Are high defence spending and economic growth mutually inclusive?
The Big Ask | No. 13.2025
Britain finds itself in the worst geopolitical environment since the Cold War, with Russia’s full-scale invasion of Ukraine returning interstate conflict to Europe. With a more transactional United States (US) and a revisionist Russia once again threatening the continent, His Majesty’s (HM) Government recently announced an increase in defence spending to 2.5% of Gross Domestic Product (GDP) by 2027 and 3% during the next Parliament.
However, Britain is also struggling with more than a decade of stagnant economic growth, falling living standards and ageing critical infrastructure. Due to the tight fiscal restraints on the country, some commentators suggest that the money set aside for increased defence spending could be utilised more effectively in other sectors of the United Kingdom’s (UK) economy. So, in this week’s Big Ask, we asked five experts: Are high defence spending and economic growth mutually inclusive?
Senior Lecturer in National Security Studies, King’s College London
High defence spending and economic growth can be mutually inclusive – if approached strategically and sustainably. Defence investment can drive innovation, create high-skilled jobs and enhance national competitiveness. For example, Estonia, a small state with limited resources, has leveraged its defence spending to drive digital transformation, build world-leading e-governance and cyber infrastructure, and bolster its digital economy.
Thinking about defence and economic growth in tandem is not the end of the story, however. I would also propose that we bring climate considerations into this equation. The Ministry of Defence (MOD) is one of the largest landowners and energy consumers in HM Government, accounting for around 50% of central government emissions. Investing in green defence – such as energy-efficient bases, low-emission vehicle fleets, climate-resilient logistics and sustainable procurement – can reduce these emissions while creating new markets and jobs in clean tech. Indeed, academic research has estimated that every US$1 million (£773,000) invested in renewable energy can create 7.49 full-time jobs, compared to just 2.65 jobs in fossil fuel industries.
Climate change is a threat multiplier which will continue to have profound adverse impacts upon lives and livelihoods. Defence spending which integrates sustainability can therefore help to mitigate risks in both the short and long term. With the right vision, Britain can invest in its security, boost economic growth and lead the transition to a climate-resilient future. To do so, HM Government must open its eyes to the fact that national security, economic growth and sustainability are not competing priorities; they are all deeply intertwined.
Professor of International Security, King’s College London
As the new US administration continues its attack on the existing world order, governments across Europe and elsewhere are revisiting their defence spending and their dependence on the US. The UK is typical of this, and in her spring statement this week, Rachel Reeves, Chancellor of the Exchequer, spoke of Britain becoming a defence industrial superpower. She made the case that defence spending would help deliver growth in the UK economy.
This built on the previous government’s idea that defence could support the ‘prosperity agenda’. This Cameron – and subsequently Johnson – policy drew on a 2015 King’s College London paper, which showed how defence spending at home can have a significant impact if that money is spent acquiring equipment made in the UK and maintaining military personnel at bases in Britain. Generally, defence industrial base jobs are paid significantly above the national norm, while arms sales abroad can be a substantial money earner. Similarly, military bases invariably bring a significant revenue stream to a local community, supporting local businesses.
Higher defence spending will lead to growth. The question is: whose spending and whose growth? An unwritten element of the US-European defence relationship was that while European governments would spend less on defence, they would also buy a significant amount of US defence equipment. The actions of Donald Trump, President of the US, have led to increased defence spending by US allies – these actions are leading many to question their dependence on US equipment. Portugal and Canada are already revisiting their plans to acquire F-35 fighter jets from Boeing, and more nations are likely to follow. The UK, France, Turkey and South Korea could become defence industrial superpowers if they can become the new providers of choice.
Assistant Professor of International Relations, University of Waterloo
The relationship between economic growth and defence spending is hardly linear and is, at best, unclear. More military expenditures do entail more government spending, which in turn could spur job creation and, crucially, generate a higher GDP – the standard statistic used to calculate economic growth. To invoke an extreme example, war spending has allowed Russia to post much higher growth than Canada in 2023 despite the significant macroeconomic instability its campaign in Ukraine has engendered. Accordingly, military expenditures can involve serious opportunity costs if they crowd out other more productive investments which would otherwise utilise public resources.
States thus resort to a wide array of measures to finance their military build-ups. As one of Europe’s best-performing economies, high-spending Poland deals with the opportunity costs by deferring them by way of issuing more debt to pay for its defence build-up. Regarding their rearmament efforts, the Baltic countries have resorted to temporary taxes on some goods and services, which could cut into profit margins as well as households’ disposable incomes. Nevertheless, their concern is that there may be no economy to be defended without these investments, and that neglecting military power will leave them vulnerable to aggression, with the resulting capability gaps becoming even more expensive as they widen over time.
Associate Fellow, Council on Geostrategy
We know that spending on defence equipment and maintenance has a high growth multiplier: for every £1 billion spent on defence capital expenditure (capex), we get £2.2 billion in Gross Value Added (GVA). The issue is what happens if you rapidly increase that spending.
On the plus side, defence jobs are well paid and high skilled, and if, as HM Government promises, we spread new investment to places not traditionally part of the defence industrial clusters, the spillovers will be positive.
But the key challenge is sectoral reallocation: you have to manage the movement of people, capital and resources actively from the top down. Otherwise, shipyards cannibalise each other’s workers, and civil nuclear and construction also compete, while finance and big tech goes on eating up the Science, Technology, Engineering and Mathematics (STEM) graduate talent. Ultimately, you have to be prepared to see low value sectors decline: in a full-scale rearmament scenario, you cannot have an Itsu on every street corner.
There is probably a sweet spot between 5% and 9% of GDP where the sectoral reallocation challenge is manageable (as per the late 1930s). But the macroeconomics are challenging even at this scale. We have debt close to 100% of GDP and capital is globally risk averse. So, managing debt servicing costs becomes the strategic challenge, which means an element of ‘financial repression’. Incentivising capital to finance rearmament without harming growth in the civilian private sector is the conceptual challenge.
Researcher, Coalition for Global Prosperity
A government’s first duty is national security, but the link between defence spending and economic growth remains inconclusive. Economic models, including variations of the Feder-Ram and Solow models, suggest that for Organisation of Economic Cooperation and Development (OECD) countries like the UK, defence spending has minimal impact on growth. Given the many factors at play, such as a country’s economic structure, resource wealth and how funds are allocated, such inconsistencies in the literature are unsurprising. The key takeaway? Defence spending and economic growth are not that closely linked.
Moreover, past analyses have not accounted for today’s evolving geopolitical landscape, making any previous conclusions less applicable. Given this uncertainty, a key question emerges: how can defence spending be optimised to support economic growth?
Economists such as Benoit have theorised that defence spending can mobilise underutilised resources. If so, how do we ensure the positive externalities of defence spending – including investments in technology, infrastructure and workforce development – lead to inclusive growth rather than widening inequality? Targeted spending in these areas could generate broader economic benefits and aligns with the Labour government’s existing economic growth strategy.
This raises another critical issue: are we effectively scrutinising defence spending? Until now, military budgets have faced less public scrutiny, but as spending rises, so too will demands for transparency. The same oversight should apply to how increases are financed, whether through higher taxes, borrowing, inflation or cuts elsewhere. Recent cuts to the development budget highlight the risks of poor planning. They are insufficient to meet defence ambitions, yet have weakened UK foreign policy by undermining aid’s long-term security and economic benefits.
Ultimately, there is little evidence that defence spending can drive GDP growth. But, while increased defence spending may or may not contribute to economic growth, war definitely does not.
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