Defence Spending

A defence economy comprises the fiscal, industrial, and budgetary systems through which a state finances, maintains, and adjusts its military capacity. During peacetime, these systems tend to remain stable; in wartime, they become the main mechanism through which conflict transforms a nation’s economic structure. The escalation of Israeli military operations since October 2023 and the broader confrontation with Iran and its regional proxies have caused a defence-economy shift, leading to significant realignments in how the conflicting sides allocate public resources, incur debt, and prioritise expenditure.   This analysis examines how sustained military escalation has reshaped the defence economies of its three key actors: Israel, Iran and the United States. It assesses both short-term fiscal responses and longer-term budget trajectories, arguing that the conflict has not produced a temporary spending spike but a structural transformation, one that has widened deficits, crowded out civilian services, mobilised domestic defence industries, accelerated sovereign credit deterioration, and embedded elevated military spending into national budgets in ways that will persist well beyond any ceasefire. Across the Middle East, the boundaries between battlefield expenditure and national economic health have become increasingly difficult to separate.

In the wake of the recent NATO summit, European leaders have committed to a landmark pledge: raising defence spending to 5% of GDP. Hailed by its backers as a historic move, the agreement reflects a sharp shift in European threat perception, driven not only by Russia’s ongoing war in Ukraine but also by the renewed pressure from Washington under the return of the Trump presidency. The "Trump effect" has reignited long-standing fears over the reliability of U.S. security guarantees, pushing Europe to take on greater defence responsibilities.   But while the pledge signals a tougher European posture, it raises pressing concerns. Can Europe realistically meet such ambitious targets without undermining the very democratic model it seeks to defend? As defence budgets grow, many fear this could come at the cost of welfare, social cohesion, and democratic checks, exposing the continent to a deeper risk: the creeping militarisation of European politics and the erosion of its democratic dividend.