War and security come at a price. Global defence spending is rising in response to geopolitical threats – from Russia’s aggression in Europe to conflict in the Middle East. Governments face difficult choices as a result: balancing the need for security with other priorities and targeting defence investment to foster innovation and growth without draining public finances.
Newsletter from 14 November 2025
In 1953, President Eisenhower declared during a speech that every gun made, warship launched, and rocket fired was “a theft from those who hunger and are not fed, those who are cold and are not clothed.” This proposition – particularly in the aftermath of World War 2, which had ended less than a decade earlier – raises some challenging questions.
On the one hand, the immense human suffering and economic destruction caused by wars is clear. So too is the idea of ‘wasted’ resources – firearms, warships and missiles in place of hospitals, schools and welfare. But at the same time, wars can bring with them astonishing economic development: innovation born out of necessity can lead to better living standards in peacetime.
Today, the world is in the midst of the fastest rise in defence spending since the Cold War. Global military expenditure reached a record $2.7 trillion in 2024, and NATO members pledged further increases at this July’s summit.
Figure 1. World map of defence expenditure as a share of GDP, 2024
Source: SIPRI
Why this surge in spending? In part, governments around the world are responding to new conflicts, shifting geopolitical threats, and emerging technologies. Russia’s invasion of Ukraine has been a defining event for Europe: defence spending, which had been declining for years, began to rise after Crimea’s annexation in 2014 and has accelerated since Russia launched its full-scale invasion in 2022.
Figure 2. Global defence expenditure by region, 1988-2024
Source: SIPRI
As defence spending rises, the allocation of these funds is coming under increasing scrutiny. In the UK and many other countries, rising defence budgets come amid tight public finances and competing policy priorities. The economic impact of this surge in spending is likely to be far-reaching.
Well-targeted defence spending has the potential to drive economic growth, as outlined in the UK’s Defence Industrial Strategy: Making Defence an Engine for Growth. It can support small enterprises, protect regional/manufacturing jobs, and bolster demand for domestic industries. For example, a recent £10 billion deal with Norway to supply UK warships is expected to create over 4,000 jobs including 2,000 in Scotland.
But higher defence spending must be funded somehow – whether through smaller pots for other priorities such as health or education, higher public borrowing and debt, or tax increases. With the UK’s November Budget weeks away, and tax rises not ruled out, defence spending decisions are all the more consequential.
With this in mind, three new articles from the Economics Observatory explore how conflict, security, and defence spending shape economies and lives.
Forecasting with fault lines
Wars are often seen as turning points, defining economies and societies. But their causes, onset, and effects are very hard to predict. In the first article of our series, Ron Smith (Birkbeck Business School) explores what history can tell us about the causes and consequences of conflict, and why forecasting war remains so elusive.
While military spending is rising around the world, there is little evidence that it makes conflict less likely. Using a dataset spanning 161 countries over 75 years, research shows that even large increases in defence budgets have only modest effects on reducing conflict risk. In fact, the past four years have been the most violent period since the end of the Cold War, with nearly 740,000 people killed as a result of armed conflict.
Ron also examines how major wars act as geopolitical and technological turning points, reshaping the global economy and accelerating innovation. From canning and prosthetics to the internet and GPS, many transformative technologies have wartime origins. But Ron finds that innovation continues in peacetime, often more efficiently, as civilian sectors now move faster than military equivalents.
Past attempts to predict conflict have often fallen short. Ron concludes that, as history shows, the ‘fault lines’ of conflict may be visible, but the timing, triggers, and costs of major wars are rarely foreseeable.
Defence dividends
Predicting conflict is difficult, but preparing for it is increasingly a priority. The UK’s 2025 Spending Review marks a major shift in fiscal priorities: the Ministry of Defence will see the largest capital budget increase of any department, rising on average 7.3% per year in real terms, with around 7% earmarked for research and development (R&D).
In their new Observatory article, Paolo Surico and Will Hotten (London Business School) explore whether this boost in defence spending can strengthen the UK economy. They find that mission-driven innovation is key: when defence investment supports R&D, it can generate long-term productivity gains and broader economic benefits.
