Rising Defence Costs Squeeze Budgets

In recent years, many countries in the North Atlantic Treaty Organisation (NATO) have agreed to spend more money on their armed forces. NATO, formed after the Second World War, is a group of countries that promise to protect each other if one of them is attacked. For a long time, most NATO members did not spend as much as they promised on defence. They had agreed to try to spend 2% of their country’s total economic output, known as Gross Domestic Product (GDP), on their militaries. But many fell short.

Now, with growing fears in Europe about safety and security—largely because of Russia’s actions—more countries are trying to meet this 2% target. Some are even talking about spending 2.5% or 3% of their GDP by 2030. At the same time, keeping up with these promises puts a lot of pressure on national budgets. Governments have to balance the cost of weapons, military training, and new technologies with other important things like health care, education, and infrastructure.

This shift has big effects on finance. It affects how governments raise and spend money, how they plan their budgets, and how they invest for the future. It also influences the way businesses think about defence contracts, the development of new military technology, and how global investors view the economies of countries that must suddenly spend much more on their militaries.

Why Higher Defence Spending Matters

When a country spends more on defence, it usually means it must find that money from somewhere else. A nation’s budget is like a household budget, but on a much bigger scale. If a family suddenly needs more money to pay for home repairs, it might spend less on holidays. The same idea applies to countries. If leaders decide to spend more on tanks, fighter jets, and soldiers’ salaries, they may end up spending less on public hospitals, schools, or road repairs. Alternatively, the government might borrow more money. Borrowing can raise the amount of debt a country owes to banks and investors. This can then lead to higher interest payments in the future.

In other words, each pound or euro that goes to defence is a pound or euro that cannot be spent on something else. This can be tough for governments because voters often want better public services, lower taxes, and strong national defence, all at the same time. Balancing these desires is never easy. Higher defence spending can make it even harder.

Pressures on National Budgets

Many European countries, such as Italy and Spain, do not yet spend the promised 2% of GDP on defence. These countries now face pressure from NATO allies and from within their own governments to spend more on their militaries. At the same time, their national budgets are already stretched thin. The recent years have seen pressures from economic slowdowns, health crises, and the need to support people who struggle with the cost of living.

If these countries must now spend more on defence, they might have to reduce other expenses. This could mean cuts in welfare programmes, delays in road building, or freezing pay increases for public workers. Another option is to raise more money, maybe by increasing taxes. But raising taxes is often unpopular and can slow economic growth if done without care.

Some countries might decide to borrow more money by selling government bonds to investors. Yet the more a country borrows, the more it must pay in interest every year. High levels of debt can make investors worry about whether the government can repay them. If investors become nervous, they might charge higher interest rates, making future borrowing even more expensive.

Effects on Business and Jobs

The impact of higher defence spending does not stop with the government’s accounts. Businesses that make weapons, military vehicles, or advanced security equipment may see their profits grow. This can create new jobs in these sectors, as more workers will be needed to build new tanks, ships, or aircraft. It can also mean more work for technology companies that design communication systems, cybersecurity tools, and surveillance drones.

In the short term, this may seem like a good thing. It can boost a country’s economy by increasing employment and demand for goods and services. But there are risks. If a country spends too much on defence at the expense of other industries, it might fail to invest in areas that would help its economy grow in the long run. For example, investing in education and research often leads to long-term gains in productivity and innovation. If that money is instead spent on defence items that become outdated, the country might miss out on future growth opportunities.

Impact on International Investors

International investors, who put their money into different countries by buying government bonds or investing in companies, pay close attention to how countries spend their money. When a country’s defence budget rises sharply, investors may wonder if it will lead to bigger debts and higher taxes in the future. They may also worry about the stability of that region. More defence spending often means a country believes it faces serious threats. Heightened tensions can make some investors nervous about putting their money into projects in that area.

On the other hand, some investors might see rising defence budgets as an opportunity. Companies that produce military equipment or provide training and support to armed forces might see their earnings rise. Such companies can become attractive investments. As a result, share prices of defence firms might go up, and more investors might buy their stocks.

Technology and Innovation

Spending more on defence can also speed up the development of new technology. Military research has historically led to inventions that later became useful in everyday life. The internet and GPS started as military projects. Higher defence budgets could fund research into advanced materials, artificial intelligence, and robotics. Later, these innovations could find their way into civilian products, creating new markets and opportunities.

This can have positive financial effects in the long term. Countries that lead in defence technology may also lead in commercial technology. This can improve their competitiveness in global markets, helping them sell high-tech products around the world. As they export these new products, they earn income from other countries, helping to balance the cost of their higher defence spending.

The Risk of Overspending

One problem with higher defence spending is the risk of overspending. Defence projects often cost more than planned. Building modern submarines, training pilots to fly fighter jets, or developing new missile systems can run billions of pounds over their original budgets. Delays, technical issues, and changes in project requirements can cause costs to spiral.

For governments, this can be a big financial headache. Money that could have improved schools or hospitals might be spent fixing problems in a defence project. When costs rise without much control, it can create a cycle of higher taxes, more borrowing, and deeper cuts to other parts of the budget. This makes it harder for governments to manage their finances wisely and keep their promises to voters.

Wider Economic Effects

High defence spending can also affect a country’s trade balance. If a country relies on buying weapons and equipment from abroad, it must spend more of its money on imports. Too many imports and not enough exports can weaken a country’s currency. A weaker currency can make it more expensive to buy goods from other countries, pushing up costs for consumers and businesses at home. On the other hand, if a country can produce its own military equipment, it might avoid this problem and even export some of that equipment to other nations, earning money in return.

At the global level, if many countries start to spend more on defence, it could push the world economy in new directions. Money that might have gone into solving environmental problems or improving global health could end up being spent on warships and weapons. This could slow down progress in areas that many people believe are just as important for long-term peace and stability.

Looking to the Future

NATO countries are discussing raising their defence spending targets beyond the current 2% goal. Some leaders are talking about hitting 2.5% or even 3% in the next decade. This would mean a lot more money flowing into defence budgets. While the aim is to make NATO stronger and safer, there is a clear financial cost.

For some countries, meeting these targets will not be easy. It will require tough choices. They might need to cut other spending, raise taxes, or borrow more money. Each choice has financial consequences. These changes in government spending will affect businesses, workers, and investors. They will also influence the speed and direction of technological progress.

As people watch their governments spend more on defence, they might ask whether this is the best use of their money. Governments will need to explain why this spending is necessary and show that they are managing it carefully. Good planning, oversight, and transparency are key. If done well, higher defence spending could improve security, boost certain industries, and spur innovation. If done poorly, it could lead to waste, higher debts, and weaker economies.

Conclusion

The push to meet or exceed NATO’s defence spending targets has a big impact on finance. It forces countries to rethink their budgets, often at a time when they face other challenges. It can lead to short-term gains for defence-related businesses, but also long-term concerns about debt, overspending, and lost opportunities. It influences investor confidence, the strength of a country’s currency, and the direction of technological advances.

As nations decide how much to spend on defence, they must weigh these financial factors carefully. The decisions they make today will shape their economies for years to come.