMARY - DEFENCE BUDGET

According to Taiwan's 2013 National Defense Report "the defence budget is allocated based on enemy threat,
force buildup concepts, progress of the force buildup programme, and the government's financial resources."
While the defence budget has been prioritised politically in the past it is not immune from cuts to government
spending particularly when challenging economic conditions arise. In each year since 2007 the budget has either
grown by over 5% or has been reduced creating a period of relative volatility. More recently in 2013 and 2014 the
budget saw marginal cuts of between 1-2% in nominal terms however as economic conditions improve the budget
is expected to return to a period of more stable growth.

Taiwan's Ministry of National Defense (MND) was forced to remove expenditure in 2012 that had been allocated
towards its proposed purchases of diesel-electric submarines and Lockheed Martin F-16C/D fighter aircraft. In
June 2011, the MND outlined that in light of the US government's continuing deliberation over the sale of the
platforms, it had decided to reduce associated expenditure in the 2012 defence budget. In previous defence
budgets the MND had earmarked expenditure towards both procurement programmes despite their lack of
progress. Indeed the 2013 National Defense Report states that "practical and cost effective budgeting will be
practised to support minimum requirements for initial project operations while evaluating the progress of US
decisions. If the US agrees to the sales [of diesel-electric submarines and Lockheed Martin F-16C/D fighter
aircraft] proper budgeting procedures will be followed to acquire sufficient funding from the Executive Yuan."

However, Taiwan still regards the platforms as necessary in efforts to maintain military balance with China
Taiwan's defence budget has fallen considerably since 2008 as relations with China have improved; budgets have
consistently been substantially lower than a government pledge made in 2008 to maintain military spending at 3%
of GDP. As of 2014 the core budget is expected to fall to just 1.94% of GDP compared with 2.71% in 2007.

  2014 2015 2016 2017 2018 2019 2020 2021

Defence Budget 14.612 14.221 14.245 14.043 14.333 14.639 14.956 15.300
(Constant 2017 USD
billion) 

Defence Budget 463.156 450.757 451.507 445.103 454.294 464.001 474.059 484.939
(Constant 2017
Local billion) 

Total Regular 277,000 260,000 233,700 220,000 215,000 210,000 205,000 204,000
Forces 

Budget per 62,526 64,642 66,255 66,871 69,916 71,760 73,677 75,741
Manpower
(Constant 2017
USD) 

GDP (%)  2.71% 2.62% 2.59% 2.51% 2.51% 2.51% 2.49% 2.48%

DEFENCE BUDGET TRENDS

Although Taiwan outspent China on defence as recently as 1995, Beijing now spends 15 times as much, despite
the continued identification of its closest neighbours as the key security threat facing Taiwan. Competing
government priorities combined with doctrinal changes and lower-than-expected economic performance have
caused funding for the Ministry of National Defense (MND) to fall well below the 3% level of GDP that the MND
considers essential to deter China. Despite a ramp up in military expenditure between 2006 and 2008 during which
time the core budget increased from 2% of GDP to 2.7% of GDP the general trend has been towards a declining
budget in these terms since that time. The election of Ma Ying-jeou - leader of the 'Beijing-friendly' Kuomintang
Party (KMT) - in March 2008 signalled a move towards further engagement with China which has largely been
responsible for the threat of Chinese action against the island generally subsiding.

Although this greater cross-strait cohesion was largely viewed as a positive development, there were concerns
that the US may withhold further arms deals with Taiwan due to fears of an increased risk of sophisticated
technology falling into Beijing's hands. However, October 2008 saw a new US-Taiwan arms deal signed to the
value of USD6.4 billion essentially ending an effective eight month freeze on sales of US military material imposed
by the Bush administration in an apparent attempt to maintain stable relations in the Strait. IHS Jane's  noted that
this freeze had hampered Taiwan's efforts to procure a package of US military equipment worth around USD13
billion which had initially been cleared by Washington in 2001. Indeed the reluctance of foreign governments to
authorise politically sensitive military sales has had a significant detrimental effect on overall Taiwanese defence
expenditure. Traditionally, Taiwan had financed these large periodic defence procurement deals using special
budgets to augment core defence expenditure. Between 1994 and 2003 the military received USD23 billion in extra
funding in this way to procure US made defence equipment. However the lack of deals cleared since 2008 has
essentially removed an important form of supplemental funding, with USD2 billion in special budget allocations
known to have gone unutilised between 2007 and 2012.

