OECD Economic Outlook, Volume 2026 Issue 1

3. The fiscal and economic impacts of higher defence spending

Summary

Defence spending is rising rapidly in OECD countries as many move to shore up security. The primary goal of defence spending is to bolster defence, not boost GDP, but it is still important that governments consider the economic consequences of higher military expenditure, and the implications for public finances. This chapter examines trends in defence spending across OECD countries, the fiscal context to, and the effects of, increases in defence spending, and evidence on the short- and longer‑term economic impacts (Conigrave and Shin, 2026). While security is essential for economic stability, increased military spending is likely to have broader implications, including for growth and public finances. In general, available evidence suggests that the economic multiplier of defence spending is modest. However, the economic effects of higher defence spending will vary across countries due to factors such as their economic and fiscal context, industrial structure and the composition of military purchases. Trade and supply-chain linkages will also distribute some output gains to parts of the non-defence economy and across national borders.

In the short term, defence purchases could help push output closer to potential in those economies with spare capacity to absorb the extra demand. Imports, while potentially reducing the fiscal costs of timely capability upgrades, will dilute output gains from defence expenditure in countries with limited military production capacity. In contrast, the initial stimulus to production could be greater in countries sourcing more of their defence requirements from domestic suppliers. However, over time, competition for resources from military spending may push up prices and crowd out other private activity, potentially drawing labour and capital away from more efficient uses in the economy. The purchasing power of defence budgets could also diminish amid strong international demand for military equipment and elevated defence-related price inflation. Higher interest rates or fiscal corrections, essential in many countries to keep public finances on a sustainable track, could further limit the short-run growth boost from military spending. Compensating cuts to non-defence public spending could also compromise other policy objectives – for instance, if governments postpone climate action, curb social spending, or shrink budgets for health and education.

In the long run, it is unlikely that higher military spending will expand economies’ productive capacity unless it produces spillover effects in non-defence sectors via innovation. For these to be realised though, structural reforms may be needed, including improving procurement practices, harnessing competition, and alleviating skills shortages that might impair knowledge diffusion. Greater coordination in military purchases, particularly in Europe, could enhance the overall efficiency of higher spending, limit cost pressures and enlarge markets for productive firms while supporting interoperability.

Defence spending is on the rise

Defence spending has surged in many countries since 2022, the first year of Russia’s war of aggression against Ukraine. Amid sustained military build-ups, defence budgets have in many OECD countries grown more rapidly than national incomes (Figure 3.1, Panel A). Relative to the size of the economies concerned, this widespread rise in spending has brought military expenditure back to levels last seen at the end of the Cold War. Significantly, recent defence spending increases are also highly synchronised across countries (Figure 3.1, Panel B).

Figure ‎3.1. Recent military spending increases are large and highly synchronised across countries

Note: Data for 2025 are estimates. Panel A: A simple average is shown for outcomes over 2015-22. Israel’s elevated military spending in 2025 followed a sharp increase in military activities amid evolving conflicts in the Middle East. Panel B: GDP is trend nominal GDP. The sample includes all current members of the OECD for which data are available; it expands to include Colombia in 2002 and Lithuania in 2003.

Source: Stockholm International Peace Research Institute (SIPRI); OECD Economic Outlook 119 database; and OECD calculations.

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Spending targets have been revisited

Medium-term targets for defence spending have increased. NATO members are committed to allocating 5% of GDP to defence and security-related spending by 2035, of which 3.5% of GDP must go to core defence.1 Rapid rearmament on the alliance’s eastern flank has already brought some countries’ defence spending close to (Estonia) or above (Latvia, Poland) these thresholds. Some other European countries expect to meet the new NATO targets ahead of schedule, by the end of this decade or sooner (Denmark, Germany, Norway, Sweden). Large military spending increases are not confined to Europe or NATO. Relative to GDP, defence budgets in Canada and Japan are now expanding from low levels. Increased military spending has also been proposed by the US administration, while Israel’s defence budget has historically been much larger than in other countries and has risen significantly in recent years.

