NATO members have committed to raising defense-related spending to 5 percent of GDP by 2035—3.5 percent for core defense and up to 1.5 percent for broader security and resilience investments. For many European and other non-US NATO members, this represents a substantial increase from current spending levels, which average about 2 percent of GDP. At a time of elevated public debt, population aging, and mounting spending pressures on health, pensions, and other public services, financing this commitment will require difficult fiscal choices. While governments can raise taxes, borrow more, or reallocate spending, these options all involve significant economic and political costs. In this post, we argue that accelerating structural reforms to raise economic growth should be viewed as an integral component of national security strategies in the medium term.
Growth dividend and military spending
Faster economic growth generates additional fiscal resources without requiring governments to increase tax rates or reduce existing public services. Even if tax ratios remain unchanged, a larger economy produces higher revenues, easing the budgetary tradeoffs associated with higher defense spending. A country with tax revenues at 40 percent of GDP gains roughly 0.4 percentage points of GDP in annual revenue for every additional point of trend growth, without any change in tax rates. Growth also improves debt dynamics by expanding GDP, thereby lowering the debt-to-GDP ratio over time, allowing countries to sustain larger defense budgets while maintaining fiscal credibility. For many NATO members, where debt already exceeds 100 percent of GDP, stronger growth would reduce interest burdens and create additional room for defense spending while helping finance age-related expenditures.
Historical experience illustrates how sustained economic growth expands a country's capacity to finance national security. The United States benefited from strong productivity growth during much of the Cold War. More recently, growth expanded the fiscal room within which China and India increased defense spending.
Data from the Stockholm International Peace Research Institute (SIPRI) show that China and India both entered the world’s top ten military spenders in nominal dollar terms by 2000. By 2010, China had displaced the UK from second place and in 2020, India rose to third place after the US and China. Between 2015 and 2025, the increase in defense spending in China and India exceeded 70 percent in nominal terms. In real purchasing power terms, estimates suggest that a large share of the global increase in defense spending in the past two decades happened in these two countries. During 2010-2025, the share of military spending in GDP in China and India remained broadly unchanged even as nominal spending rose. The key lesson is not that higher growth automatically raises defense spending, but that it makes higher defense spending easier to accommodate without requiring equivalent increases in tax rates, spending cuts, or rises in public debt.
Structural reforms and growth
A bolder pace of structural reforms could boost growth and living standards in many European and other non-US NATO countries. For example, the IMF estimates that closing half of the regulatory and policy gaps relative to best practice could raise output in advanced European countries by 5 percent—and Central, Eastern and Southeastern European economies by 7 percent—over a five-year period. While priorities will vary across countries, several reforms can increase employment and productivity, including measures to lower labor taxes, ease overly restrictive employment protection rules, and better integrate skilled migrants. Pension reforms can encourage older workers to remain in the labor force for longer. Streamlining regulation can reduce red tape, facilitate business entry and exit, and remove obstacles to housing and infrastructure construction. Policies that support innovation, research and development, and digitalization can further boost productivity growth.
Many of these reforms would also deepen European integration by increasing competition across countries and allowing firms to achieve greater economies of scale.
The bottom line
NATO's defense commitment should not be viewed solely as a spending target. It is also an economic challenge. Countries that succeed in raising productivity and long-term growth will find it easier to sustain higher defense spending while preserving investments in health, education, and infrastructure. In that sense, structural reforms are not simply economic policy—they are increasingly part of national security strategies. At the same time, structural reforms should not be seen as a substitute for difficult fiscal decisions in the short run. Rather, they reduce the long-run fiscal burden of sustaining higher defense expenditures by expanding economic capacity over time.
