Defence outlays rise amid mounting debt

As civilian stimulus tools weaken, advanced economies turn to rearmament as a macroeconomic stabiliser

Vidhu Shekhar 

Governments across the developed world can barely afford to stimulate their economies. Yet they are expanding defence spending at the fastest pace since the late 1980s.

Global growth remains weak, hovering near 3% despite years of extraordinary policy support. Household balance sheets are stretched, corporate investment is subdued and fiscal space is narrowing. However, according to the Stockholm International Peace Research Institute released in April 2025, global military expenditure reached a record $2.7 trillion in 2024, rising more than 9% in real terms over 2023, the steepest annual increase in nearly four decades. This surge has occurred not during a boom, but amid stagnation and tightening fiscal constraints.

Geopolitics explains part of the story. Wars, strategic rivalry and a deteriorating security environment have pushed governments to rearm. Yet security conditions alone do not fully explain why rearmament is accelerating across economies with very different strategic positions and exposure to conflict.

A deeper structural driver appears to be at work. One established response to economic stagnation is Keynesian policy, named after the economist John Maynard Keynes, in which governments step in with public spending to counter weakened private demand. As traditional engines of civilian growth lose traction, defence spending is emerging as a macroeconomic stabiliser of last resort. What we are witnessing is the quiet return of military Keynesianism — not as ideology or coordinated doctrine, but as the default response of debt-saturated economies that have exhausted their conventional policy tools.

For decades, downturns were managed through familiar Keynesian tools: fiscal stimulus and monetary easing, bridging demand until private activity recovered. Today, that transmission mechanism is increasingly impaired.

Across the United States, Europe and China, households are heavily leveraged. In the United States, household debt remains close to historic highs relative to income. In much of Europe, elevated mortgage exposure constrains discretionary consumption. In China, years of property-led growth have sharply increased household debt, leaving consumption persistently weak despite repeated policy support. 

Under these conditions, income gains are absorbed by debt service rather than translated into new spending.

Research by the International Monetary Fund (IMF) and several central banks confirm that in high-debt economies, fiscal multipliers on household transfers fall well below pre-crisis norms.

Corporate balance sheets reveal similar constraints. Excess capacity, weak pricing power and uncertain demand have suppressed investment. China's manufacturing sector remains burdened by overcapacity across steel, chemicals, automobiles and heavy machinery. In Europe and Japan, returns on capital have been chronically low for years. Even where financing is available, firms hesitate to expand without credible demand growth.

Governments themselves are boxed in. Public debt ratios sit near post-war highs, while higher interest rates have raised servicing costs. Inflation has narrowed the scope for monetary easing, and fiscal expansion now encounters sharper political and financial resistance. Stimulus increasingly stabilises balance sheets without restarting growth.

Defence spending works

Defence spending operates under a different macroeconomic logic. It bypasses precisely the channels through which civilian stimulus has lost effectiveness.

Military demand does not depend on household confidence or discretionary consumption. It does not require private profitability, credit expansion or export growth. The state acts simultaneously as buyer, financier and guarantor. Procurement decisions are embedded in multi-year planning cycles and insulated from short-term economic fluctuations, allowing spending to proceed even when private demand stalls.

Defence programmes generate sustained activity across manufacturing, advanced technology, logistics and services. They support high-skill employment and capital-intensive supply chains, providing contractors with predictable cash flows backed by the sovereign balance sheet. While the precise fiscal multiplier remains debated, the structural advantage is clear: defence procurement injects execution-ready demand without passing through over-leveraged private balance sheets. 

It emerges when other forms of stimulus lose traction and governments search for demand channels that remain operational under debt saturation.

The scale and durability of current rearmament suggest something structural rather than episodic. Defence budgets are being embedded in medium- and long-term fiscal frameworks, even as other categories of public spending remain constrained.

Germany illustrates this shift. Despite weak growth and binding fiscal rules, Berlin has committed to a €100 billion defence fund alongside sustained increases in military outlays. Japan, facing modest growth and no immediate large-scale war, has abandoned its long-standing 1% of GDP ceiling and is moving towards 2%. Poland already spends more than 4% of GDP on defence. For China, defence modernisation may be primarily driven by strategic rivalry and regional security concerns. Yet it also coincides with slowing growth, property sector stress and industrial overcapacity, reinforcing the alignment between security priorities and economic stabilisation.  

If rearmament were purely threat-driven, spending patterns would diverge sharply by geography and strategic exposure. Instead, they are converging. Defence outlays are rising most rapidly where civilian growth is weakest and where conventional stimulus has delivered diminishing returns.

This convergence suggests that defence has assumed a new macroeconomic role — as an anchor of growth and employment. Once integrated into stabilisation frameworks, it becomes costly to unwind. Jobs, industrial capacity and regional economies grow dependent on continuous procurement. Political incentives tilt towards maintaining production lines. Rearmament, in this context, becomes intertwined with economic management.

The escalation bias

That reliance carries risks that are often underestimated.

Large-scale defence production generates inventories that must be stored, maintained, upgraded or replaced. Production lines cannot be shut down without economic disruption. Skilled labour cannot be dismissed and rehired without loss. Over time, the system develops a structural bias toward continuation.

The logic gradually shifts: deployment justifies replenishment; replenishment sustains production and production sustains employment. None of this requires a desire for war. It only requires that conflict remains politically usable as justification.

History offers a stark warning. By 1939, after nearly a decade of public works, welfare programmes and monetary easing, US unemployment remained around 17%. Wartime mobilisation transformed the picture. By 1944, unemployment had fallen to 1.2% and output had nearly doubled. Rearmament solved the demand problem, but it did so by binding economic stabilisation to geopolitical confrontation. 

The lesson is not inevitability but incentive structure: when growth depends on armament, risk becomes endogenous to the model itself.

Alternative counter-cyclical tools face structural constraints.

A renewed real estate push requires further credit absorption by households already servicing large mortgages. Consumption stimulus — tax rebates, transfers or subsidies — is directed towards deleveraging rather than fresh spending. Infrastructure and green transition programmes are viable in principle, but they operate on long timelines, demand complex coordination and depend on sustained political consensus that has grown fragile. They also rely on private demand to validate investment, demand that may not materialise in debt-saturated economies. Defence procurement faces none of these obstacles. The state purchases directly, at scale and under its own authority, without passing through over-leveraged private balance sheets.

Exception or beneficiary?

India offers an instructive contrast. A decade of balance-sheet repair has left private-sector debt ratios relatively low by global standards. Consumption is rising organically. Corporate investment is returning without heavy fiscal compulsion. India remains one of the few large economies where growth is driven by underlying demand rather than stimulus exhaustion.

Yet India cannot remain insulated from a rapidly militarising world. Regional military modernisation and intensifying Indo-Pacific competition leave New Delhi with limited strategic choice. The distinction, however, is critical. India is adding defence-industrial capacity on top of a growing civilian economy, not in place of one. That positions it as a potential structural beneficiary of the current cycle rather than a participant trapped within it.

The danger is not simply higher military budgets. It is that economic stability is increasingly tied to rearmament. When growth depends on armament, restraint becomes economically costly. And when restraint becomes costly, escalation becomes easier.

That is the paradox now shaping the global economy.

(Vidhu Shekhar is an Associate Professor of Finance and Accounting at the S P Jain Institute of Management & Research, Mumbai)