Weapons purchases are a prominent focus of many defence budgets

Considerable resources are going to capital spending (Figure 3.2). Weapons purchases, often aimed at refilling equipment stores or closing capability gaps, are lifting the share of defence expenditure accounted for by fixed investment. In accrual terms, such spending, which also includes outlays on military infrastructure and innovation, made up one quarter of OECD countries’ defence budgets on average in 2024.2 This is up from 20% of defence expenditure through the second half of the 2010s. In parallel, some governments are supporting expansion in domestic arms and ammunition production or making sizable capital transfers to other countries, notably Ukraine, in military aid (Denmark, Finland, Germany, the Netherlands, Norway) (see “Other” in Figure 3.2). Intermediate consumption has remained a sizable share of many countries’ defence outlays. This large category includes, among other things, costs of transport, communications, energy, repairs and technical services. In contrast, personnel costs, including wages, while the largest single part of many defence budgets, have grown more modestly than total spending. This reflects the overall stability of active personnel numbers, notably in European OECD countries. While several have recently revived mandatory (Latvia, Lithuania) or voluntary military service (France, Germany) or expanded existing military service programmes (Denmark, Norway, Sweden), few have significantly raised their permanent defence forces in recent years (Poland, Czechia, Estonia and Latvia). Adverse demographics – population ageing and, in some regions, emigration – add to the challenge of military recruitment.

Figure ‎3.2. Defence spending composition varies across countries

2024

Note: The figure shows the composition of general government defence expenditure in 2024. “Personnel” is compensation of employees (e.g., armed forces wages). “Intermediates” is intermediate inputs (e.g., transport, communications, fuel, building and technical services). “Investment” is gross fixed capital formation (e.g., weapons systems). “Other” includes capital and current transfers and stock building, among other items.

Source: OECD COFOG database; and OECD calculations.

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Trade in defence materiel has increased

Trade in defence materiel has increased. Indeed, reflecting a focus on equipment acquisitions, some countries’ arms imports have expanded much more rapidly than their total defence spending (for instance, Japan and Poland). Current industrial capacity will limit the extent to which domestic supply can meet countries’ immediate defence needs, even with support for local arms production. NATO European countries, for example, depend heavily on suppliers in other regions for some types of military equipment, including air defence and rocket artillery (Figure 3.3). Imports of defence materiel cause more of the economic stimulus of defence spending to leak abroad to other countries. However, purchases of imported equipment, backed with good procurement and international cooperation (Box 3.1), may also be critical if countries are to quickly close capability gaps and limit the cost of rearmament. Rising international demand for military equipment risks adding upward pressure to input prices – including for metals, energy, specialised components and skilled labour – eroding the real buying power of defence budgets, especially if supply constraints bind.

Figure ‎3.3. NATO Europe's import dependency varies by military equipment type

Selected contracts by supplier origin, % share of category total: February 2022 to September 2024

Note: Data are for contracts signed between February 2022 and September 2024, covering domestic and international equipment purchases. The total value of contracts across all categories is just over USD 180 billion. “Other origins” includes Brazil, Israel and Korea. “Artillery” includes self-propelled howitzers and rocket launchers. “Air defence” includes ballistic missile defence and medium and long-range surface-to-air missiles. “Aircraft, ships, guided missiles” also includes combat drones; values for this category are calculated as residuals from IISS-reported total procurement values by origin.

Source: International Institute for Strategic Studies (IISS); and OECD calculations.

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Box ‎3.1. Considerations for cost assessment, price risk management and effective procurement

Ensuring defence planning is informed by complete cost assessments

Thorough assessment of the costs of proposed programmes, and alternative ways to meet defence requirements, is important to inform purchasing decisions (Tryggvadottir and Bambalaite, forthcoming 2026). In addition to upfront payments on acquisitions, lifecycle costs of operating, maintaining, repairing and replacing weapon systems should be accounted for, particularly when the programmes concerned are large. For some defence expenditures, contingent government liabilities may be substantial. One possible example is the non-repayment of state-backed loans for private defence firms’ capital expenditures. For military personnel, benefits payable on new recruits’ pensions will also add to future years’ government expenditure, alongside the costs of providing health care to veterans (Stiglitz and Bilmes, 2008).

