Edward Conard

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Upside of Inequality Oxford Unintended Consequences

AI Summary. Defense spending typically has a fiscal multiplier below one, meaning each euro spent raises GDP by less, so it is not a short-term growth strategy. One estimate holds that extra military spending worth 1% of GDP could lift output up to 2% long term if concentrated on research and development.

Charles Clover, Delphine Strauss, Sylvia Pfeifer and Laura Pitel Financial Times
Date Posted:

As the short-run fiscal multiplier for defence spending is likely <1, the EU’s increased defense budget will have large effects on GDP only if focused on R&D. Defence R&D is just 0.04% of GDP across the EU and 0.12% in the UK, vs. 0.62% in the US.

Does higher defense spending boost economic growth?

Core argument: Paolo Surico of London Business School estimates extra military spending worth 1% of GDP could raise output by up to 2% in the long term and lift productivity, provided the money is concentrated on R&D.

Even if Europe does manage to spend most of its swelling defence budget at home, rather than on US-made hardware, the big question is whether the economy will benefit beyond the initial sugar rush of growth. Typically, defence spending has a “fiscal multiplier” below one, meaning that each pound or euro spent boosts GDP by a smaller amount. “This is definitely not something you would do for short-term economic gain,” says Ethan Ilzetzki, a professor at the London School of Economics. Paolo Surico, a professor at the London Business School suggests that extra military spending worth 1% of GDP could boost output by up to 2% in the long term and boost productivity — providing the money is concentrated on R&D. "US defence spending has been critical to an ecosystem that has made them head the innovation race for the last 50 years," he says, pointing to advances in nuclear energy and GPS that flowed from military research programmes. He estimates that defence R&D in Europe is just 0.04% of GDP across the EU and 0.12% in the UK — way below the 0.62% recorded in the US, and that US venture capital involvement in defence industry activity is far greater than in Europe.

Takeaways by Macro Roundup® AI

  1. Paolo Surico of London Business School estimates extra military spending worth 1% of GDP could raise output by up to 2% in the long term and lift productivity, provided the money is concentrated on R&D.
  2. Defence R&D is just 0.04% of GDP across the EU and 0.12% in the UK, far below the 0.62% recorded in the US, according to Surico's estimates.
  3. Defence spending typically carries a fiscal multiplier below one, so each pound or euro spent raises GDP by a smaller amount, and Ethan Ilzetzki of the London School of Economics says it is not something to do for short-term economic gain.

Related Articles:

  • Behind NATO’s 2 Percent: Measuring the True Scope of Alliance Defense Investments and the NATO Defense Deficit — NATO's collective defense spending averaged 1.72% of GDP over roughly two and a half decades, below the alliance's agreed 2% threshold, leaving a cumulative shortfall the authors estimate at over $2tn that was not invested in force structure, modernization, and readiness. The authors argue closing the gap requires years of sustained investment beyond current commitments.
  • The Intellectual Spoils of War? Defense RD, Productivity and International Spillovers — The authors estimate that a 10% increase in government-financed R&D, largely defense, is associated with a 4.3% rise in privately funded R&D across OECD countries, indicating "crowding in" rather than "crowding out." They also find international spillovers raise private R&D abroad, though the overall effect on US productivity growth is modest.
  • Why Every Country Needs To Master The Electric Tech Stack — Drones are the foundation of hard power in the early 21st century, so a country unable to produce them domestically is at a disadvantage. As electric motors overtake combustion engines as the core technology that makes machines move, the same supply chains and production processes used for electronics can also produce cars, drones, robots, and appliances.
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