How governments finance and defund military spending: Global evidence on deficits, taxes, and civilian spending

Armin A. Bolouri, Tim Lohse and Salmai Qari

No 2026/12, Discussion Papers from Free University Berlin, School of Business & Economics

Abstract: Using cross-country data for 167 countries with broad post-World War II coverage and historical extensions to earlier periods, we quantify how deficits, taxes, and civilian spending respond to increases and decreases in military spending. On average, deficit financing dominates: a 1 percent-age point (pp) increase in military spending (as share of GDP) is associated with 62% deficit financing, 20% higher taxation, and 18% reductions in civilian spending. The composition shifts with intensity, as larger armaments are accompanied by deeper civilian cuts. Fiscal space systematically moderates these patterns: low-debt countries rely primarily on borrowing-funding a 1 pp increase by 75% deficits, 11% taxation, and 14% cuts-whereas high-debt countries adjust more through taxation (33%) and civilian spending cuts (26%). Armaments and disarmaments are asymmetric. Disarmaments only partially reverse prior fiscal expansions, sustaining elevated civilian spending as a peace dividend: a 10 pp decline in the military share raises the civilian share by 5 pp, whereas a symmetric increase reduces it by less than 2 pp. By quantifying these adjustment patterns jointly across fiscal instruments, countries, and episodes of armament and disarmament, we provide an integrated global perspective that connects insights from the literatures on war finance, fiscal space, and ratchet effects. We conclude by discussing implications for the current wave of rearmament.

Keywords: Military Spending; Budget Composition; Fiscal Space; Guns versus Butter; Peace Dividend (search for similar items in EconPapers)
JEL-codes: D72 H11 H56 H63 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fubsbe:342440

DOI: 10.17169/refubium-52042

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