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 geopolitical tensions escalating between China and Taiwan and Iran potentially developing nuclear capabilities, the economic pressures analogous to those seen during the Covid-19 crisis are intensifying. These include substantial expenditures on defense alongside ongoing global challenges like climate change and migration.

Even if the war machine increases defense companies’ sales, provides new credit lines for Banks and potential reconstruction deals for contractors, war is one of “the most expensive and least productive of human activities,” according to James Grant, a financial historian, and editor of Grant’s Interest Rate Observer.

John Llewellyn, a former head of economic forecasting at the OECD, encapsulates the dilemma: “Nobody wants to pay more taxes. But at the same time, everybody wants better defense and good health services too,” highlighting the inevitable public discourse on funding methods that is looming on the horizon. At some point, the issue will be forced into the public arena, as nobody knows how the funds will be raised. It’s becoming increasingly important to address the question: Who pays for a war?

 

Understanding the Defense Budget | Who Pays for a War 

Post-World War II, nations transformed their War Ministries into Defense Ministries, a diplomatic change reflecting a broader shift towards maintaining peace through strength. The old adage ‘Vis pacem para bellum’—If you want peace, prepare for war—resonates strongly in this context, particularly with the European Union, which has been prompted by Russian aggression to reconsider its defense strategies. The unprecedented rise in military spending is a direct response to the global deterioration in peace and security,’ said Nan Tian, Senior Researcher with SIPRI’s Military Expenditure and Arms Production Programme. ‘States are prioritizing military strength, but they risk an action-reaction spiral in the increasingly volatile geopolitical and security landscape.’ Yet, the financial burden begs the question: Who pays for a war?

 

Global Defense Budgets on the Rise | Who Pays for a War

According to the Stockholm International Peace Research Institute (SIPRI, April 2024), global defense spending reached $2443 billion in 2023, a staggering increase of 6.8% in real terms since 2022. This trend is occurring even as higher interest rates escalate government borrowing costs. This is the 9th year-over-year increase in the military budget. But amid these figures, the underlying question remains: Who pays for a war?

Diego Lopes Da Silva, a senior researcher at SIPRI, notes, “Countries that increased their defense spending in 2022 are likely to continue this trend, while others have announced plans to start in 2023.” This forecast suggests a persistent upward trajectory in global military expenditures, prompting us to reconsider Who pays for war.

Military Expenditure - who pays for a war - sweat your assets

SIPRI Military Expenditure Database, 2024

 

  • United States: Despite debt ceiling negotiations, military spending is set to increase by 3%, reaching $886 billion.
  • China: Continues its upward trajectory with a defense budget expected to reach $292 billion, marking 29 consecutive years of increases.
  • Russia: Despite budget secrecy, has declared “no funding restrictions” for its conflict in Ukraine. Russia’s military spending increased by 24 per cent to an estimated $109 billion in 2023, marking a 57 per cent rise since 2014, the year that Russia annexed Crimea. In 2023 Russia’s military spending made up 16 per cent of total government spending and its military burden (military spending as a share of gross domestic product, GDP) was 5.9 per cent. 
  • Ukraine was the eighth largest spender in 2023, after a spending surge of 51 per cent to reach $64.8 billion. This gave Ukraine a military burden of 37 per cent and represented 58 per cent of total government spending. Ukraine’s military spending in 2023 was 59 per cent the size of Russia’s. However, Ukraine also received at least $35 billion in military aid during the year, including $25.4 billion from the USA. Combined, this aid and Ukraine’s own military spending were equivalent to about 91 per cent of Russian spending.
  • Other Notables: India and Saudi Arabia are significantly increasing their defense budgets in response to regional instabilities, with similar increases seen across Japan, the UK, and Germany, each facing unique geopolitical challenges.

In 2023 the 31 NATO members accounted for $1341 billion, 55 percent of the world’s military expenditure. Military spending by the USA rose by 2.3 percent to reach $916 billion in 2023, representing 68 percent of total NATO military spending. In 2023, most European NATO members increased their military expenditure. Their combined share of the NATO total was 28 percent, the highest in a decade. The remaining 4 per cent came from Canada and Türkiye.

‘For European NATO states, the past two years of war in Ukraine have fundamentally changed the security outlook. This shift in threat perceptions is reflected in growing shares of GDP being directed towards military spending, with the NATO target of 2 per cent increasingly being seen as a baseline rather than a threshold to reach.’

