Defense Spending Is Rising, and It Will Cost Everyone
The IMF’s April 2026 World Economic Outlook devoted an entire chapter to the macroeconomic consequences of rising defense spending, and the findings are timely. As geopolitical tensions intensify, governments around the world are scaling up military budgets at a pace not seen in decades. In a typical defense spending boom, the IMF finds that military outlays increase by about 2.7 percentage points of GDP over two and a half years, with roughly two thirds of that financed through deficit. The short-term economic effects can look positive. Defense spending multipliers average close to 1, meaning each dollar spent on defense generates roughly a dollar of economic output, at least initially. Fiscal deficits, however, worsen by about 2.6 percentage points of GDP, and public debt rises by approximately 7 percentage points within three years. External balances deteriorate. During wartime specifically, the costs compound: public debt jumps by about 14 percentage points and social spending falls, which the IMF warns can ignite discontent and social unrest. For countries that have spent years warning about unsustainable fiscal trajectories, the implications are uncomfortable. Elevated public debt narrows the space for fiscal stimulus when the economy eventually slows. Countries simultaneously managing energy price shocks and rising military budgets face the sharpest trade-offs. The IMF’s warning that “elevated public debt and eroding institutional credibility further heighten vulnerabilities” is not abstract. It is a description of what several major economies are walking into in real time, and the bill will eventually arrive.
