Many countries have begun to raise defence spending significantly (Figure 1). The primary goal is to bolster security, not boost GDP, but it is still important for governments to consider the economic consequences of larger defence budgets. The relationship between defence spending and growth has long been debated and has recently returned to the centre of discourse on industrial, fiscal, and macroeconomic policy (Ilzetzki 2025). In a new paper (Conigrave and Shin 2026), we show that increased military expenditure should add modestly to economic activity in the near term, while adding to fiscal pressures. Beyond the stabilising effects of improved security, lasting economic benefits from rearmament are far from guaranteed. However, positive long-term effects are more likely if governments seize the moment to improve their procurement practices, cooperate, and 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. Recent military spending increases are also synchronised across countries in a way not seen in decades. In 2024, for instance, defence budgets grew faster than estimated trend GDP in four out of five OECD countries.

Figure 1 Recent defence spending increases have been large

Military spending in selected OECD countries (% of GDP)

Note: Data for 2025 are estimates. NATO allies are committed to allocating 3.5% of GDP to core defence expenditure by 2035.
Source: NATO, SIPRI, national budgets and defence plans; OECD calculations.

Tilted towards weapons systems purchases, recent defence outlays aim to refill emptied stores of equipment and address capability gaps exposed by years of underspending and rapid technological advances. A challenge in monitoring trends in military expenditure is that “defence”, as an industry or category of spending, is typically not identified in regularly released data on the economy, such as national accounts. Alternative data sources, such as NATO, show a step-up in the share of defence budgets allocated to purchases of equipment. Estimates for 2025 show outlays on equipment, including major weapons systems, exceeding 40% of defence spending in five OECD countries (Finland, Hungary, Lithuania, Luxembourg and Poland) while remaining below a quarter of defence spending in only three OECD-NATO members (Belgium, Canada, and Portugal).

The economic effects of higher defence spending remain uncertain and are likely to vary across countries. Fiscal multipliers from defence spending – measuring the cumulative GDP gains relative to changes in government expenditure over a given horizon – frequently fall within a range of 0.6 to 1 (Ilzetzki 2025, Ramey 2019). Such estimates, broadly consistent with recent macroeconomic modelling of defence spending shocks (e.g. Bokan et al. 2025), suggest that output gains can be expected in the near term, albeit with some crowding out of private activity. Outcomes will depend on economic conditions, industrial structure, public finances, and the macroeconomic policy response to the shock. A set of underlying trade-offs will shape how the effects play out over time.

Industrial policy versus trade

Defence spending faces a trade-off between the security and economic benefits of bringing production home and the efficiency benefits of cheaper purchases from specialised producers.  Measures to strengthen domestic production, particularly where capacity is limited, can add to the costs of re-armament and may extend timeframes for programme delivery. While helping to safeguard output gains from government defence purchases, it could potentially come at greater cost to the budget and in terms of efficiency.

At the same time, trade in defence materiel has risen, with arms imports to some countries increasing sharply. For example, UN Comtrade data show that Czechia’s weapons and ammunition imports in 2024 were seven times their value in 2021. In Japan and Poland, the value of arms imports increased by a factor of 11 and 12, respectively. Arms imports will weaken the overall domestic demand stimulus from government spending, particularly in economies lacking a substantial local defence industry, but should also help limit the immediate costs of rearmament. More broadly, trade should also help distribute gains within and across national borders.

Fiscal and monetary policy responses

Defence requirements will add to mounting fiscal pressure from rising outlays on pensions, health and long-term care, and climate change. While governments have clearly explained the need for bigger defence budgets, less has been said about 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 (e.g. Estonia, Latvia, and Poland).

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, such as Belgium, France, Italy, and Spain. Each of these countries is estimated to have spent around 2% of GDP on defence last year; and have public debts close to or exceeding 100% of annual national income (Figure 2).

Figure 2 Few high debt countries have significantly increased defence spending so far

Military spending change, 2021-25 (% GDP)

Note: Military spending data for 2025 are estimates. For Türkiye, gross debt is based on the Maastricht definition; for other countries, gross debt is gross general government financial liabilities.
Source: NATO, SIPRI, national budgets and defence plans, OECD Economic Outlook 118 database; OECD calculations.

Fiscal rules will accommodate borrowing for defence expenditure in the next few years, notably in the EU. Yet tough budget choices must be made if governments are to meet their defence commitments while keeping public debt at manageable levels, especially if defence ministries’ technical assumptions regarding the costs of energy, equipment, wages, and other inputs to defence prove optimistic (Hartley 2015).

