Defence spending is rising rapidly across many OECD countries, reflecting heightened security concerns. The goal is to bolster defence, but it is important that governments also consider broader consequences for the economy and public finances. While higher defence spending may provide a modest short-term boost to activity, the economic benefits are uncertain and may fade over time, while the fiscal implications are significant.
The fiscal and economic impacts of higher defence spending
This special chapter, from the June 2026 OECD Economic Outlook, 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.
Published 3 June 2026
Introduction
Key findings
- Recent defence spending increases have been large and synchronised across countries.
- Short-term growth effects are possible, but typically modest, with multipliers often estimated between 0.6 and 1.
- Sustaining large defence budgets would add significantly to existing fiscal pressures, requiring many countries to increase tax revenues or cut other spending to keep debt at manageable levels.
- Long-term economic gains are uncertain, unless defence spending generates spillovers through innovation or comes with structural reforms, including to public procurement.
Defence spending is on the rise
Defence spending is rising rapidly in many countries, including NATO members committed to allocating the equivalent of 3.5% of GDP to core defence requirements by 2035. This expansion has been highly synchronised internationally, with defence spending increasing more rapidly than economic output in most OECD countries.
Fiscal pressures are mounting
Defence spending is rising from different fiscal starting points, with some high-debt countries trying to rearm while consolidating overall budgets and others using their available fiscal space. Temporary flexibility in fiscal rules is facilitating deficit financing in the short term, notably by EU countries, but higher defence outlays will add to debt and eventually require fiscal adjustments. Over time, governments will face difficult trade-offs—cutting other spending, or raising revenues—to keep public debt sustainable in the face of growing fiscal pressures from pensions, health and climate spending, as well as defence.
Recent large military spending increases have tended to occur in lower debt countries
Short-term economic effects: modest and uneven
The economic effects of higher defence spending are uncertain and will vary across countries, with modest short-term gains often limited by crowding out of private activity and higher prices. Pressures on capacity and public finances can see interest rates rise, while import leakages dilute domestic gains. However, when many countries increase defence spending at the same time, short-term benefits are also shared through trade.
Long-term economic benefits are uncertain and depend on reforms
Long-run economic benefits from higher defence spending may be unlikely without spillovers to the wider economy from defence-related innovation. Realising lasting economic gains beyond current military build-ups may require structural reforms—better procurement, enhanced competition and addressing skills shortages—while greater international coordination in military purchases can improve efficiency and reduce costs.
Policy implications
To support economic benefits and limit fiscal pressure, countries may need to:
- Improve procurement efficiency and cost control
- Strengthen international coordination, especially in Europe
- Address skills shortages in defence-related industries
