Public debt may surge by 14%! IMF warns: Soaring defense spending is driving up global deficits.

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The global wave of defense spending is having a profound impact on national finances. The latest research from the International Monetary Fund (IMF) warns that the surge in defense spending is primarily financed through borrowing, which will significantly increase public debt and fiscal deficits in the medium term, and squeeze social spending.

In its upcoming World Economic Outlook report, the IMF notes that under the scenario of wartime surge in defense spending, public debt could jump by about 14 percentage points (as a share of GDP), and social spending would see a real decline.

IMF researchers Hippolyte Balima, Andresa Lagerborg, and Evgenia Weaver state that this situation places policymakers before critical choices regarding trade-offs.

According to Bloomberg, IMF President Kristalina Georgieva said in an interview on Tuesday that, affected by the conflict in the Middle East, the IMF is prepared to lower its forecast for global economic growth. Data from the Institute of International Finance (IIF) shows that global debt is projected to rise to a record $348 trillion in 2025.

The surge in defense spending has become a global trend

Faced with the ongoing war in Ukraine and pressure from U.S. President Trump for Europe to take greater responsibility for its own defense, countries such as Germany and France have significantly increased military spending in recent years.

In the United States, the Trump administration has requested a substantial increase in defense spending from Congress in its latest budget.

Based on data from over 160 countries since 1946, the IMF identified 215 cycles of increased defense spending. The report notes that such surges were concentrated in the 1970s and 1980s but large-scale defense expansions have become more frequent in recent years.

The IMF defines a "surge in defense spending" as an increase in a country's military expenditure's two-year moving average by at least 1% of GDP.

Short-term economic boost, medium-term debt pressure

IMF research shows that defense build-up can stimulate economic activity in the short term by driving consumption and investment, but in the long term leads to ongoing accumulation of public debt.

The report points out that the expansion of defense spending is typically "front-loaded" and mainly financed by increasing deficits. In a typical cycle of surging defense spending (usually lasting more than two and a half years), about two-thirds of spending is financed through borrowing.

IMF economists also found that the effect of expanded defense spending on economic output is essentially "one-to-one" and does not yield significant multiplier effects, meaning its overall impact on economic activity is relatively limited.

The cost of war is particularly high

The IMF particularly emphasizes that wartime defense spending is much costlier than in peacetime. Under scenarios of wartime surges, public debt will jump by about 14 percentage points (as a share of GDP), while social spending will be reduced in real terms, exposing citizens to dual pressures.

Currently, the U.S. and Iran have reached a two-week ceasefire agreement, but the ultimate direction of the situation remains highly uncertain.

Georgieva has previously warned about the risks of war with Iran, stating that preparations for mitigating related shocks globally are clearly insufficient. Against this backdrop, the tension between continuously rising defense spending and fiscal sustainability has become a core challenge that global policymakers cannot avoid.

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