Examples from history include the Apollo Project, which spurred technologies like GPS and solar panels; Turing’s wartime codebreaking, which laid the foundations for modern computing; and public investment during the Covid‑19 pandemic, which accelerated mRNA research. In each case, public R&D can create transformative economic and social spillovers.
Not all defence spending delivers such returns. The operational costs of conventional weapons or military employees can generate short-term gains but have fewer lasting economic benefits. The trade-off also matters. R&D in other areas, like health, education, and science, produce even greater long-run returns. If defence R&D rises while other innovation budgets remain flat or fall, the net effect on productivity could be weak.
From Paolo and Will, the lesson is clear: defence R&D can be part of a growth strategy, but only if it complements, rather than crowds out, broader innovation. Well-targeted investment in research is what transforms defence spending into long-lasting economic dividends.
Collaboration in combat
Defence spending has risen sharply across Europe since Russia’s full-scale invasion of Ukraine. Our third article, from Keith Hartley (University of York), looks at European defence policy and the role of collaboration in technology and procurement.
Europe’s new Defence Industrial Strategy (EDIS), launched in March 2024, aims to fix long-standing fragmentation in the continent’s defence industry. The urgency is clear, given the pace of rearmament – EU member states invested €106 billion in defence in 2024, a 43% increase on the previous year. Yet, Europe’s defence market is inefficient, with duplicated R&D, production often split across borders, and widespread dependency on foreign suppliers.
The fighter jet market exemplifies some of these issues. Europe currently produces three separate models (the Typhoon, Rafale and Gripen), rather than a single shared aircraft. Keith suggests that a unified programme would have a combined production of 1,800 aircraft, cutting costs by 10-20% through economies of scale. The United States, in contrast, is set to produce over 3,500 new fighter jets under a single programme.
Keith argues that the UK and EU face two choices: deeper collaboration, sharing R&D and production across more partners, or buying American gear, trading autonomy for speed and simplicity. Both paths bring political and economic trade-offs.
As defence budgets rise across Europe, understanding these trade-offs is increasingly important. Smarter procurement and coordinated industrial strategy will shape not only military capability, but also jobs, competitiveness, and the resilience of Europe’s defence sector.
Conclusion
Defence spending is rising rapidly, but how will this money be spent, and where will it come from? Policymakers will need to ensure that spending is effective, well-targeted, and provides security, rather than simply draining public finances.
Across Europe, such defence dilemmas continue to play out. The UK and EU are racing to rearm following Russian aggression, while also facing mounting pressure from the United States. Washington – the dominant provider of NATO capability – has long urged European allies to spend more, and under President Trump this message has become more forceful. Europe may be increasing budgets, but there is also a need to use them more efficiently through collaboration and scale.
The UK-EU Security and Defence Partnership, signed in May 2025, reflects a tentative step in this direction by committing both sides to strengthening cooperation in defence readiness and procurement. The agreement forms part of the UK government’s wider ‘EU reset’, seeking to rebuild ties after years of distance. But it remains an early-stage framework: timelines and concrete commitments are limited, and negotiations can be fraught. The risk, for now, is that the partnership remains more diplomatic signalling than industrial reality.
Domestically, the UK government has released a suite of strategy documents this year, including the Strategic Defence Review, National Security Strategy, Defence Industrial Strategy, and the forthcoming Defence Investment Plan – laying the groundwork for more coherent spending decisions.
The Investment Plan will be of particular interest. We know that investing in R&D is crucial for ensuring long-term economic returns. Defence is one of the UK’s ‘IS8’ – eight high-growth, high-innovation sectors identified as priorities for future economic competitiveness. The ambition is for the UK to become a world leader in these sectors. But delivering on that ambition will require sustained investment at the technological frontier, raising questions over how far budgets can stretch, especially when other R&D areas offer higher long-run productivity gains than defence. These trade-offs will come into focus once the Investment Plan is published.
If geopolitical fault lines continue to descend into conflict, the economic implications of defence decisions will become harder to separate from their security implications. After all, a country with weak finances will struggle to win a war. Governments cannot simply spend more on defence: they must spend it well, to deliver both security and prosperity in the years ahead.
