How Increased Defense Spending Will Affect the Global Economy
NATO allies agreed to more than double their defense spending target from 2% of GDP to 5% by 2035, marking the most decisive move from the alliance in more than a decade. The target consists of 3.5% of GDP on core defense such as troops and weapons, with an additional 1.5% on broader defense and security-related investments including cyber-security and infrastructure adaptation.
If NATO states had all spent 3.5% of GDP on defense last year, that would have amounted to some $1.75 trillion, meaning hitting the new targets could eventually require spending hundreds of billions of dollars more per year. This dramatic escalation responds to heightened geopolitical tensions, particularly Russia's continued threat and pressure from President Trump for burden-sharing. Spain has declared it will not commit to the 5% target, creating potential unity challenges within the alliance.
The economic implications are profound: research indicates that over a 20-year period, a 1% increase in military spending decreases economic growth by 9%, while fiscal pressures mount as many NATO members already face high debt-to-GDP ratios approaching or exceeding 100%.
Forecast Scenarios (GCHQ)
Likely (55-75%): Partial Compliance with Significant Delays
Most NATO members will struggle to meet the 2035 timeline, with many requesting extensions or redefining spending categories to appear compliant. Britain has reportedly requested a 3-year delay to the hike, while other members will likely follow suit. Expect widespread creative accounting where dual-use infrastructure and cyber investments are maximally counted toward the 1.5% security-related spending component. By 2030, average NATO spending will reach approximately 3.5-4% of GDP rather than the targeted 5%, with significant variations between Eastern European frontline states (exceeding targets) and Western European nations (falling short). This scenario leads to persistent alliance tensions but avoids major fiscal crises.
Realistic Possibility (45-55%): Economic Recession Triggered by Fiscal Constraints
The combination of massive defense spending increases and existing high debt levels triggers a European recession by 2027-2028. With French debt at 112% of GDP and Italian debt at 135% of GDP, the additional fiscal burden proves unsustainable for multiple large economies simultaneously. Credit rating downgrades cascade through Southern European nations, raising borrowing costs and forcing austerity measures that contract economic activity. This creates a vicious cycle where defense spending crowds out growth-enhancing investments, ultimately undermining the very economic foundation needed to sustain military capabilities. NATO members begin abandoning spending targets to address domestic economic crises.
Unlikely (30-45%): Successful Implementation with Minimal Economic Disruption
NATO members successfully manage the transition through a combination of gradual implementation, debt-financed spending, and strategic reallocation from less productive government expenditures. European defense R&D spending increases from 4.5% to approach the US level of 16% of military expenditure, creating genuine innovation spillovers. The European Commission's modeling suggests real GDP could rise by 0.5% by 2028 under a 1.5% of GDP increase in defense spending, and this effect scales proportionally. Smart procurement policies emphasize interoperability and joint European projects, reducing the estimated inefficiencies from operating 12 different battle tank types. Economic growth benefits from defense R&D partially offset the fiscal costs, making the targets more sustainable than initially projected.