As tensions with China have eased, the Taiwanese government has shifted focus towards the development of a
diversified society, social welfare provision and overall economic performance, which saw the proportion of the
state budget allocated to national defence fell from 25.3% in 1993 to 16.1% in 2006. Aside from a small spike in
2008 the level has since stabilised at around 16.5% of state spending and there have been few indications that the
share will return to its previous levels despite regular assertions from the MND that this level of funding
insufficient.

Although at various times since 2006 statements have been made by government officials suggesting that the
government would like to reverse the trend and increase defence expenditure, economic and political factors have
made this a difficult prospect as the budget requires parliamentary approval before it can be implemented.
Previously during the Democratic Progressive Party (DPP) period in power Taiwan's main opposition parties - the
Nationalist Party of China (KMT) and People First Party (PFP) - both opposed to Taiwanese independence -
formed the largest block in the Taiwanese parliament and were able to block plans that were viewed as increasing
the likelihood of Taiwan becoming an independent. Increasing defence expenditure was viewed as one such
policy. One tactic used by the KMT to achieve this end was to force the executive to move some military projects
originally funded under the TWD610.8 billion Special Procurement Package (SPP) - which was intended to fund
major military equipment projects as a supplement to the main defence budget - into the main MND procurement
budget. This had the effect of slowing the rate at which Taiwan could introduce advanced military equipment
intended to match China's growing capabilities, particularly its ability to counter China's ballistic missile force, by
reducing overall equipment expenditure. For example, the SPP originally allocated TWD145 billion for six new
Patriot Advanced Capability-3 (PAC-3) anti-tactical missile batteries. In 2005, this procurement was replaced by an
eight-year upgrade to the existing PAC-2 system - to be funded out of the main budget.

Since the 10.7% increase in the core defence budget in 2007 and 7.5% increase in 2008 budget growth has
moderated markedly. Cuts of around 5% were made in both 2009 and 2010 in response to the global financial
crisis and despite the robust economic rebound experienced in 2010 spending fell by a further 1% in 2011. While
nominal growth of 7.7% returned in 2012 further reductions of 1.4% and 0.5% subsequently occurred in 2013 and
2014 respectively as the government focused on fiscal consolidation and laying the foundation for future
economic growth. As a result defence expenditure was cut in five of the six years since 2008 causing a real terms
reduction in core spending of around 8.2% in real terms over the period. In the short term the move to an all
volunteer force by the end of 2016 (pushed back from an original target of 2014/15) has placed upward pressure
on the defence budget as personnel costs rise.

The 2015 defence budget provided growth of 2.6% in nominal terms from TWD311.1 billion (USD10.0 billion) to
TWD319.3 billion (USD10.2 billion), however government figures show that spending was subsequently increased
by just 0.5%. A 2.3% increase to TWD320.1 billion announced for 2016 was similarly reduced to a 1.4% increase
upon the release of the finalised budget causing spending on the military fall to its lowest level as a proportion of
government expenditure since 2006 and drop to 1.9% of GDP, its lowest level for more than a decade.
Furthermore, the 2015 National Defense Report referred to specific challenges with regards to further increasing
defence expenditure including sluggish economic growth in a stagnating global economy, a reduced work force
and limited increases in government tax income.

The election of the more pro-independence Democratic Progressive Party (DPP) in January 2016 under president
Tsai Ing-wen is however expected to usher in a sustained period of moderate real terms growth given the party's
pre-disposition to Taiwanese independence. From a defence perspective for example, The New Frontier
Foundation, a Taiwanese think tank previously chaired by now president Tsai, outlined an aspiration to the core
budget to 3% of GDP in a series of papers on National Defense Policy Papers released in 2015. Despite
suggestions in August 2016 that budget growth for 2017 would be limited to a 0.5% nominal increase its seems
unlikely that the core defence budget will continue to fall against GDP over the medium term. President Tsai Ing-
wen has also suggested that special budgets may be reinstated in order to finance high priority procurement
programmes, however the reluctance of potential suppliers to authorise politically sensitive sales of military
equipment may prove to be the larger obstacle to achieving this goal.