Managing price-related risks

Future exchange rates, wages, equipment prices and energy costs are all subject to uncertainty. Unexpected price developments can drive up costs, increasing the resources needed to meet capability goals. Recent spikes in the price of fuel, a significant input to some defence budgets, illustrate one source of uncertainty facing defence planners. Costs of military supplies may also rise more rapidly than ministries’ technical assumptions. During the war in Ukraine, for instance, arms and ammunition price indices have risen more rapidly than overall industrial prices in some countries (Italy, Spain, the United States). Such outcomes are more likely amid rising international demand for defence materiel. Sound practices are needed for setting price assumptions and to handle surprise price swings – for instance, using currency hedging or contingency reserves alongside judicious stock management and choice of contract types to redistribute risks.

Improving defence procurement

The scale of some countries’ plans may test the capacity of procurement agencies used to smaller purchasing volumes. Amid constant technological change, defence procurement often involves challenges in encouraging suppliers to innovate and reduce costs (Rogerson, 1994). This is not always straightforward, including as firms know more about their own costs than governments. When purchase quantities of individual products are small and firms face scale economies in production, competition may not lower costs, at least in the production phase of procurement. Within defence bureaucracies, programme performance is hard to measure while secrecy impedes oversight. As incentives in contract variation often favour technical sophistication in weapons and preserving big budgets, good governance must ensure a continued focus on cost effectiveness (Tryggvadottir and Bambalaite, forthcoming 2026). Reforms in some countries (Canada, Germany) rightly aim to streamline processes and curb waste. Another common goal is to improve international coordination in purchasing, particularly in Europe, and thereby harness scale economies and help expand the markets accessible to firms in small countries.

Large increases in defence spending add pressure to the public finances

OECD countries enter rearmament from different fiscal starting points. However, in most, large defence requirements will bring forward tough choices on public spending priorities and how to finance them to keep debt sustainable.

Fiscal contexts differ across rearming countries. Some higher-debt countries plan to increase defence spending while consolidating their overall budgets (Belgium, France, Italy, United Kingdom). Some other countries have fiscal space to allow debt burdens to grow for a period, with military build-ups in some instances occurring amid broad fiscal expansions (Denmark, Germany, Norway). The size of public debt, and the means for funding defence spending – including fiscal reprioritisation and reduced envelopes for other spending needs – may influence its economic effects (discussed in more detail below; see also Figure 3.5) and could make it more difficult for governments to meet other policy objectives.

Fiscal rules, particularly in the European Union, are accommodating national debt financing of higher military spending over the next few years. National escape clauses under the Stability and Growth Pact have been activated for 17 countries, enabling them to spend an extra 1.5% of GDP annually on defence from 2025 to 2028.3 Such flexibility temporarily removes a formal hurdle to defence budget expansion in countries now spending less on defence than their security strategies propose or alliance commitments require. To date, large spending increases have tended to occur in countries with low or moderate public debt ratios (Figure 3.4, Panel A), but meeting NATO targets in coming years would see defence budget expansion in several high-debt countries as well (Figure 3.4, Panel B). Supranational support for defence investments is available to EU members in the form of EU- and EIB-issued loans, Social and Cohesion Funds and unspent funds from the Recovery and Resilience Facility. Loans funded by EU debt, such as those under the EUR 150 billion Security Action for Europe (SAFE) instrument, offer relatively cheap financing for countries with high borrowing costs. But such loans still add to public debt. When countries’ escape clauses expire, normal EU fiscal limits are set to reapply, requiring fiscal tightening in countries where public debt is growing at unsustainable rates.

Added pressure from sustaining large defence budgets would require many countries to reduce other government expenditure and consolidate public finances more broadly in the years ahead to contain government debt. Debt accumulation has, for instance, been rapid in Latvia and Poland, countries that moved early to boost defence spending from 2022. Having borrowed to kick-start rearmament with moderate debt burdens, both countries have since taken or announced measures to limit further budget balance deterioration.4 For many countries, big defence spending compounds existing challenges of making room in budgets for increased outlays on pensions, health care, and climate measures. Medium‑term adjustments will be needed in many cases to keep public debt on a sustainable track. Improvements in spending efficiency could prove essential. However, to correct wide budget imbalances, some high-debt countries may have to do more to reprioritise government spending or raise tax revenues.