In the short term, activity generated by deficit-financed military purchases should help move many economies with spare capacity closer to potential. In countries such as Germany, defence-related industries, notably manufacturing, appear to have ample capacity to absorb the additional public demand. Growth benefits may, however, shrink over time as strains on resources push up prices and interest rates, and as governments consolidate their budgets. In higher-debt countries, expectation of likely future fiscal corrections could weaken any stimulus from unfunded increases in military spending, even in the near term (Ilzetzki et al. 2013). Over the long run, net income losses might occur if productive non-defence spending shrinks or if tax burdens increase, as is common after a military build-up (Marzian and Trebesch 2025).

Productive utilisation of labour and capital

Defence activities may be competing for labour in a limited pool of human capital resources. They are already increasing demand for skills that are in short supply. Although defence expansion creates jobs, including for high-skilled workers, recruitment may draw talent away from other sectors and exacerbate existing labour shortages, particularly in STEM (science, technology, engineering, and mathematics) fields.

In most OECD countries, spending on defence personnel, including military wages, has not grown as rapidly as overall defence expenditure. Population ageing complicates efforts to expand countries’ armed forces. In some OECD countries, notably in Central and Eastern Europe, outmigration compounds demographic ageing by further draining the pool of potential recruits (Figure 3). While some countries have responded by reintroducing mandatory military service (Latvia, Lithuania), expanding conscription to include women (Denmark, Norway, Sweden), or resuming voluntary service (France and Germany), labour supply constraints remain significant.

Figure 3 Demographics poses challenges for military recruitment in some OECD countries

Males aged 18-24 in Central and Eastern European countries (thousands)

Source: Eurostat; OECD calculations.

These pressures extend to capital and innovation. Some types of defence spending can have positive effects on productivity that are measurable and enduring. For instance, government-funded research has been shown to stimulate private innovation (Moretti et al. 2025). In countries with large defence R&D budgets (Figure 4), military expenditure might tilt the composition of government spending towards productivity-enhancing research (Antolin-Diaz and Surico 2025). However, 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 (Goolsbee,1998).

Figure 4 Defence R&D budgets are small in most OECD countries

Defence budget research and development allocations, 2024 or latest available (% of GDP)

Note: Data for the United Kingdom and Korea are for 2023. Provisional values are shown, except for Denmark, Estonia, France, Japan, Latvia, Norway and Slovenia. Definitions for Australia, Austria and Japan may differ.
Source: OECD R&D Statistics; OECD calculations.

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 economies are now undertaking reforms to improve the speed and coordination of acquisitions, such as 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 also enhance efficiency, unlock economies of scale, and expand markets for highly productive firms while safeguarding interoperability (IISS 2025, Wolff et al. 2025). Combined with broader structural reforms to enhance competition and reduce barriers to market entry, and alleviate skills shortages, such measures would increase the likelihood that higher defence spending delivers lasting gains in growth and living standards.

References

Antolin-Diaz, J and P Surico (2025), “The Long-Run Effects of Government Spending”, American Economic Review 115(7): 2376-2413,

Bokan, N, P Jacquinot, M Lalik, G Müller, R Priftis and R Rigato (2025), “Macroeconomic impacts of higher defence spending: a model-based assessment”, ECB Economic Bulletin 6/2025.

Conigrave, B and Y Shin (2026), “Fiscal and macroeconomic impacts of defence spending”, OECD Economics Department Working Paper No. 1861.

Goolsbee, A (1998), “Does Government R&D Policy Mainly Benefit Scientists and Engineers?”, The American Economic Review 88(2): 298–302,

Hartley, K (2015), “UK defence inflation and cost escalation”, Defence and Peace Economics 27(2): 184-207.

IISS – International Institute for Strategic Studies (2025), Transforming European Defence Procurement and Industry. 

Ilzetzki, E (2025), Guns and growth: The Economic Consequences of Defense Buildups, Kiel Report 2, Kiel Institue for the World Economy.

Ilzetzki, E, E Mendoza and C Végh (2013), “How big (small?) are fiscal multipliers?”, Journal of Monetary Economics 60(2): 239-254,

Marzian, J and C Trebesch (2025), “How to Finance Europe’s Military Build-up? Lessons from History”, Kiel Policy Brief 184.

Moretti, E, C Steinwender and J Van Reenen (2025), “The Intellectual Spoils of War? Defense R&D, Productivity, and International Spillovers”, Review of Economics and Statistics 107(1): 14-27.

Ramey, V (2019), “Ten Years After the Financial Crisis: What Have We Learned from the Renaissance in Fiscal Research?”, Journal of Economic Perspectives 33(2).

Wolff, G, A Steinbach and J Zettelmeyer (2025), “The Governance and Funding of European Rearmament”, Bruegel Policy Brief.