With the new DPP government expected to favour more robust increases to defence expenditure and GDP growth
expected to accelerate from the 1.5% seen in 2012 to around 3% in 2020 it seems likely that core military
expenditure will return to real terms growth. Upward pressure is also being applied by a number of long delayed
procurement programmes, most notably for new combat aircraft and submarines. Longer term IHS Jane's Defence
Budgets  expects funding for the MND to grow by around 3-4% annually over the next five years which will allow
the core defence budget to increase from around USD9.8 billion in 2015 to around USD11.7 billion in real terms by
2020. Including pensions expenditure the budget is expected to increase from USD13.7 billion in 2015 to around
USD15.3 billion by the end of the decade.

MILITARY ASSISTANCE
Taiwan heavily relies on the US for equipment and support. The USD6.4 billion deal was claimed by a spokesman
for the de facto US embassy in Taipei as "a significant and tangible demonstration of the commitment of the US,
under the Taiwan Relations Act (TRA) to provide to Taiwan the defensive weapons that it needs". The TRA was
passed in 1979 following Washington's severance of ties with Taipei in favour of Beijing; it guarantees that the US
will sell "defensive arms" to Taiwan.

DEFENCE BUDGET BY CATEGORY

Taiwanese defence expenditure is separated into the following three main categories:

Personnel Maintenance  which includes salary, insurance, staple and non-staple costs, retirement funds,
and subsidies for military dependants. As of 2013 a key goal of this section of the budget was to expand
recruitment in order to continue to move Taiwan towards an all volunteer military.
Operational Maintenance  which includes primary combat equipment maintenance, operational training,
logistical preparations and other "warfighting capability sustainment" requirements.
Military Investment  which includes procurement, research and development and military projects.

Over the last 10 years, between 21 and 36% of Taiwan's annual core defence budget has been channelled towards
military investment; 20-30% toward operational and maintenance; and 38-57% is allocated to cover personnel
spending. As a result of declining spending and the costs entailed by Taiwan's decision to pursue an all-volunteer
force the proportion of the annual budget dedicated to personnel expenses has gradually increased. According to
the 2013 National Defence Report personnel maintenance costs accounted for 37.9% of the defence budget
however that level had increased to 49.9% by 2013 (the most recent year for which official figures are available).
As a result military investment expenditure has fallen over the same period from 36.0% to 26.0%.

In addition a separate allocation is made for Veteran's Affairs which administers military pensions and represents
around 30% of total defence spending (and significantly increases the level of personnel funding when the budget
is viewed in its entirety).

Title 2014 2015 2016 2017 2018 2019 2020 2021

 Procurement 2.297 2.457 2.726 2.710 2.667 2.724 2.867 2.920

RDT&E 0.471 0.503 0.508 0.501 0.505 0.516 0.533 0.546

Military Personnel 9.408 8.842 8.574 8.430 8.645 8.829 8.955 9.160

O&M 2.253 2.228 2.239 2.207 2.316 2.366 2.394 2.461

Other 0.184 0.190 0.198 0.195 0.200 0.204 0.208 0.213

Procurement

As a general rule, funding for new weapon systems is spread over a four to six year time-frame. Levels of funding
for other security areas - such as disaster response, border control and counter terrorism - are far lower than that
dedicated toward defence.

Taiwan's defence procurement process is complex. The theoretical foundation is based upon a 10-year
assessment, updated annually, of its security environment which is linked to a five year plan. The budgeting of
specific acquisitions is a complex process that normally takes 22 months from conception to legislative
authorisation. Coupled with the reluctance of the US Government to sanction a number of high value, high priority
acquisition programmes over recent years this has served to make procurement and protracted and at times
unpredictable process which creates complications from a budgetary perspective.