Figure ‎3.4. Recent large military spending increases have tended to occur in lower debt countries

Note: In panel B, the implied gap to target is calculated as the difference, as a percentage of GDP, of estimated defence spending in 2025 compared with 3.5%, the NATO commitment for core defence spending by 2035. Negative figures indicate that in 2025 defence spending in the countries concerned (Latvia, Poland) was estimated to exceed the new NATO commitment. Türkiye’s gross debt estimate is based on the Maastricht definition; for other countries, gross debt is general government gross financial liabilities.

Source: SIPRI; OECD Economic Outlook 119 database; and OECD calculations.

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Defence spending could provide a near-term boost to economic activity

The economic effects of defence spending are uncertain and will vary across countries. Estimates of multipliers on defence spending – measuring output gains accumulated over a given horizon relative to changes in government spending – often fall in a range of 0.6 to 1 (Table 3.1).5 Such estimates suggest near‑term output gains could be expected, though often with some crowding out of private activity as resource competition drives up prices (Figure 3.5). Amid rising international demand for military equipment, price pressures in defence-related sectors could emerge while supply is expanding to meet new orders. Offsetting losses in non-defence activity may occur if interest rates rise, an outcome made more likely where spare capacity is limited or, in a monetary union such as the euro area, when defence spending rises in multiple member economies at once, as currently. Necessary fiscal corrections to stabilise public debt could also negate the growth boost from higher defence spending. Indeed, where increased military spending is primarily funded by cuts to non-defence public expenditure or higher taxes, net declines in economic activity could occur (Barro and Redlick, 2011). Import leakage will dilute the direct stimulus from defence purchases, and more so in countries with open economies and small defence sectors. However, with military spending rising in many countries simultaneously, trade will also distribute gains across borders and to non-defence firms.

Figure ‎3.5. The transmission of higher defence spending to the real economy

Note: The figure depicts the transmission to the real economy of higher defence purchases. “Total expenditure” is total final expenditure. “K” is capital, “L” is labour, “A” is total factor productivity. The figure abstracts from possible longer run influences of defence spending on the economy’s supply side – for instance, spillovers to non-defence innovation from military research, and productivity-weakening resource misallocation.

Table ‎3.1. Selected estimates of defence spending multipliers

Study / sample	Multiplier	Horizon	Comment / type of defence data
1. Empirical studies of US data
Antolin-Diaz and Surico (2025) United States 1890-2015, quarterly data	0.6	1 year	Multipliers are estimated to be greater at longer time horizons. Defence spending news.
Auerbach and Gorodnichenko (2012) United States 1947-2008, quarterly data	1 - 1.2	1 year	Impulse responses are scaled by sample average values of the output-spending ratio to convert from percentages to dollar changes. National accounts data on government defence purchases.
Barro and Redlick (2011) United States 1950-2006, annual data	0.6 - 0.8	2 years	Lower bound corresponds to shocks that are temporary, upper is for permanent shocks. Estimates control for tax rate changes. Defence spending news.
Ben Zeev and Pappa (2017) United States 1947-2007 quarterly	2.1	1.5 years	Based on news shocks orthogonal to current government defence spending that best explain future movement in defence spending over a five-year horizon.
Hall (2009) United States 1930-2008, annual data	0.6	On impact	Estimates are lower for subsamples excluding WWII. National accounts data on government defence purchases.
Ramey and Zubairy (2018) United States 1889-2015, quarterly data	0.7	2-4 years	Output effects are similar (slightly higher) at the two-year horizon in a subsample that excludes WWII. Defence spending news.
2. Empirical studies of other OECD countries
Furceri et al. (2026) EU-27 2009-2023, monthly data	1.5	1 year	Defence procurement data.
Garcia et al. (2025) EU-27 1995-2023, annual data	1.4	1 year	National accounts (COFOG) data on military expenditure.
Olejnik (2023) 9 Central and Eastern European countries 1999-2021, annual data	0.6	1 year	National accounts (COFOG) data on military expenditure.
Sheremirov and Spirovska (2022) 129 advanced and developing countries 1988–2013, annual data	0.8	1 year	Multipliers are above unity for a subsample of advanced economies, though estimated less precisely. SIPRI data on military expenditure.
3. Analyses using macroeconomic models
Bokan et al. (2025) Euro area	0.4 - 1.1	2 years	Government spending, monetary policy active, debt and tax‑financed. Assumes a linear increase in spending. Upper bound is from a semi-structural model. Lower bound is from a dynamic stochastic general equilibrium model.
European Commission (2025a) European Union	0.1 - 0.3	4 years	Government spending, debt financed. Assumes a linear increase in spending. Lower bound assumes a higher import content of defence purchases.
Giagheddu and Kanik (2025) Sweden	0.4 - 0.7	2 years	Military spending, debt financed. Adjustments account for high import content, economy in recession. Lower bound assumes a permanent spending increase, no adjustment for the cycle. Upper bound is for a temporary increase, with adjustment for the cycle.
IMAD (2025) Slovenia	0.3 - 0.5	2 years	Government consumption, debt financed. Assumes a linear increase in spending. Lower bound assumes a higher import content of defence purchases.

