More defence spending is good for the economy
Last year, I wrote a post explaining why defence spending tends to increase economic growth. Today, I want to double down with the results from an extremely detailed study of individual procurement contracts in the EU between 2009 and 2023. The beauty of this new analysis is that it allows us to look at the EU specifically and analyse in great detail how defence spending influences the economy.
To be honest, I read this analysis a month ago on the day Lord Robertson chastised the UK government for putting the UK in danger because it doesn’t invest enough in defence. A day later, Fiona Hill, a co-author of the UK’s Strategic Defence Review led by Robertson, joined him in criticising the government. Meanwhile, politicians on the left like Diane Abbott accused Robertson of putting ‘guns before butter’ and of cutting welfare in favour of rearmament.
As you can imagine, it took me a while to calm down after reading these comments from Diane Abbott and other left-wing politicians, so here we are.
In my view, this guns vs butter argument is flawed on at least two levels. First, if we don’t put guns before butter today, we soon may no longer have butter to hand out to people because we are in a war with Russia. And if we lose that war, we might be able to hand out as much butter to the poorest people in our country as Russia does in its.
Second, and more importantly, the best way to give people butter is to boost economic growth because that creates jobs, so people can buy butter themselves and increases tax revenues with which to support poor people who need welfare assistance.
The charts below show the impact of an increase in defence spending in Europe of 1% of GDP, roughly twice as much as what the EU is doing in the three years from 2025 to 2028. Not in the UK, mind you, where the defence budget is expected to increase from 2.3% in 2025 to 2.5% in 2027. Meanwhile, in Germany, the increase in defence spending between 2025 and 2028 is one percentage point from 2.0% to 3.0%.
Response to a one percentage point increase in defence spending vs GDP
Source: Furceri et al. (2026)
As you can see, a one percentage point increase in defence spending creates a two percentage point cumulative increase in GDP over the next five years. It is almost impossible to get a better deal, economically.
Crucially, if you look at the three charts below, you see that this increase in defence spending increases capital supply from investors, labour supply from workers (aka new jobs) and productivity. I mean, what’s not to like about that?
Defence spending creates jobs and boosts productivity
Source: Furceri et al. (2026)
One important caveat, though. It is important to spend as much money at home as possible. If you spend your defence budget on buying foreign weapons, the boost to the economy will be much smaller (no surprise there).
Economic impact declines if more arms are imported
Source: Furceri et al. (2026)
But the bottom line is clear. More defence spending increases GDP growth and thus tax revenues for the government. It creates new jobs, and it improves worker productivity. And higher worker productivity leads to higher wages. Oh, and we may not have to learn Russian as an added benefit.
Hi Joachim, two small further points for your consideration. One is that increased defence spending by a country with a developed domestic defence industry with internationally-competitive technology that goes to domestic prime contractors can increase the probability that clean-sheet, new platforms or systems are launched and developed and can generate significant export revenues in future for some decades. Another is that it is important to distinguish between different categories of defence spending, which (to use the US classification) include Procurement vs R&D vs Personnel vs Operations and Maintenance. The former two probably should have a higher multiplier attached, as they result in innovation, spin-off products with commercial application (such as wireless mobile telephony), higher revenues and greater viability for companies in the supply-chain, and potential export sales.
Unfortunately I have to agree that military investments and expenses are currently (and maybe always) needed. I am happy to see that this also creates a positive economic impact for Europe (as long as we buy to some degree local).
However, I am skeptical that in general increasing military spending is “good”.
A) This will have an optimum range of GDP with saturation. Is it still true if we would already spend 10% of GDP? Where is this optimum?
B) I agree, it’s better than spending on butter. However, spending the same money in education and R&D doing directly good for society is definitely better. And unfortunately especially education spendings are not on the high end and seen as a long term investment in our prosperity.
As far as I remember you once shared statistics on how education investments increase GDP?