While the sale of 66 Lockheed Martin F-16C/D combat aircraft has been continually delayed over recent years, in
October 2008, it was announced that the US will provide a procurement package to Taiwan valued at USD6.4
billion by the US Department of Defense, ending an effective eight-month freeze on weapon sales to the island.
The package included: 30 AH-64D Block III Apache Longbow Attack Helicopters for USD2.5 billion; 330 Patriot
Advanced Capability (PAC-3) missiles for USD3.1 billion; 32 UGM-84L ship-launched Harpoon block II missiles for
USD200 million; 182 Javelin anti-tank guided weapons for USD47 million; upgrades for four E-2T airborne early
warning and control aircraft to the Hawkeye 2000 configuration for USD250 million. Nevertheless the procurement
of combat aircraft and submarines continues to be delayed with little apparent movement on the issue from
Washington.

Research, Development, Training and Evaluation (RDT&E)

Taiwan does not have a specific R&D agency which is surprising given the uncertainty of arms sales to them from
foreign producers unwilling to make themselves an enemy of china. R&D funding is assumed to be a proportion of
procurement with assignations based on the level of indigenous capability. R&D spending is thought to make up a
portion of the 'confidential budget' which the government has sought to reduce as a proportion of total spending
over recent years in order to increase transparency. By 2013 this classified portion of the budget had been
reduced to around 5.67% of the core budget suggesting that a significant proportion of this figure is now
dedicated to R&D. While the amount of funding dedicated to this purpose is thought to be relatively consistent at
around 3.5% of total defence expenditure (including pensions) this share is expected to rise gradually over the
medium term as the Ministry of National Defense seeks to increase self sufficiency.

Personnel

Taiwan's large army but relatively small defence budget means that the budget per uniformed person is very low
compared to most developed defence forces. However, as Taiwan moves from a conscripted to an all-volunteer
force, troop numbers will begin to decline and funding per member of the armed forces will increase enabling a
better equipped and well-trained force. The 2013 National Defense Report revealed that plans to move to an all
volunteer force by 2014/15 had been pushed back to 2016 as a result of difficulties meeting recruitment targets.
Reports in August 2013 citing the Director of the Recruitment Center of the National Armed Force stated that only
72% of the 2012 recruitment goal had been met, and that only 4,290 personnel had been recruited out of the 2013
goal of 28,531. Nevertheless, with the move now central to the MND's strategy personnel expenses are due to
increase as a share of the core budget with government ministers expressing concerns that unless real growth
returns to the defence budget over the short term personnel spending could potentially crowd out spending on
O&M and procurement. In terms of total defence expenditure declining pensions spending should serve to ensure
a downward trend in the proportion of the defence budget allocated to personnel expenses over the longer term.

IHS Jane's  reported in January 2009 that the MND was also considering slashing the number of personnel serving
in the armed forces by almost 100,000 over the next five years. An MND spokeswoman, Major-General Lisa Chi,
said that the "decrease in the number of serving personnel will not affect the island's national security and is being
considered due to the military's now limited annual budget". As of 2013 the MND has continued to implement the
reductions and expects armed forces personnel numbers to fall from 275,000 to 215,000 by the end of 2014 while
the reserve force is simultaneously bolstered.

The need to spend more money on benefits, salaries, and quality of life improvements to recruit and retain the
people it needs - namely highly skilled officers and non-commissioned officers - is likely to mean that the cost
savings from streamlining the military will not be enough to offset the increased costs. The transition to an all-
volunteer military will also increase the costs of benefits for retired military personnel, including education,
welfare, and medical care expenses.

Operations and Maintenance (O&M)

Taiwan's O&M budget accounts for around 23% of the core defence budget or around 18% of total defence
expenditure if pensions obligations are included. This share has fallen significantly since 2009 when it stood at
30% and 23% respectively suggesting that the funding pressures of shifting to an all volunteer force coupled with a
declining defence budget may be having a detrimental effect upon O&M spending.

NATIONAL DEFENCE BY SERVICE

Due to the fact that personnel accounts for - on average - 42% of the defence budget and that the army accounts
for 67% of all personnel, the army retains the largest share of the defence budget estimated at between 45-50%.
Due to high O&M costs, the air force consumes the next largest portion - around 27%, while the navy accounts for
25% on average. It is expected that the army budget will be maintained at its currently level over the next five years
due to the funding pressures caused by the abandonment of conscription. Any major breakthrough in terms of the
authorisation of long delayed sales of military equipment to the air force or navy could however create short term
fluctuations.

