Business news from Ukraine

Governments face increased borrowing, taxes and public sector cuts to finance their soaring military budgets. European NATO members are set to spend a record $380 billion on defense this year — a tough sell to voters.

If you want a reminder of the security threats faced by the world today, take a look at how much governments have hiked defense spending. Global military budgets reached $2.44 trillion (€2.25 trillion) last year, nearly 7% higher than in 2022. It was the steepest year-on-year rise since 2009, recorded during the second year of Russia’s full-scale invasion of Ukraine. For every man, woman and child, world military spending is now at its highest since the end ofthe Cold War — at $306 per person.With Kyiv unprepared to fight such a large-scale conflict, Western countries ramped up military aid to Ukraine, while other escalating tensions with Russia and in the Middle East and Asia also prompted governments to shore up their defenses, unlike any time since World War II.

In 2024, the United States has allocated $886 billion for defense, a rise of more than 8% over two years. For the first time, NATO’s European partners are projected to meet the target set by the military alliance of spending 2% of gross domestic product (GDP) — a major bugbear of former US President Donald Trump, as many weren’t. This year alone, they’ve budgeted a collective $380 billion on defense, NATO chief Jens Stoltenberg said in February.

Poland leads the way (measured by GDP)

While Germany is still playing catch up with other NATO members — helped by Chancellor Olaf Scholz’s special €100 billion ($109 billion) fund to upgrade the Bundeswehr armed forces — Poland is due to spend 4.2% of GDP on defense this year, the highest in the military alliance. Others on NATO’s eastern flank also far exceed or will soon surpass the 2% target, due to the heightened security threat on their borders.

As a result, governments are facing an increasingly tough choice over how to pay for those new defense commitments, just as many economies weaken due to the effects of the ongoing global geopolitical tensions and lingering inflation. Many countries are already fiscally stretched.

“Short-term commitments for military equipment for Ukraine should be financed with additional debt. That’s the way wars have historically been funded,” Guntram Wolff, a senior fellow at the Brussels-based think tank Bruegel, told DW. “But for longer-term increased defense spending, either taxes need to go up or you cut other spending.”

“Is it painful politically? Sure! But if you spread it across the various government departments, it will be less so.”

Germany cuts ministry budgets, apart from defense

Germany, which faces the prospect of lower tax revenues due to weaker growth, has slashed spending across most government departments and has singled out international development aid for an almost €2 billion cut this year.

“Germany has some very significant trade-offs to make,” Jeffrey Rathke, president of the American-German Institute at the Johns Hopkins University in Washington D.C., told DW. “They need to be managed politically so that they don’t erode public support for strengthened security and defense.”

Leftist political parties in several countries have led calls for peace between Russia and Ukraine and have stoked the debate over whether the new military spending could be better spent on health care or social programs.

Rathke noted how Germany’s debt brake, which limits the government’s ability to borrow money to cover gaps in the budget, meant that Scholz’s coalition has less wiggle room compared to, say, France.

While Poland’s finances are in much better shape than many Western European countries, Prime Minister Donald Tusk, who ousted the right-wing populist government last October, is struggling to deliver on election promises, including raising the limit before income taxes are levied, due to the much higher defense budget.

Other EU states struggle with NATO target

Other countries, such as those hit worst by the 2011 European debt crisis, have already faced deep austerity measures and any further cuts could affect the quality of public services.

Italy, for example, is expected to spend just 1.46% of GDP on defense this year and warned that meeting NATO’s 2% target by 2028 would be tricky. The country’s debt-to-GDP ratio is forecast to hit 137.8% this year.

Other countries in similar fiscal tight spots, like Spain, could find limits on any additional deficits needed to fund new military spending, which could be anything from 0.5% to 1.5% of GDP. Last year, Madrid hiked its defense budget by 26%.

“The European debt crisis forced budgetary adjustments of 5% to 7%, even 10% for Greece,” Wolff said. “Fortunately, these cuts will be much less painful than anything the European south had to endure.”

Sweden, Norway, Romania and the Netherlands have lower debt burdens. But even so, Dutch far-right firebrand Geert Wilders also plans significant spending on social security housing and agriculture to ensure his new four-party coalition holds.

“As well as the fiscal capacity and the indebtedness problems, this resource debate is overlaid on an ongoing difference of threat perception across Europe,” Rathke said, so countries located further from Ukraine may be less keen to prioritize defense than those near its border.

Next target: 3%?

Defense spending is expected to keep increasing over the next decade. NATO’s 2% defense spending target was first set in 2014 after war broke out between the Ukrainian military and Russian-backed separatists in the east of the country and Moscow annexed Ukraine’s Crimea peninsula.

Last year, at a meeting in Vilnius, Lithuania, NATO leaders agreed that the target could often exceed 2%. Germany, which until now has struggled to meet the original target, has now mooted the prospect of a 3% budget target, which would have even bigger ramifications for government finances.