How the defence bonanza will reshape the global economy
As they spend big, politicians must resist using one pot of money to achieve many goals
In its article, How the defence bonanza will reshape the global economy, The Economist notes that, for the first time in decades, the developed world is undertaking large-scale rearmament.
"Wars in Ukraine and the Middle East, the threat of conflict over Taiwan and President Donald Trump’s impulsive approach to alliances have all made bolstering national defence an urgent priority. On June 25th members of NATO agreed to raise their target for military spending to 3.5% of gdp, and allocated an extra 1.5% to security-related items (Spain insisted on a loophole). If they achieve that target in 2035, they will be spending $800bn more every year, in real terms, than they did before Russia invaded Ukraine. The boom goes wider than NATO. By one estimate, embattled Israel splurged more than 8% of its GDP on defence last year. Even doveish Japan plans to stump up."
London Business School's Professor Paolo Surico draws on his research, The Long-Run Effects of Government Spending (American Review, July 2025) to make the following comments: "While the returns of 1.2 to 2 refer to overall increases in defence spending, our findings show that large spikes in such spending are consistently associated with a shift toward public R&D. Historically, during major build-ups, military R&D expanded significantly more than military consumption (e.g. salaries and personnel) or investment (e.g. equipment and infrastructure), both of which also grew, but to a lesser extent. These disproportionate increases in R&D are key to explaining our long-run results.
"In the short term, the returns to defence spending are more modest (multipliers between 0.6 and 1), driven largely by demand effects from consumption and investment. Over time, however, gains from military R&D begin to materialise, boosting productivity enough that output benefits can reach twice the original expenditure."
To read Professor Paolo Surico's research, The Long-Run Effects of Government Spending, click here
This article appeared in the Leaders section of the print edition of The Economist, under the headline 'The economic consequences of war'.