ARMY BUDGET
With the military nearing completion of a substantial reorganisation and reduction in the size in an effort to resolve
some of this tension between capability and funding, the army, as the most manpower intensive service, is seeing
some significant changes at present. In 2004 the armed forces as a whole possessed 385,000 personnel but by
the end of 2017 this figure is expected to reach 215,000. For the army, this means a reduction from 250,000 to
175,000 personnel with the intention being to produce a more streamlined and more effective fighting force.

Title 2014 2015 2016 2017 2018 2019 2020 2021

Army Budget 6.650 6.143 5.983 5.898 6.020 6.148 6.282 6.426

ARMY BUDGET BY CATEGORY

Evidently, personnel costs are the largest portion of the army's defence budget and are thought to account for
around 70% of all expenditure as of 2013. The rises that have been seen in personnel spending since 2008 have
had the greatest effect upon the army and these pressures look set to continue to increase over the short term as
the all volunteer strategy is implemented. As a result there have been broad - although not army specific -
indications that O&M costs and to a lesser extent procurement budgets are being effected by the transition. In the
longer term the reduction of the number or personnel serving in the army offers once means by which the balance
can be restored.

Title 2014 2015 2016 2017 2018 2019 2020 2021

Procurement 0.734 0.721 0.688 0.678 0.692 0.707 0.722 0.739

RDT&E 0.150 0.148 0.179 0.177 0.181 0.184 0.188 0.193

Military Personnel 5.095 4.626 4.427 4.365 4.455 4.550 4.648 4.755

O&M 0.641 0.619 0.658 0.649 0.662 0.676 0.691 0.707

Other 0.030 0.029 0.030 0.029 0.030 0.031 0.031 0.032

Key Programmes
Main Battle Tank:  The army has made clear its interest in procuring new main battle tanks (MBT). Whilst a
portion of the ROCA tank fleet is made up of M60A3 MBTs, the majority are variants of the M48. The M60
tanks still have room to be upgraded, but the older M48 tanks are far beyond their effective service life and
need replacing. In mid-2012, Taiwan's deputy Defence Minister advised the Taiwanese parliament that the
army was looking to procure 200 tanks in total. Originally, Taiwan sought M1A2 Abrams MBTs, but this was
rejected by the US and more recently talk has focused on second-hand M1A1 tanks that have seen service
in Iraq and Afghanistan. Officials have confirmed that if a sale of 200 M1A1 tanks were to go ahead, it
would include refurbishment of the vehicles but not an upgrade. Taiwan would need to pay for their
refurbishment.
Armoured Personnel Carriers:  The army is moving forward with plans to replace its ageing armoured
personnel carrier (APC) fleet of M113 and CM-21 tracked platforms as well as the LAV-150. The
indigenously developed and built 8 × 8 CM-32 Yunpao (Cloud Leopard) was selected in 2010 as the
replacement under a programme estimated to be worth at least TWD58.1 billion (USD1.83 billion). A total
of 1,400 Cloud Leopards were originally to be manufactured from 2007 but this figure was later cut
dramatically. The MND also said it hoped to produce 650 vehicles during the first production stage, with an
initial contract for 368 currently being filled by 2018.
Attack Helicopters:  Taiwan is set to become the first export customer for the Boeing AH-64E Apache
Longbow attack helicopter, with US Army officials confirming that Taiwan will receive 30 helicopters
between late 2013 and mid-2014. Taiwan was first offered Apache helicopters in 2002, but it was only in
July 2007 that Taiwanese MND representatives selected the Apache AH-64D helicopter ahead of the Bell
AH-1Z SuperCobra. Taiwan's legislature authorised funding for as many as 30 Apaches in late 2007 and a
contract was finalised in mid-2010 with deliveries beginning in 2013.
Transport Helicopters:  Following the crash of a UH-1H aircraft in April 2007 that killed eight senior officers
of the elite 601st Airborne Brigade, the army renewed its long-standing effort to replace its ageing UH-1H
fleet. The 2008 defence budget listed a request for 60 UH-60M Black Hawk helicopters as a partial
replacement for the UH-1Hs. Subsequently, in January 2010, the US Defense Security Cooperation Agency
(DSCA) notified US Congress of a possible Foreign Military Sale to Taiwan for 60 UH-60M helicopters.
Sikorsky is currently building the first four examples and they should be handed over in March 2014.
Multiple Rocket Launchers: The army is in the midst of replacing the Kung Feng VI multiple rocket
launchers (MRLs) that have equipped the rocket artillery battalions of Taiwan's three army groups since the
early 1980s. These ageing systems are being phased out and replaced by the RT2000 Artillery Multiple
 Launch Rocket System (AMLRS), also known as the Ray Ting (Thunder). In February 2012, IHS Jane's 
reported that the RT2000 was in full production, although the initial order for 57 launchers appears to have
been scaled back to just 43 launchers as a result of ongoing downsizing of the army. As of late 2013, at
least 40 had been delivered to the ROCA.

