Who Pays for a War, and How?
As the war in Ukraine marks Europe’s largest armed conflict since 1945, the world stands on edge. With rising tensions between China and Taiwan and Iran’s potential nuclear ambitions, global instability is escalating. Just as with the Covid-19 crisis, nations now face mounting economic pressures: soaring defence budgets on top of long-term challenges like climate change, ageing populations, and migration.
Even if war boosts defence companies, banks, and reconstruction contractors, it remains one of
“the most expensive and least productive of human activities,”
as financial historian James Grant reminds us.
And yet, as John Llewellyn, a former head of economic forecasting at the OECD, puts it:
“Nobody wants to pay more taxes. But at the same time, everybody wants better defence and good health services too.”
At some point, the issue will be forced into the public arena. The central question remains: Who pays for a war?
Understanding the Defence Budget | Who Pays for a War
After World War II, most nations rebranded their “War Ministries” into “Defence Ministries” — a symbolic shift toward peace through strength. The old maxim, si vis pacem, para bellum (if you want peace, prepare for war), resonates today as governments redirect resources toward military preparedness.
Nan Tian, senior researcher at SIPRI, notes: “States are prioritising military strength, but they risk an action-reaction spiral in the increasingly volatile geopolitical and security landscape.” Military spending is rising, but the financial burden raises the pressing question: Who pays for a war?
Global Defence Budgets on the Rise
According to the Stockholm International Peace Research Institute (SIPRI, April 2024), global defence spending reached $2,443 billion in 2023 — a 6.8% increase from 2022, and the 9th consecutive annual rise. This surge comes even as governments grapple with higher borrowing costs due to rising interest rates.
United States: Military spending rose 2.3%, reaching $916 billion in 2023, 68% of NATO’s total defence budget.
China: On track for its 29th consecutive annual increase, at $292 billion.
Russia: Declared “no funding restrictions” for the war in Ukraine, spending $109 billion in 2023 — 16% of its government budget.
Ukraine: Spent $64.8 billion, equal to 37% of its GDP, alongside at least $35 billion in military aid.
Other major spenders: India, Saudi Arabia, Japan, the UK, and Germany all raised budgets significantly in response to regional threats.
By 2023, the 31 NATO members collectively accounted for 55% of global military expenditure. Eleven countries now meet NATO’s target of spending 2% of GDP on defence, with equipment spending rising sharply. These numbers highlight the financial reality of modern security. But again — who pays for a war?
SIPRI Military Expenditure Database, 2024
How Governments Finance Wars: Taxes vs. Debt
Nations have historically financed wars through two main tools: taxation and borrowing. The mix depends on how long the war lasts.
More Taxes
During World War II, governments dramatically expanded tax systems. In the U.S., the 1942 “Victory Tax” increased income taxes and introduced wage withholding. Citizens felt the burden immediately, but the state could fund the war effort without spiralling debt.
More Debt
Borrowing is often the first choice, especially in short wars. War bonds became iconic tools during WWI and WWII. But debt lingers: the UK only finished repaying its WWII loans to the U.S. and Canada in 2006. Economists like James Macdonald warn that long wars ultimately require not just borrowing but higher taxes and spending cuts in other areas.
For households, this dilemma is familiar: if income isn’t enough, you either cut expenses, take on debt, or raise more money. Governments face the same trade-offs when financing wars. However, it is much easier for a government to take on debt, often without fully disclosing it, and leaving the problem to future generations.
The Economic Impact of War
The financial burden doesn’t stop when the fighting ends. War leaves lasting imprints on national debt, inflation, and economic growth. Economists Lawrence Summers and Olivier Blanchard caution that higher defence spending can drive up interest rates, crowd out investment, and slow recovery.
Indirect costs also weigh heavily:
Inflation occurs when governments print money or borrow excessively.
Opportunity costs, as funds diverted to defence reduce investment in education, health, and infrastructure.
Inequality, as the tax burden or inflation disproportionately affects lower- and middle-income households.
Ultimately, ordinary citizens — through taxes, inflation, or reduced public services — are the ones who pay for a war.
The Value and Cost of Peace | Who Pays for a War
The true cost of war underscores the immense value of peace — not only morally, but economically.
Periods of peace allow governments to invest in infrastructure, healthcare, education, and climate initiatives that directly improve lives. Businesses thrive in stable environments, attracting investment and fueling growth. By contrast, war diverts resources away from welfare and prosperity, sometimes for generations.
Every dollar spent on war is a dollar not spent on advancing human development. Recognising these hidden trade-offs helps us appreciate the dividends of peace.
Conclusion: Who Pays for a War?
While defence budgets are essential deterrents, war itself should always remain the last resort. As diplomat Anita Nergaard once said:
“Our freedom is not free.”
But it’s worth remembering: every dollar spent on war is a dollar not invested in human welfare, development, or climate action.
Just like families must balance their budgets, nations too must weigh the trade-offs between security today and prosperity tomorrow. Financing wars means higher taxes, bigger debts, or cuts to public services — costs that ripple through generations. So, who pays for a war? We all do. The real dividend, however, lies in peace — a strategic, moral, and economic choice that secures not just our present but our future.
Keep it Real. Sweat Your Assets.