What bigger military budgets mean for the economy

IN THE WAKE of the war in Ukraine, military budgets around the world are about to get bigger. This is most notable in Europe, where the threat of Russian aggression looms largest. Germany, Italy and Norway, among others, have already decided to spend more on defence. America and China, the world’s two biggest military spenders, are also ramping up their allocations. Pressure on smaller countries to do likewise seems inevitable. What are the economic consequences of this push? When governments spend more on soldiers and arms, they have less available for other things. A common assumption, therefore, is that extra spending on armies is harmful to growth and development. But the relationship is not so straightforward. In some cases bigger defence budgets may in fact yield substantial economic benefits.That there is a trade-off between spending on the army and on, say, roads or hospitals is a lesson that students of economics internalise early on. The classic model for illustrating the concept of opportunity costs is guns versus butter: the more you produce of one, the less you can of the other. In any given year, that simple model holds true. Governments have finite budgets, which can only be pulled in so many different directions.