NAVY BUDGET
Taiwan's aim for some years has been to counter China's growing fleet of advanced submarines, highlighted by
the acquisition of Kilo-class submarines from Russia and the Chinese Navy's pursuit of a new-generation,
indigenous submarine that would significantly extend Beijing's strategic front. In response, the Taiwanese
government has repeatedly indicated it wants to field a new fleet of diesel-electric submarines, through foreign
procurement or indigenous development. However, neither option has shown signs of progress and new
submarines from any source are unlikely to be fielded in the short to medium-term.

The navy proportion of the defence budget is lower than the air force due to higher procurement and O&M costs in
air operations. Furthermore, Taiwan's navy is very small with no nuclear capability submarines or aircraft carriers.

Title 2014 2015 2016 2017 2018 2019 2020 2021

Navy Budget 2.363 2.114 2.279 2.247 2.437 2.489 2.393 2.448

NAVY BUDGET BY CATEGORY

Although naval personnel account for only 13% of total troops, personnel costs are still thought to account for
around 44% of all service expenditure. As with the rest of the Taiwanese military this share is thought to have
increased as a result of the end of conscription however the effect on the navy budget is thought to have been
less pronounced. Procurement and R&D costs combined are thought to account for around one third of the total
budget with this share expected to be largely maintained over the forecast period.