Note: The first and second panels show time series and panel estimates of defence spending multipliers from aggregate data. Excluded are state-dependent and subnational multiplier estimates, and estimates for subcategories of defence spending. Most of the studies present results for cumulative multipliers. “Purchases” means the sum of government consumption and investment. “Defence spending news” are narrative‑based measures of defence expenditure shocks constructed from news sources. Several of the studies estimate effects on output of total government spending using military purchases or related variables as an instrument. The third panel shows implied multipliers from model simulations of defence spending shocks. Some figures are calculated from visual inspection of graphs depicting simulation results.

Output effects will differ across countries

For a given country and context, the following factors will help determine the sign and size of potential near-term growth effects from higher military spending (see also Figure 3.5):

• Financing: In countries funding rearmament with cuts to non-defence spending or higher taxes, output effects would be small, and potentially negative. In contrast, higher multipliers could result from primarily deficit-financed military spending, particularly if public debt is moderate (Ilzetzki, Mendoza and Végh, 2013). If debt burdens are large, increases in government borrowing costs could transmit to other interest rates, lifting risk premia and capital costs and denting investment. Consumption responses are uncertain; muted reactions might be expected if households anticipate a fiscal correction will be needed to pay for big defence spending, as has been the case in some countries recently (Figure 3.6).

• Spending composition: Boosts to domestic activity from weapons purchases, a focus of recent defence budgets, will be smaller if goods are sourced from foreign producers (Balima et al., 2026) (for NATO Europe, see Figure 3.3). Higher multipliers on equipment purchases may apply in countries where weapons are bought from local manufacturers, despite possible import leakage as firms source inputs from abroad and as higher demand lifts final goods and services imports. Spending multipliers tend to be lower in economies, like many in the OECD, that are highly open to trade (Ilzetzki, Mendoza and Végh, 2013).

• State of the economy: Several studies find that the near-term output impact of public spending is larger when there is slack in the economy (Auerbach and Gorodnichenko (2012), Fazzari, Morley and Panovska (2014), Caggiano et al. (2015)), as is currently the case in many rearming countries. Spare capacity in defence-related sectors, such as manufacturing (Figure 3.7), would reduce the risks of straining resources and generating broader price pressures. In Germany, for instance, manufacturing capacity utilisation is below the peak seen in the past decade; there is also evidence of plant, equipment and labour redeployment from automotive to defence manufacturers (The Economist, 2025).

• Monetary policy: Short-term output gains and price inflation from higher public demand will be larger if monetary policy is constrained6 or otherwise accommodates the fiscal stimulus, notably in view of the state of the economy. In a monetary union, a spending increase in a small economy might be met with little to no central bank reaction. Limited policy rate responses could result in higher inflation and a short-term stimulatory effect for private demand from lower real interest rates (Farhi and Werning, 2016). Such positive effects could be greater for interest rate-sensitive expenditures such as private investment or durable goods consumption. In contrast, simultaneous defence spending shocks by several monetary union member states, as seen currently in the euro area, might be more likely to affect the path of union-wide policy interest rates.

