Military spending is the least cost-effective item in public budgets

Military spending does move the economy, but less and for less time than the defence industry claims. Banco de Spain calculates that its multiplier barely exceeds 1 in the fourth year and returns to zero in the seventh.

NATO has entered an arms spending race to meet the target set by **Donald Trump**: dedicating **5% of GDP** to defence. That peine the old guns-versus-butter debate, because that money comes from other public policies. The industry's business association argues that investing in defence gives the economy a significant boost. A recent study by researchers at the **Banco de España** (Spain's central bank) cools that assumption: the multiplier effect is lower than in previous reports and, its authors say, this spending "has long-term effects that are more fleeting and smaller in magnitude than general public investment projects".

## Why the impact takes years to show up

Accurately measuring the effect of defence spending has a basic difficulty: the life cycle of contracts is extremely long. Between announcement and production, **one to five years** can pass, and statistical treatment means the spending is only recorded in national accounts after delivery, which can take up to **ten years**. That means the increase in production over that period is not reflected.

The researchers believe their method overcomes that obstacle. They built a database covering more than **30 years of defence contracts**. From it they conclude that public investment barely reacts during the first year, starts to rise slowly in the second and peaks four years after the shock. In other words, the GDP impact of awarding the contracts is close to zero during the first **two and a half years**.

## The multiplier rises to 1.3 and then fades

From there, production grows to its maximum in the fourth year. At that point the fiscal multiplier —the impact on the economy of the investment, excluding wages and consumables such as fuel— slightly exceeds **1**. In other words: for every euro spent, activity rises by another euro. In the fifth year it reaches **1.3** and then falls until it disappears. In the seventh year it is back to zero. It is a transitory effect, not a permanent engine.

There is another detail that dampens enthusiasm: contracts awarded to companies abroad generate a negligible macroeconomic impact. If the money leaves the country, the effect stays outside.

## The industry association and BBVA calculate more

Not all the numbers agree. A **2025** study by **BBVA Research** estimated that the multiplier of defence spending in the first two years reached **1.5** and that, considering investment alone without wages, it could reach **2**. Where it did agree was on the transitory nature of the impact.

Spain's defence industry association, **TEDAE**, commissioned **PwC** to produce a study on the economic impact of defence spending, published last week. It shows an average multiplier of **2.3** for **2025**: for every euro invested, 2.3 were generated. The difference with Banco de España is not small.

## What Banco de España's calculation does not measure

The three Banco de España researchers note that "larger public investment projects can generate more persistent effects than those observed in the case of defence investment". And they remind readers that their estimates only cover the direct effects of the spending.

To get the full picture, they add, policymakers would also have to consider the economic costs of military conflicts and the possible deterrent effects of improving defence capabilities. That does not enter the multiplier. The question of whether it is worth it is not answered by a table: it depends on what is understood as cost-effective and on what stops being funded to pay for it.