Global defense spending hit a record $2.2 trillion last year, and that number is only expected to rise as countries rearm themselves amid growing tensions in Europe, Asia and the Middle East. While NATO members have been boosting their defense spending to get closer to the military alliance’s target of 2% of GDP in the wake of Russia’s invasion of Ukraine, some military experts think that outlays will need to rise well beyond that, closer to Cold War levels of 4% of GDP. If that were to occur, it would translate to an additional $10 trillion in military spending over the next 10 years among the Group of Seven nations (Canada, France, Germany, Italy, Japan, the U.K. and the U.S.), according to calculations by Bloomberg Economics.
“The post-Cold War ‘peace dividend’ is coming to an end,” said Jennifer Welch, the chief geoeconomics analyst at Bloomberg Economics. “That’s likely to have a transformative effect on defense companies, on public finances and on financial markets.”
Although it’s too early to say how significantly the burgeoning arms buildup will affect public finances, it’s probably safe to assume that the spending will pressure already strained budgets. While many economists think increased defense spending will worsen inflation and put upward pressure on interest rates, some argue that wealthy Western governments can handle the strain. “I don’t foresee a fiscal crisis triggered by elevated defense spending,” MIT economist and former International Monetary Fund chief Simon Johnson told Bloomberg. “But I do worry about a national security crisis caused by a failure to defend your country.”