Title 2014 2015 2016 2017 2018 2019 2020 2021

Procurement 0.594 0.483 0.684 0.697 0.780 0.796 0.754 0.759

RDT&E 0.122 0.099 0.068 0.067 0.073 0.075 0.072 0.073

Military Personnel 1.019 0.925 0.912 0.876 0.926 0.946 0.909 0.930

O&M 0.598 0.578 0.581 0.573 0.621 0.635 0.622 0.649

Other 0.030 0.029 0.034 0.034 0.037 0.037 0.036 0.037

Key Programmes
Submarines:  Confronted with the threat of a naval blockade or invasion by China, Taiwan is eager to
expand its anti-submarine and subsurface warfare capabilities. In January 2013 President Ma Ying-jeou
again called for the United States to sell Taiwan new diesel-electric submarines to replace the existing Hai
Lung-class submarines, which have been reported by local experts as "no longer serviceable". However, the
US operates an exclusively nuclear-powered submarine fleet and has not built conventional submarines for
around 50 years, thus the construction of conventional submarines is reportedly meeting resistance within
the US Navy. Since 2001 a number of options were explored. The Netherlands, Germany, and Spain are
thought to have been approached, however they too appear to have declined any such requests with
indigenous development now considered most likely.
 Corvettes:  Procurement of a class of 900-tonne corvette were under consideration according to
statements by MND officials in April 2010 to replace eight Knox-class frigates as well as fast attack missile
boats. The Taiwanese legislature approved a TWD24.98 billion (USD817.8 million) budget in 2011 to fund
the construction of between 7 and 11 such corvettes under the Hsun Hai programme. A fleet of 12 ships is
now expected. Sea trials of Tuo Jiang began in October 2014 and upon completion of these, the vessel will
be fitted with anti-ship missile systems and is expected to be put on a nine-month tactical testing phase by
the RoCN. On 23 December 2014 the first Tuo Jiang-class catamaran corvette, PGG 618, was delivered to
the navy in a ceremony at Suao Port. The RoCN says a further 11 vessels could be built after an evaluation
of Tuo Jiang is completed. The vessel is scheduled to be deployed with the RoCN in the first half of 2015.
Patrol Ships:  In 2000, Taiwan announced plans to build a 180-tonne Kuang Hua 6 (KH-6) stealth missile
boat, which are considered to be better equipped for hit-and-run attacks on hostile shipping entering
Taiwan's territorial waters. However, the acquisition process was slowed by rival bids regarding the tender
process, causing the construction budget to be frozen until 2007. Finally, in May 2010, the navy
commissioned its first squadron of 10 KH-6s. The squadron (Number 5) is based at Tsoying Naval Base in
the southern city of Kaohsiung. In April 2011, another squadron of 10 vessels was stood up at Suao Naval
Base in eastern Taiwan. The final boats were handed over on 12 October 2011 and a third squadron of 10
KH-6s became operational in 2012.
Maritime Patrol Aircraft:  Long-range anti-submarine warfare (ASW) and maritime patrol capability are
currently provided by a small fleet of S-2T Turbo Tracker aircraft. In anticipation of the eventual retirement
of the S-2T, the RoKN began negotiations in the late 1990s to acquire 12 surplus US Navy P-3C Orion
maritime patrol aircraft. A deal for the aircraft was initially approved by the US in 2001 as part of a wider
arms purchase, but was not approved by the Taiwanese parliament until 2007. This cleared the way for the
refurbishment and eventual delivery of the aircraft into RoKN service. The first aircraft was handed over at
Pingtung-North Air Base in September 2013, with deliveries expected to be completed by 2015.

AIR FORCE BUDGET

The Republic of China Air Force (ROCAF) (Chung-Kuo Kung Chuan) is regarded as one of the country's strongest
military assets. Although its fleet of combat aircraft is smaller than that of mainland China, for several decades it
was regarded as being qualitatively superior; when taking the support of US air power into account, this advantage
appeared insurmountable. However, this superiority has been much eroded of late and now appears in danger of
being overturned by Chinese acquisition of potent new combat aircraft such as the indigenous J-10 and J-11B
along with the Russian made Sukhoi Su-27 and Su-30.

Expect a high proportion for air force due to the need to maintain a high state of readiness which pushes up O&M
costs. In addition, procurement more expensive than in navy and army. Given a relatively developed indigenous
capability in fighter production, it is expected that the air force would be allocated a higher proportion of any R&D
funding.

Title 2014 2015 2016 2017 2018 2019 2020 2021

Air Force Budget 2.800 2.982 2.991 2.949 2.867 2.928 3.141 3.213

AIR FORCE BUDGET BY CATEGORY

Taiwan's air force accounts for 15% of total troop numbers however, as with the navy, related cost are thought to
account for around 42% of all spending as of 2013. Given the significant O&M costs involved in operating the
ROCAF's comparatively large fleet of combat aircraft O&M costs are thought to be significant and as such, the
downward trend in related spending within the MNDs budget is likely to have a more marked effect upon the
service. Furthermore, as the air forces inventory ages waiting for the procurement of replacement combat aircraft
these cost pressures are likely to be exacerbated. Any significant increase in procurement related expenditure will
remain largely dependent upon the ability to acquire foreign made equipment.
 Title 2014 2015 2016 2017 2018 2019 2020 2021

