The macroeconomic effects of defence spending: what impact beyond GDP?

ECB working paper (No 3310, Checherita-Westphal and Særkjær) estimating the macroeconomic effects of defence spending in the 27 Member States from 1999 to 2025 using panel local projections, looking beyond GDP: prices, consumption, net exports and private investment. It corrects the accounting lag between order and delivery of military equipment using SIPRI data, which shifts the peak GDP effect to the third or fourth year and makes the inflation effect larger and earlier.

Key points

• A defence spending increase of 1% of GDP yields a peak GDP multiplier of roughly 1; at five years it falls to 0.6 with the order-date adjustment (0.3 without it).
• Cumulative HICP inflation rises by about 1 percentage point in the first year, peaks at 1.4 points in the third year and stays around 1.25 points at five years; the GDP deflator responds more.
• Capital spending drives GDP; personnel and intermediate consumption generate more inflation per euro spent.
• Each euro of arms procurement triggers about 30 cents of additional personnel and maintenance spending over five years.
• Multipliers are substantially lower in countries with high public debt, although the estimates are imprecise.

Who is affected

Governments and fiscal authorities planning rearmament (ReArm Europe, NATO target of 5% of GDP by 2035) and monetary policy, given the inflationary effect of higher defence spending.

Plain-language version

Summary produced with artificial intelligence from the official publication. It may contain errors: always check the original document.