Escalating military costs burden Western economies in Ukraine war's wake

Governments face increased borrowing, taxes, and public sector cuts to finance military budgets. It's a tough task, writes "Deutsche Welle." The German daily notes that the war in Ukraine is costing the West over a trillion dollars.

To comprehend the security threats facing today's world, one must look at how much governments have increased defence spending. The global military budget reached £2 trillion (2.25 trillion euros) last year, nearly 7 percent more than in 2022. This was the largest increase since 2009, achieved in the second year of Russia's full-scale war with Ukraine.

Per capita, global military spending is now the highest it has been since the end of the Cold War, amounting to £251 per person.

As Kyiv was unprepared to fight a large conflict, Western countries have increased military aid to Ukraine. Other escalating tensions with Russia and the Middle East and Asia have also prompted Western governments to bolster their defence, something not seen since World War II.

In 2024, the United States allocated £725 billion for defence, an increase of over 8 percent over two years. For the first time, European NATO partners are anticipated to meet the alliance's goal of spending 2 percent of their GDP on defence—a major issue for former US President Donald Trump. As NATO Secretary General Jens Stoltenberg said in February, these countries will collectively spend £311 billion on defence this year alone.

While Germany is still catching up with other NATO members, helped by Chancellor Olaf Scholz's special fund of 100 billion euros (£87 billion) to modernize the Bundeswehr, Poland is set to spend 4.2 per cent of its GDP on defence this year, the most in the entire North Atlantic Treaty Organization. Other countries on NATO's eastern flank also significantly exceed or will soon exceed the 2 per cent goal due to heightened security threats at their borders.

As a result, governments face increasingly difficult choices about how to fund these new defence commitments. Many economies are weakening due to persistent global geopolitical tensions and ongoing inflation, and many countries are also facing a strained tax situation.

"Short-term commitments to supply military equipment to Ukraine should be financed by taking on additional debt. This is how wars have always been financed. But to increase defence spending in the long run, taxes must either be raised or other expenditures must be cut," said Gunther Wolff, an analyst with the Brussels think tank Bruegel, in an interview with DW.

"Is it difficult and politically painful? Of course! But if we spread these expenditures across various ministries, it will be less painful," he explained.

Germany, which is facing lower tax revenues due to slower economic growth, has cut spending in most ministries and reduced its foreign aid this year by nearly £1.7 billion.

"Germany must make some very significant compromises," Jeffrey Rathke, president of the American-German Institute at Johns Hopkins University in Washington, told DW. "They must, however, do this very carefully to avoid eroding public support for increased security and defence spending," he added.

Leftist political parties in several Western countries have led calls for peace between Russia and Ukraine and have fueled debate on whether new military expenditures should instead be allocated to healthcare or social programs.

Jeffrey Rathke noted that Germany's debt brake, which restricts the government's ability to borrow money to cover budget gaps, means that Chancellor Scholz's ruling coalition has less leeway than France.

Other countries, especially those most impacted by the European debt crisis of 2011, have already faced severe austerity measures, and any further cuts could affect the quality of public services.

For example, Italy is set to spend just 1.46 percent of its GDP on defence this year and has warned that meeting the 2 percent NATO target by 2028 will be challenging. The country's debt-to-GDP ratio is projected to reach 137.8 percent this year.

Other countries in similar tax situations, such as Spain, may face constraints in funding new military expenditures, ranging from 0.5 to 1.5 per cent of GDP. Last year, Madrid increased its defence budget by 26 per cent.

"The European debt crisis forced budget adjustments of 5 to 7 per cent or even 10 per cent in Greece's case. Fortunately, such cuts will be much less painful than the European south previously had to endure," said Gunther Wolff.

Sweden, Norway, Romania, and the Netherlands have lower debt levels. However, Dutch far-right politician Geert Wilders also plans substantial social housing and agriculture spending to maintain his new four-party coalition.

"Besides fiscal capacities and debt issues, this debate on financial resources overlays ongoing differences in threat perceptions in Europe," said Jeffrey Rathke, so countries farther from Ukraine might be less inclined to prioritize defence spending than those near its border.

Defence spending is expected to increase over the next decade. NATO's target of members spending 2 per cent of GDP on defence was first set in 2014, following the outbreak of war between Ukrainian forces and Russian-backed separatists in eastern Ukraine and Moscow's annexation of Crimea.

Last year, at the NATO summit in Vilnius, Lithuania, NATO leaders agreed that this target could often exceed 2 per cent of GDP. Germany, which has struggled to meet the original target, is now considering the prospect of 3 per cent, which would have even greater consequences for its financial policy.