Implications of increased defence spending for subnational governments

The ongoing increase in defence spending has important and uneven consequences for subnational governments, both through local economic spillovers and public-finance channels. The paper reviews evidence on national and local defence spending multipliers, finding that effects are often positive but vary with the composition of spending, the business cycle and local economic structure. It then examines how higher defence outlays by national governments, whether funded through revenue increases or cuts in other spending, or financed through borrowing, can affect subnational governments differently. These effects depending on various features of the intergovernmental fiscal relations system, such as revenue and spending assignments, and the design of intergovernmental transfers. The paper concludes that stronger intergovernmental coordination and place-based policies are essential to maximise benefits, mitigate adverse spillovers, and support regions exposed to adverse effects.