• Demand shocks in trading partners: Synchronous spending increases in multiple countries will benefit arms exporters and influence broader growth and price effects. Sales of intermediates to foreign defence firms may support output in countries with small defence sectors or limited national defence spending increases. Simultaneous demand shocks by trading partners might also limit real exchange rate appreciation that in other circumstances could weigh on exports and trade-exposed sectors. On the other hand, compared with a single country’s unilateral defence build-up, bottlenecks in the supply of materiel, and inputs to arms production, might more likely emerge from a global increase in defence spending. If supply is slow to respond, delays may result, with cost pressures eroding the buying power of defence budgets as well as GDP gains. A step-up in military equipment demand could also add pressure to the prices of commodities used in arms production, notably steel, aluminium and copper.7

Figure ‎3.6. Many households expect higher taxes or spending cuts to fund rearmament

Note: The graphs are based on household survey responses. Respondents were asked: (Panel A) how they believe defence spending will change in their country over the next 12 months; (panel B) if defence spending were to increase, how they expect it to be financed. In Panel A, "Decrease" is the sum of respondent shares for "Decrease a little" and "Decrease a lot".

Source: Baumann et al. (2025); and OECD calculations.

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Figure ‎3.7. Capacity utilisation is below past peaks in some economies’ defence-related industries

Note: Panel A shows capacity utilisation rates in four manufacturing industries (Fabricated metal products; Electrical equipment, appliances and components; Computer and electronic products; and Transportation equipment) and construction. In Panel B, the dotted line shows the peak capacity utilisation rate since 2015.

Source: Statistics Canada; TD Economics; Eurostat; and OECD calculations.

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Gains within economies could be highly concentrated

Where aggregate economic benefits turn out to be modest, the gains from defence spending may be offset by counteracting forces – including drags on growth from trade restrictions, high energy prices, or conflict itself. Sectoral or local boosts to output and employment could still be substantial (Nakamura and Steinsson, 2014). Benefits from some defence purchases may be highly concentrated by industry (Figure 3.8). Spending on defence also tends to be more geographically concentrated than other categories of national spending (De Mello and Ter-Minassian, 2026). Empirical evidence suggests local spending multipliers may be larger than national multipliers, with sizeable positive spillovers to nearby areas and non-defence firms. Relatively large local multipliers appear to reflect in part the greater factor mobility within countries than between them. This may outweigh the negative effect of sizable imports from other regions to local economies that tend to be more open than national economies. Responses from macroeconomic policy and exchange rates are also typically absent from the measurement of local multipliers, but present in the case of aggregate ones.

Job creation could be limited if defence purchases mainly benefit capital-intensive firms – for instance, in metals manufacturing. Advertisements for jobs in major European defence firms increased in number from 2022 but job postings subsequently moderated (Figure 3.9, Panel A). Skill requirements in defence-related manufacturing tend to be higher, on average, than in the general workforce. Firms in defence industries rely relatively heavily on advanced technical, engineering and safety-related skills (Galai et al. (2019), European Commission (2025b)). Data on vacancies suggest demand has been strong for engineers and software developers (Figure 3.9, Panel B). In attracting workers from other businesses, defence recruitment may exacerbate existing skill shortages in rearming economies.

Figure ‎3.8. Gains from some defence purchases may be highly concentrated by industry

Production required for a USD 100 million demand increase for selected US defence products, USD million

Note: The figure shows total requirements by industry from benchmark US input-output tables for 2017. Not shown are production requirements from the defence industries themselves (USD 110 million for Ammunition, arms, ordnance and accessories; USD 105 million for Military armoured vehicle, tank, and tank components).

Source: US Bureau of Economic Analysis; and OECD calculations.

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Figure ‎3.9. Job ads at European defence firms surged in 2022-23 but subsequently moderated

Note: Data cover Switzerland, EU countries and European NATO members for which an Indeed site exists. Data for defence companies are based on monthly job postings for the largest European defence companies. Panel B: Data are for a one-year period ending 31 May 2025.

