If you need a reminder of today's global security threats, just look at the recent surge in government defense spending. Last year, global military budgets hit $2.44 trillion (€2.25 trillion), marking nearly a 7% increase from 2022. This was the sharpest year-on-year rise since 2009, coinciding with the second year of Russia's full-scale invasion of Ukraine.
Military spending is now at its highest per capita since the end of the Cold War, amounting to $306 per person worldwide. With Ukraine initially unprepared for such a large-scale conflict, Western countries significantly increased their military aid to Kyiv. Meanwhile, rising tensions with Russia and in the Middle East and Asia have driven other governments to bolster their defenses to levels not seen since World War II.
In 2024, the United States allocated $886 billion to defense, an increase of over 8% in two years. For the first time, NATO's European allies are expected to meet the military alliance's target of spending 2% of GDP on defense. This year alone, they have collectively budgeted $380 billion for defense, as noted by NATO chief Jens Stoltenberg in February. While Germany is catching up with other NATO members, aided by Chancellor Olaf Scholz's special €100 billion ($109 billion) fund to upgrade the Bundeswehr, Poland is set to spend 4.2% of GDP on defense this year, the highest in NATO. Other countries on NATO's eastern flank are also surpassing the 2% target due to the heightened security threats on their borders.
As a result, governments are grappling with the challenge of funding these new defense commitments amid weakening economies and lingering inflation. Many countries are already financially stretched. According to Gunther Wolff, a senior fellow at the Brussels-based think tank Bruegel, short-term military commitments for Ukraine should be financed through additional debt, as wars have historically been funded. However, for sustained increases in defense spending, either taxes must rise or other expenditures must be cut.
"Is it politically painful? Sure! But spreading the cuts across various government departments can lessen the impact," Wolff said.
Germany is reducing budgets for most government departments, except defense, due to anticipated lower tax revenues from weaker growth. This year, international development aid faced an almost €2 billion cut.
"Germany has significant trade-offs to manage," said Jeffrey Rathke, president of the American-German Institute at Johns Hopkins University in Washington D.C. "These must be handled politically to maintain public support for enhanced security and defense."
Leftist political parties in several countries have called for peace between Russia and Ukraine and debated whether new military spending could be better allocated to health care or social programs. Rathke noted that Germany's debt brake, which limits the government's borrowing ability, gives Scholz’s coalition less flexibility compared to countries like France.
While Poland's finances are stronger than many Western European countries, Prime Minister Donald Tusk, who recently ousted the right-wing populist government, struggles to fulfill election promises like raising the income tax threshold due to the high defense budget.
Other EU countries also face challenges meeting NATO's target. Nations severely affected by the 2011 European debt crisis have already undergone deep austerity measures, and further cuts could impair public services. Italy, for example, is expected to spend just 1.46% of GDP on defense this year and has warned that reaching NATO’s 2% target by 2028 will be difficult, with its debt-to-GDP ratio forecasted at 137.8%.
Countries like Spain, facing similar fiscal constraints, may also struggle to fund new military spending. Last year, Madrid increased its defense budget by 26%. "The European debt crisis required budget adjustments of 5% to 7%, even 10% for Greece," Wolff said. "Fortunately, these cuts will be less severe than those endured by southern Europe."
Although Sweden, Norway, Romania, and the Netherlands have lower debt burdens, political figures like Dutch far-right leader Geert Wilders plan significant spending on social security, housing, and agriculture to sustain coalition support. "Beyond fiscal capacity and debt issues, there's an ongoing difference in threat perception across Europe," Rathke added, noting that countries farther from Ukraine may be less inclined to prioritize defense.
Defense spending is expected to rise over the next decade. NATO's 2% spending target was set in 2014 after conflict erupted between Ukrainian forces and Russian-backed separatists, and Moscow annexed Crimea. At a meeting in Vilnius last year, NATO leaders agreed that spending could exceed 2%. Germany, previously struggling to meet the original target, has now considered a 3% budget target, which would have significant implications for government finances.
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