Fiscal and macroeconomic impacts of defence spending

Military spending is increasing rapidly as many OECD countries move to shore up defence in a degraded security environment. Larger defence budgets compound strains on public finances from past crises and mounting fiscal pressure from population ageing and the cost of climate change. Many governments which are financing the first phase of rearmament with debt will have to tighten their fiscal positions in the medium term, particularly if defence spending remains high. The economic effects of higher defence spending will vary across countries due to economic and fiscal context, industrial structure, the composition of military purchases, and through trade. Near-term stimulus to demand may be offset over time by output reductions from higher interest rates and any future fiscal consolidation. In the long run, if military expenditure is to have positive effects, it must expand economies’ productive capacity. Enduring gains are more likely if governments pursue structural reforms alongside higher defence spending, including to improve public procurement, enhance competition and reduce barriers to market entry.