Funding Military Expansion: Taxes or Debt?

Germany is grappling with the question of how to finance increased military spending. Historically, the nation has maintained high defense expenditures, particularly during the Cold War. In the wake of the Korean War and in response to Soviet threats, the Western Allies granted West Germany the right to rearm in the 1950s. The first soldiers of the newly established Bundeswehr were sworn in 1955, marking a significant investment in defense capabilities. Throughout the 1950s and 1960s, Germany allocated an average of 3.8% of its annual economic output to military spending, a target that is currently being discussed as a goal for future budgets.

To understand the financing of military expansion in the 1950s, economists Christoph Trebesch and Johannes Marzian from the Kiel Institute for the World Economy have conducted a historical analysis. They found that defense costs associated with the deployment of foreign troops were reallocated to the defense budget starting in 1956. This period was characterized by robust economic performance, which allowed the government to finance military acquisitions through its regular revenue streams. Lars Feld from the Walter Eucken Institute emphasized that defense expenditures during the 1950s and 1960s were largely covered by ongoing income.

However, the 1970s ushered in a different fiscal landscape marked by increased public deficits, primarily due to the first oil crisis and government attempts to stimulate the economy through demand-side policies. Throughout the 1970s and 1980s, military expenditures fluctuated around 3% of GDP, with Feld noting that the rise of national debt during this time was not directly tied to defense spending but rather to rising unemployment and increased social welfare costs.

After 1982, the government led by Chancellor Helmut Kohl focused on reducing the budget deficit following the NATO double-track decision, which involved the deployment of nuclear missiles in Western Europe. Despite budget cuts and a tax reduction initiative, military spending remained at approximately 3% of GDP until the easing of tensions between East and West in the late 1980s, when it gradually declined to about 2.5%. By 1989, the deficit was significantly reduced, resulting in a small surplus.

In subsequent decades, following the collapse of the Soviet Union, Germany benefited from a peace dividend, allowing military expenditures to drop to nearly 1% of GDP. Throughout this time, the country's deficit levels varied, but a direct connection between defense spending and national debt was not evident in the broader context. Feld asserted that national defense should ideally be financed through current revenues rather than by incurring debt. Instead of adjusting debt brakes, he proposed a temporary tax increase aimed at generating an additional EUR25 to EUR30 billion annually for defense.

One potential solution could involve the establishment of a special fund for the Bundeswehr, though Feld expressed concern about the political implications of hasty legislative action without the support of the newly elected Bundestag. The economists from Kiel concluded that historically, during periods of military buildup, governments have rarely reduced spending and more frequently opted to raise taxes or take on debt. They cautioned against relying solely on budget cuts for defense funding, drawing parallels to the missteps of the British government in the 1930s, which led to inadequate military preparedness before World War II.