Source: Judes, A. and V. Sondergeld (2025), “Europe’s Defence Industry Is Hiring, but UK Jobseekers Remain Hesitant”, Indeed Hiring Lab, with industry data updated to March 2026; and OECD calculations.

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Longer-term economic effects of defence spending are highly uncertain

To generate measurable long-run economic gains, military expenditure must expand an economy’s productive capacity – whether by adding to the stock of productive capital, increasing the size or skills of the labour force, or enhancing the efficiency with which factor inputs are used in production. Failing this, an initial stimulus to demand will fade over time, with households potentially left facing higher taxes to pay for increased public expenditure.

Some types of defence spending can have positive effects on potential output:

• Defence R&D, a small item of government spending for most OECD countries (Figure 3.10), can support private innovation and generate long-term productivity gains (Antolin-Diaz and Surico, 2025). Positive spillovers to civilian innovation may be quantitatively important when budgets for defence R&D are large, as in the United States, where successes from mission-oriented research are well documented and government-funded defence research occurs within an effective innovation system (Gross and Sampat, 2023). Measures to address skills shortages, most obviously through immigration, may be important to avoid shrinking the pool of workers available for non-defence innovation. Without such measures, spending on defence research might simply push up the wages of engineers, scientists and technology workers (Goolsbee, 1998), crowding out private R&D.

• Military procurement may enable private investments by improving firms’ cash flow and access to finance. Defence firms’ productivity might also rise as work on large orders brings process or technology improvements that lower businesses’ unit production costs (Ilzetzki, 2025). Reforms to improve procurement, and associated institutions, could reduce waste in government spending (Box 3.1), ensuring a strong translation from purchases to a larger capital stock (Pritchett, 2000).

• Military service might, for some recruits, substitute for years of schooling (Angrist, 1998), create pathways to jobs in science, engineering and technology (Werum et al., 2020) or provide skills useful for management in civilian industries (Grönqvist and Lindqvist, 2016). In contrast, aspects of active service and conflict exposure could weigh on veterans’ future labour market prospects (Bailey et al., 2025). The lasting employment effects of military service are uncertain.

• Protection of critical infrastructure from malicious cyber activity or physical sabotage, instances of which have increased (OECD, 2025b), will not of itself shift the economy onto a higher growth path. However, such investments could still prevent incremental drops in output after attacks. But as with defence generally, the lack of a defined counterfactual, in terms of averted losses, makes it harder to determine the efficient level of investment. Long-term economic benefits are similarly difficult to gauge.

Other forces may curb any potential positive effects from defence spending in the long run. Secrecy may impede the diffusion of knowledge from military research, which appears to bring smaller productivity payoffs than public non-defence R&D spending (Fieldhouse and Mertens, 2023). Military purchases may draw resources away from more efficient uses in the economy by driving up prices. In so doing, defence spending could weigh on aggregate productivity. State support for enlarged military production, including stand-by capacity for future defence requirements, could also reduce productivity if it lowers industry-wide capacity utilisation. Sustaining large defence budgets could require non-trivial cuts to other government spending. If military spending, or higher debt service costs, displaces productive expenditure on education, health or infrastructure, the net effect could be to reduce output and incomes. Other policy objectives might be impaired in the process, as could also occur if governments postpone climate action or curb social spending (Balima et al., 2026). Where offsetting fiscal adjustments rely heavily on tax increases, as is common after a military build-up (Marzian and Trebesch, 2025), this could be expected to shrink the economy’s productive capacity. Potential output reductions are more likely if defence budgets are ultimately funded by higher taxes on income which discourage work and investment.

The empirical literature does not have a clear consensus on whether defence spending raises or lowers output in the long run (Dunne and Tian, 2020), or whether there are lasting effects on consumption and welfare. Durable benefits, beyond current military build-ups, are more likely if structural reforms accompany higher defence spending. Priority reforms for many countries are to improve procurement practices, harness competition where it can lower costs and foster innovation, and alleviate skills shortages that might impair knowledge diffusion. In Europe in particular, coordination in military purchases, backed by harmonised standards, could enlarge markets for productive firms and support interoperability.

Figure ‎3.10. Defence budget research and development allocations

2024 or latest available data

Note: Data for the United Kingdom and Korea are for 2023. Provisional values are shown for most countries.