Procurement 0.745 1.007 1.107 1.091 0.946 0.966 1.131 1.157

RDT&E 0.153 0.206 0.209 0.206 0.201 0.205 0.220 0.225

Military Personnel 1.189 1.079 1.017 1.003 1.032 1.054 1.068 1.092

O&M 0.683 0.661 0.628 0.619 0.659 0.673 0.691 0.707

Other 0.030 0.029 0.030 0.029 0.029 0.029 0.031 0.032

Key Programmes
F-16C/D:  The ROCAF is anticipating a fighter shortage commencing in the middle of this decade as the
Northrop F-5 and Dassault Mirage 2000-5 begin to leave service. Taiwan has been seeking, since 2006, to
procure 66 F-16C/D Block 52 aircraft from the US however successive White House administrations have
failed to authorise the deal. In April 2012, the US appeared to be making a U-turn in this policy by hinting
that it may proceed with the sale of F-16C/Ds to the RoCAF after acknowledging that Taiwan has "a
legitimate need" for the aircraft however there has been no meaningful progress towards finalising a deal
since that time.
F-16A/B Upgrade:  In September 2012 Taiwan finalised a deal with Lockheed Martin to upgrade the
island's entire fleet of 145 F-16A/Bs - which Taiwan bought in 1992. According to the US Defense Security
Co-operation Agency notification, Taiwan initially requested 176 AESA radars, 140 Raytheon AIM-9X
'Sidewinder' missiles, laser-guided Joint Direct Attack Munitions, 128 Joint Helmet-Mounted Cueing
systems and other armaments for the aircraft. The entire arms package - which includes spare parts for
other US-sourced materiel in Taiwan's inventory - is expected to be worth USD5.8 billion. The upgrade plan
will give F-16s capabilities akin to those of the C/D models.
Transport Aircraft:  At least six new medium transport aircraft are in prospect, with the Alenia C-27J
Spartan reported in May 2009 to have been selected to satisfy this requirement. At that time it appeared
that signature of a contract would occur within the next 12 months but, in August 2010, it was revealed that
procurement had been deferred and could ultimately be abandoned because of a lack of funds. No further
information has since been released.

DEFENCE-WIDE BUDGET
Taiwan's defence-wide budget is for such aspects as military construction and administration.

Title 2014 2015 2016 2017 2018 2019 2020 2021

Defence-Wide Budget 2.800 2.982 2.991 2.949 3.010 3.074 3.141 3.213

METHODOLOGY - SOURCES AND ASSUMPTIONS

All figures quoted are in Constant 2017 USD billions unless otherwise stated.

Insofar as possible, IHS Jane's Defence Budgets  will derive as much hard budget data from official local
government sources. These include annual defence budget documentation, long term defence strategies, national
defence white papers, and government statistics. Where this data is not available, JDB models forecasts from the
bottom up using military equipment inventory and modernisation estimates from IHS Jane's DS Forecast 
databases and IHS Jane's Defence Procurement  to estimate procurement and RDT&E spending. Military personnel
spending estimates are based on IHS Jane's Armed Forces  data and analysis. O&M estimates are made through
an assessment of current inventories, current operational spend and projections of this spending. JDB also
factors in economic conditions and all economic data is sourced from IHS Global Insight. Methodologies vary for
each country depending on the availability of reliable and detailed defence budget data.

The Taiwanese Ministry of Finance provides an annual budget for the Ministry of National Defence (MND) which
details any revisions made during the fiscal year. While the budget documentation does not provide further detail
on how expenditure is broken down the annual National Defense Report published by the MND provides additional
information. The report breaks down funding into four categories: personnel maintenance, operations
maintenance, military investments, and other. Jane's Defence Budgets breaks down this data further by assessing
service allocations for procurement using Jane's DS Forecast data while personnel expenditure is broken down
using proportions of personnel serving in each armed service.

R&D spending is thought to be distributed between the various armed services with total funding determined
through analysis of IHS Jane's DS Forecast data. The desire to become self-sufficient will also drive R&D. Service-
specific personnel figures were based on manpower distribution. Therefore, the high personnel budget - almost
50% of the total budget - causes a high Army budget - 45% of the total defence budget because the Army is 4-5
times the size of the Navy or Air Force. O&M costs are highest again in the Air Force due to the need to maintain a
high level of readiness and the cost of training. Navy O&M costs tend to be lower.

Defence budget figures include the expenditure totals for the Ministry of National Defense and the Veteran's
Affairs Agency in order to provide a figure which includes pensions allocations. Distribution of pensions funding
between the three armed services has been accomplished through analysis of known personnel numbers.

Sources: 

Taiwan Ministry of Finance - Annual Budget Information

Taiwan Ministry of National Defence - National Defence Report (Annual)
Taiwan Ministry of National Defence - 2013 Quadrennial Defence Review
IHS Global Insight  
IHS Jane's DS Forecast 
IHS Jane's Sentinel Security Assessments 

Lead Analyst: Craig Caffrey , Principal Analyst (craig.caffrey@ihs.com)

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