The Macroeconomic Effects of Defence Spending: What Impact Beyond GDP? (European Central Bank)

Summary

• The paper estimates macroeconomic effects of defence spending for up to 27 EU member states over 1999-2025 using Panel Local Projections.p.2
• Capital spending induces additional recurrent costs of about 30 cents per euro spent over five years.p.2
• Cumulative HICP inflation in the adjusted specification reaches about 1 percentage point by year one and peaks at about 1.4 percentage points in year three.p.4
• The five-year cumulative GDP multiplier settles at around 0.3 unadjusted and around 0.6 adjusted.p.4
• NATO members agreed a new target of 5% of GDP by 2035, with at least 3.5% for core defence requirements and up to 1.5% for related investment.p.5
• In real terms, EU defence spending rose by about 10 per cent in 2024 alone, more than in any earlier year of the sample.p.7
• Estimated procurement lags range from 0 years (Malta) to 4 years, with a cross-country median of 2 years.p.12

Key insights

1. Cumulative GDP deflator growth peaks at approximately 2.4 percentage points at year two and moderates to around 1.5 percentage points by year five.p.17
2. For unadjusted total defence, the two-year cumulative multiplier falls from 1.8 on the matched sample to 0.8 once the final years are added.p.19
3. Capital expenditure is the primary driver of the GDP multiplier, while personnel and intermediate consumption generate stronger inflationary pressure per unit of fiscal impulse.p.21
4. The HICP response to personnel spending reaches about 3 percentage points from year three onwards.p.21
5. In the low-debt state the GDP multiplier peaks at about 2.6 in year three, while in the high-debt state it is around -1.3 in years two and three, though only weakly significant.p.25
6. Under SIPRI data the GDP multiplier peaks at about 0.7 against 1.1 on the COFOG baseline.p.26
7. The order-date adjustment shifts the peak GDP multiplier from about the first year to year three or four.p.28