Source: OECD Research and Development Statistics; and OECD calculations.

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References

Angrist, J. (1998), “Estimating the labor market impact of voluntary military service using social security data on military applicants”, Econometrica, Vol. 66/2.

Antolin-Diaz, J. and P. Surico (2025), “The long-run effects of government spending”, American Economic Review, Vol. 115/7.

Auerbach, A. and Y. Gorodnichenko (2012), “Measuring the Output Responses to Fiscal Policy”, American Economic Journal: Economic Policy, Vol. 4/2.

Bailey, E. et al. (2025), “The relationship between mental health and employment status among United States veterans: a systematic review”, Military Medicine.

Balima, H. et al. (2026), Defense spending: macroeconomic consequences and trade-offs, World Economic Outlook Chapter 2 April 2026, International Monetary Fund.

Barro, R. and C. Redlick (2011), “Macroeconomic effects from government purchases and taxes”, The Quarterly Journal of Economics, Vol. 126/1, pp. 51-102.

Baumann, A. et al. (2025), “Higher defence spending and its impact on household expectations”, ECB Economic Bulletin 5/2025, European Central Bank.

Ben Zeev, N. and E. Pappa (2017), “Chronicle of a war foretold: the macroeconomic effects of anticipated defence spending shocks”, The Economic Journal, Vol. 127/603.

Bokan, N. et al. (2025), “Macroeconomic impacts of higher defence spending: a model-based assessment” Economic Bulletin 6/2025, European Central Bank.

Caggiano, G. et al. (2015), “Estimating fiscal multipliers: news from a non‐linear world”, The Economic Journal, Vol. 125/584.

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

De Mello, L. and T. Ter-Minassian (2026, forthcoming), “Implications of increased defence spending for subnational governments”, OECD Working Papers on Fiscal Federalism, OECD Publishing, Paris.

Dunne, J. and N. Tian (2020), Military expenditures and economic growth, Oxford University Press, https://doi.org/10.1093/acrefore/9780190228637.013.1929.

European Commission (2025a), “The economic impact of higher defence spending”, European Economic Forecast Spring 2025, European Commission.

European Commission (2025b), 2026 European Macroeconomic Report.

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Notes

← 1.  The remaining 1.5% of GDP, falling outside NATO’s agreed definition of defence spending, would go towards protecting critical infrastructure, defending networks, civil preparedness and resilience, innovation and strengthening the alliance’s defence industrial base.

← 2.  Based on an unweighted average of outcomes for 25 OECD countries for which internationally comparable data are available. Figures are calculated from accrual-based national accounts data on expenditure by function of government (COFOG data). Differences in the accounting of pre-payments for the supply of military equipment can cause accrual and cash-based estimates of defence spending (such as those reported by NATO) to diverge, at times significantly.

← 3.  The countries are Austria, Belgium, Bulgaria, Croatia, Czechia, Denmark, Estonia, Finland, Germany, Greece, Hungary, Latvia, Lithuania, Poland, Portugal, Slovakia and Slovenia. The maximum increase in defence spending is determined relative to 2021 levels calculated from COFOG data.

← 4.  Latvia has introduced taxation of undistributed profits of credit institutions. Tax receipts are also increasing with reduced rates of informality. Poland has increased rates of corporate income taxation for banks and has announced a freeze in family benefits; bracket creep in personal income taxation will help lift revenues (OECD, 2025a).

← 5.  A review of the broader literature on government spending multipliers can be found in Ramey (2019). Ilzetzki (2025) also reviews empirical evidence on the growth effects of defence spending.

← 6.  In the years after the Global Financial Crisis, several studies examined multipliers at times when central banks were constrained by the zero lower bound. Among other papers, Ramey and Zubairy (2018) (for the United States) and Miyamoto, Nguyen and Sergeyev (2018) (for Japan) find evidence suggesting multipliers are higher in such periods.

← 7.  Estimates attributed to Goldman Sachs suggest the defence sector may account for 3% of global demand for industrial metals, ranging from 2% of demand for steel to 7% of nickel demand (Tan, 2025).