Military expenditures as a part of endogenous fiscal policy in 21 EU-NATO countries: the fiscal consequences of rising defence budgets

Military expenditures represent an integral part of government fiscal policy and significantly impact government revenues, other expenditures, the deficit and public debt. This paper analyses the military expenditures of 21 EU-NATO Member States between 1995 and 2023, treating them as an endogenous fiscal variable that influences GDP, government revenues, other expenditures, government bond risk premiums, and debt. The estimated SVAR model indicates that, initially, increases in military expenditures are primarily financed by debt, but four years after the shock, approximately 96% of the expenditures are covered by higher tax revenues and cuts in other expenditures. The calculated fiscal multiplier for military expenditures is 0.68 at the point of impact and 0.79 at its maximum, whereas the fiscal multipliers for other government expenditures are significantly higher at 1.34 for both impact and maximum. Investment in military equipment and infrastructure has a significantly higher impact on GDP than current spending on personnel and operations and maintenance (O&M). Model simulations indicate that the projected growth in military spending resulting from the commitment made at the 2025 Hague NATO Summit to spend 3.5/5.0% of GDP will require substantial fiscal adjustment in the countries under study.