Defence spending: Economic gains or lasting fiscal challenges?

Rising defence spending may lift economic activity modestly in the short term, but it brings additional fiscal strain while effects on long-run growth are uncertain. Lasting economic benefits are more likely if governments improve procurement and pursue broader structural reforms alongside rearmament.

By Ben Congrave and Young-Hyun Shin, OECD Economics Department

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Many countries have begun to raise defence spending significantly. The goal is to bolster security, not boost GDP. Still, it is important that governments consider the economic consequences of larger defence budgets and how to most effectively implement them. A new OECD working paper finds that increased military expenditure should add modestly to economic activity in the near term, but will also add to fiscal pressures and leave countries’ long-term growth challenges unresolved. Beyond the stabilising influence of improved security, lasting economic benefits from rearmament are far from guaranteed unless governments seize the moment to improve their procurement practices or pursue related structural reforms.

Relative to national income, defence spending is returning to levels last seen at the end of the Cold War in many OECD countries. Tilted towards weapons systems purchases, recent defence outlays aim to refill emptied stores of equipment and address gaps in capability exposed after years of underspending. In Europe, ammunition production has ramped up, while several countries are also restarting military service to build up reserve forces (among others, France and Germany) amid a degraded security environment.

Defence requirements will compete for resources with other national priorities, adding to fiscal pressure from greater outlays on pensions, health and long-term care, and climate measures. While governments have clearly explained the need for bigger defence budgets, less has been said on how to pay for them. Having borrowed to jump-start military build-ups after Russia’s full-scale invasion of Ukraine in 2022, some countries have since raised taxes to prevent rapid debt accumulation. In this group are Estonia, Latvia and Poland, countries close to or already exceeding the 2035 target for core defence spending agreed among NATO allies in June 2025. Medium-term defence spending plans remain to be fully settled in other cases, including in higher-debt countries committed to allocating 3.5% of GDP to their militaries by 2035 (for instance, Belgium, France, Italy, Portugal, Spain and the United Kingdom). Fiscal rules will accommodate borrowing for defence expenditure in the next few years, notably in the European Union. Yet tough budget choices must be made if governments are to meet their defence commitments while keeping public debt at manageable levels.

The economic consequences of larger defence budgets are uncertain and will differ across countries. Fiscal multipliers from defence spending – a measure of the cumulated GDP gains over a given horizon relative to changes in government spending – frequently fall within a range of around 0.6 to 1 (Ramey, 2019; Ilzetzki, 2025). Such estimates suggest output gains should be expected in the near term, albeit with some crowding out of private activity. But effects will depend on the state of the economy, industrial structure, the public finances and macroeconomic policy reactions to the shock. Initially, activity generated by deficit-financed military purchases should help move economies with spare capacity, and relatively low public debt, closer to potential. Growth benefits may, however, shrink over time as strains on resources push up prices and interest rates, and as governments consolidate their budgets.

Among countries producing military equipment, the direct economic benefits of defence spending may be concentrated in a small part of the economy. However, trade should help distribute gains within and across national borders. Arms imports will weaken the overall demand stimulus from government spending, particularly in economies lacking a substantial local defence industry, but should also help limit the immediate costs of rearmament. By the same token, measures to bolster domestic military production could safeguard output gains from government defence purchases, but potentially at greater cost to the budget and in terms of productivity.

In the long run, for military expenditure to have lasting positive growth effects, it must expand the economy’s productive capacity. Economies will benefit over time if defence spending enhances national security. Some types of defence spending can also have enduring beneficial effects on productivity – for instance, when military research leads to innovation in civilian industries. On the flip side, benefits may be reduced if defence firms draw labour and capital away from more productive uses, particularly if this raises the cost of inputs needed for private research and development. Fiscal corrections, essential in many countries if defence budgets stay large, could neutralise any growth boost from defence spending, or cause net income losses over the long run.

Effective procurement will be essential if defence ministries are to encourage innovation and strengthen the defence industrial base while containing the costs of capability upgrades. Many advanced economies are undertaking reforms to improve the speed and coordination of acquisitions, including by streamlining complex procedures (Germany, Canada), increasing the use of off-the-shelf systems and government-to-government agreements (Poland and the Baltic states), and moving away from unduly rigid contracting practices. Greater cross-border coordination, particularly in Europe, backed with harmonised standards, could enhance efficiency, unlock economies of scale and expand markets for highly productive firms while safeguarding interoperability. Combined with broader structural reforms to enhance competition and reduce barriers to market entry, such measures would increase the likelihood that higher defence spending delivers lasting gains in growth and living standards.

References

Conigrave, B. and Y. Shin (2026), Fiscal and macroeconomic impacts of defence spending, OECD Economics Department Working Papers, No. 1861, OECD Publishing, Paris, https://dx.doi.org/10.1787/b4860378-en.

Ilzetzki, E. (2025), Guns and growth: The Economic Consequences of Defense Buildups, Kiel Institue for the World Economy, Kiel, https://hdl.handle.net/10419/311212.

Ramey, V. (2019), Ten Years After the Financial Crisis: What Have We Learned from the Renaissance in Fiscal Research?, Journal of Economic Perspectives, Vol. 33/2, https://doi.org/10.1257/jep.33.2.89.