Report finds defence spending can drive economic growth and innovation

Russia’s brutal war of aggression against Ukraine has exposed a sobering reality: Europe must rapidly strengthen its armed forces to ensure the security of its citizens. But what are the economic consequences of ramping up defence spending? A recent report by the Kiel Institute for the World Economy, Guns and Growth: The Economic Consequences of Defence Buildups, challenges conventional wisdom that defence expenditure is a financial burden on states, arguing instead that such investment can serve as a catalyst for economic growth, technological innovation, and sustained productivity.

Economic stimulus

The report explains that increased military spending acts as a fiscal stimulus. Defence investments generate demand for labour and materials, spurring economic activity. The report cites empirical evidence from Valerie Ramey and Zubairy (2018), which shows that a cumulative 1% of GDP increase in military expenditure raises GDP by approximately 0.7%  –  a multiplier effect comparable to infrastructure or education spending. For policymakers, this presents a dual benefit: bolstering security while providing a countercyclical buffer against economic downturns

The R&D dividend

The transformative potential of defence spending lies in its ability to drive innovation. Defence-led research and development (R&D) has paved the way for many groundbreaking technologies – from radar to the internet – that have reshaped both security and civilian life. The report points to the considerable body of evidence which shows how defence investment can act as a powerful engine for innovation and long-term economic dynamism, highlighting two key mechanisms through which defence investments foster broader economic and technological advancement:

Spillover effects: Public investment in military R&D often generates returns far beyond the defence sector. Fieldhouse and Mertens (2023) estimate these returns can reach as high as 300%, while research by Moretti et al. (2019) suggests that a 10% increase in government-funded military R&D encourages more than a 4% rise in private-sector R&D. These innovations frequently extend beyond defence, accelerating advances in fields such as healthcare, energy, and telecommunications.

Learning by doing: Sustained defence production enhances efficiency and builds technological expertise. Historical data, for example, showed a 30% decline in the unit costs of manufacturing aircraft as production scaled up to meet demand during war. More recently, Antolin-Diaz and Surico (2022) estimate that a temporary 1% increase in military spending relative to GDP raises total factor productivity (TFP) by 0.3%, leaving a durable legacy of skills and industrial know-how.

Building European capacity

The report highlights a pressing challenge for Europe, pointing to figures which suggest that nearly 80% of Europe’s defence procurement comes from non-European suppliers. This reliance, the report argues, not only raises questions about strategic autonomy but ultimately deprives European industries of the technological spillovers that domestic investment can generate. To address this, the report calls for a more coordinated EU procurement strategy – one that strengthens the continent’s industrial base while fostering innovation and economic growth.

In all, the report makes a compelling argument that the true question is not whether Europe should invest in defence, but can it do so in ways that prioritise technological innovation, support a diverse industrial base, and encourage cross-border collaboration, thereby turning defence investment into a foundation for both security and long-term prosperity.