A decade after NATO members formally committed to spending 2 percent of GDP on the military, 11 out of 31 met or surpassed this level in 2023—the highest number since the commitment was made. Another targetdirecting at least 20 percent of military spending to ‘equipment spending’wa met by 28 NATO members in 2023, up from 7 in 2014.

 

Financing Wars: Taxation vs. Debt | Who Pays for a War

Historically, wars have been financed either through immediate taxation or by accumulating debt. Short, intense conflicts often rely on borrowing, as seen with the UK still paying off World War II debts well into the 21st century. Longer conflicts, like the Cold War, were sustained through increased taxation. As we delve into these historical patterns, the persistent inquiry remains: Who pays for a war?

Economist James Macdonald remarks, “For short wars, borrowing can cover expenses, but longer conflicts necessitate a mix of taxation and possibly spending cuts in other areas.”

More Taxes

When a country goes to war, it often needs more money than its regular budget allows. To cover these costs, governments may increase taxes. This could mean higher income taxes or additional sales taxes. Everyone feels the pinch, but it’s all in the name of national security, right? Take, for example, World War II, a time when many countries ramped up their tax systems to support the war effort. The U.S. introduced the “Victory Tax” in 1942, which significantly increased income taxes and established withholding taxes directly from wages for the first time. Similar measures were seen worldwide as nations sought to finance military spending.

More Debt

But increasing taxes isn’t the only way to raise money. Often, governments prefer to borrow, creating national debt. This is where things like war bonds come into play. Citizens buy these bonds, giving the government a loan to fund military operations, with the promise of repayment later on. However, this borrowed money has to be repaid—usually with interest. This repayment takes years and sometimes decades, affecting government budgets and, ultimately, taxpayer money. For instance, believe it or not, the UK only finished paying off its World War II debts to the U.S. and Canada in 2006!

 

The Economic Impact of War | Who Pays for a War

The financial burden of war extends beyond immediate costs, affecting everything from national debt to economic growth. Lawrence Summers and Olivier Blanchard warn that higher defense spending might push interest rates up, stifling investment and recovery. The financial mechanics behind war are complex and have a lasting impact on a country’s economy and its citizens. As we reflect on the costs of conflicts past and present, it’s crucial to remember that the decisions made today about how to finance wars will echo through our economies for generations to come.

The Value and Cost of Peace | Who Pays for a War

Understanding the actual cost of war brings us to a crucial realization: peace is invaluable, not just morally and socially, but economically.

Knowing the extensive economic burdens wars impose can help us appreciate the immense value of maintaining peace. In periods of peace, governments can focus on investing in public infrastructure, education, healthcare, and social services—sectors that directly improve quality of life and drive economic growth.

Contrastingly, the financial drain caused by wars often means these areas suffer, delaying progress and impacting daily lives for years, if not generations.

Moreover, peace allows for stable markets and investment climates. Businesses thrive in predictable and safe environments, where the risks are more about market forces than geopolitical uncertainties. This stability encourages domestic and foreign investments, which fuel economic expansion and create jobs. Investing in peace is also about investing in future generations.

Reducing national debt, enhancing public services, and ensuring economic stability are crucial for creating a prosperous society. Promoting peace also extends beyond national borders. In our interconnected global economy, the ripple effects of conflict in one area can lead to economic disturbances worldwide.

 

Conclusion

Thus, as we discuss and debate the financial implications of war, let us also champion the cause of peace—not only as the morally right choice to avoid human casualties and violence but as the economically wise one. While I  agree that a defense budget is an essential deterrent against war and that “our freedom is not free” (Anita Nergaard), I acknowledge that war is the last resort in diplomatic action when everything else has failed.

Still, in this article on financial education, let’s remember that every dollar spent on war is not spent on advancing human welfare, development, and the climate.  If we look at the hidden financial and economic costs of war, we can better appreciate, promote, and invest in the dividends of peace.

While a robust defense is undoubtedly vital, a close look at war expenditures reveals a clear trade-off: every dollar spent on defense is a dollar not invested in human welfare. As we navigate these economic and moral landscapes, let us look at peace and stability as both a moral imperative and a strategic economic choice, recognizing that understanding and managing the costs of war can lead us to better appreciate and strive for the dividends of peace.

 

Keep it Real. Sweat Your Assets.

Financial Wisdom + Discipline = Financial Freedom

 

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