In a letter addressed to the NATO Secretary General, Mark Rutte, the president of the Government, Pedro Sánchez, advanced his position against the increase in the 5% defense expenditure of GDP (Gross Domestic Product) that the organization wants to agree on the annual summit of the member countries, which is held in The Hague next week. A day later, Trump has reacted accusing Spain of not paying “enough” and has released a warning: “NATO will have to take care of it.”
According to Pedro Sánchez in his letter, the objective of reaching 5% in 2032, from 2% committed to this year, is “counterproductive” and incompatible with the maintenance of the welfare state. Different projections, as recently made by the Bank of SpainThey point out that for each euro of increased defense expenditure, our country's GDP would only increase 50 cents, at risk of an advance of inflation due to the need to import weapons and other materials, and with impact on the budget deficit – the imbalance between income and expenses of the State, which is financed with debt. A scenario in which the only clear winner will be the defense industry, and specifically that of the United States.
“It will require fiscal correction (of public accounts) stricter in the future (cuts or tax increases, in a more flat language) and will reduce the margin for other economic and social priorities,” warned at the end of March the Airef (independent authority of fiscal responsibility), In the report containing your opinion on the sustainability of long -term public administrations. According to the figures collected in this document, the highest public spending in our country is and will be that of pensions, which is currently approaching 13% of GDP, while health remains at 6.6%, education in 4.2%, unemployment at 1.5%, long -term care (dependency spending) in 0.8% and the payment of the interest invoice of the public debt in 2.4% of the GDP.
The aging of the population in Spain and in almost the entire European Union (EU) supports that the forecast exercises indicate that public spending items, health and dependence will grow in the coming years, while those related to education and unemployment will fall, with a weight of the debt that will remain at current levels or even gain importance, even if governments manage to control budgetary imbalances. A context that would barely leave room for a great increase in an expense item such as defense without damaging the priorities of the welfare state.
Even the International Monetary Fund (IMF) has warned this week that “the Member States (of the EU) and the European Commission should evaluate the impact of the increase in the defense departure on the sustainability of the debt.” As the Airef recalls, “to mitigate this impact in the short term, the Commission proposes to activate the national exhaust clause that introduced the new EU fiscal framework, allowing to accommodate this increase in spending without compromising compliance with the first tax and structural plan of medium.”
However, “in accumulated terms, the total adjustment (tax cuts or increases) in the 2025-2040 period would go from 3.16 points of the GDP (less than 50,000 million) on the initial stage, to 3.68, 4.24 and 4.76 points of the GDP (up to 80,000 million euros) in a theoretical year in which an increase in the defense expenditure of 0.5, 1 and 1.5 points is supposed to of GDP, respectively, ”concludes the tax authority.
The multiplier of defense spending
Without “fiscal margin” to increase the expense in defense, the multiplier of this game becomes key. That is, how much economic activity (GDP) is capable of generating each euro of increase. More GDP also means more investment, more employment and, ultimately, more tax collection (more public income). The multiplier that has calculated the Bank of Spain “in the medium term” is 0.5 times. For each euro of increase, 50 cents of GDP.
For example, for this 2025, the institution's team of economists has projected that the increase in defense spending will add a tenth to GDP growth, which is estimated exceeding 2% in this exercise, but that the deficit will raise two tenths, which will be left below 3% of GDP. This impact on the budget imbalance would be repeated in 2026 and 2027, according to the Bank of Spain. It should be noted that the government's commitments are uncertain for their parliamentary weakness, which prevents it from passing the General State Budget (PGE).
Inflation rebound
In addition, regulator experts explain that “the nature of defense spending implies a temporary lag between the realization of contracts and their registration in national accounting.” As they continue, “defense spending is mainly concentrated in the manufacturing industries of machinery and transport.” Finally, they consider that “an increase in defense contracts would entail an increase in industrial price level, especially in team goods.”
“Forcing the acquisition (imports from other countries, mainly the United States) of material, ammunition and weapons systems, will have an inflationary effect with marked price rise that, even with more expense, will prevent an increase in capacities as it really intends,” regrets knowledgeable sources in the sector. “The hiring and management capacity of new capacities is also at the limit, and increasing it requires time. The defense industry is not dimensioned to produce the capacities that may be required quickly,” they continue.
These same sources add that “the increase in defense expenditure excessively promptly is not possible for different reasons.” One is that “the current recruitment capacity limits the possibility of providing adequate personnel to new capacities that are acquired rapidly.” Another is “the difficulty of training of the new staff, which will require the increase in the capacity of training centers that require a certain period of time.”
“The impact on the activity in the medium term may be higher if the expense is concentrated in R&D, sectors with greater drag capacity and on goods and services produced domestically,” concludes the Bank of Spain.
NATO's proposal to reach 5% defense expenditure in 2032 is divided into two blocks. The first, 3.5% in specific defense games, for which it proposes to maintain the current definition of defense expenses, annually increasing 0.2% (approximately 3,000 million) the expenditure from the 2% that must be achieved this year. The second, an additional 1.5% in expenses related to the defense, pending to define, in which investments in infrastructure, capacities to counteract hybrid threats, preparation of civil resilience and promotion of the defense industry could be considered.
The position of Spain, highlighted in Pedro Sánchez's letter on Thursday, is to influence this second block, and get the spending goal to be “flexible”. According to the president of the Government, “the formula I propose would allow us to preserve the 5% objective in the statement for those allies who need it or who want to pursue it.” Executive sources emphasize that, “in addition, the percentage of defense expenditure with respect to GDP is necessary to measure and consider the commitments of forces in operations and missions, and investment in new capabilities.”
The reasons of the United States
The demand for a higher defense expense that the United States has raised to its allies through NATO is one of the fronts of the global commercial war on the administration of Donald Trump. The American power approach, conceived by the president of the Council of Economic Advisors (CEA) of the White House, Steve Look, is that the United States provides “global public goods” to the rest of the world, such as security or as assets shelters such as the dollar and the bonds of its public debt, and that the country must be precisely rewarded for it.
In other words, Donald Trump's main economic advisor defends that the United States “has created the greatest era of peace ever known for humanity” and emphasizes that “the global commercial and financial system that has supported the greatest era of prosperity ever known by humanity has made possible.” With this roundness, and if the statements about “peace” and “prosperity” are not questioned, anyone could understand that the first world power deserves such efforts to be charged. “Both are expensive to provide,” adds Steve Miran, who, before being put in front of the CEA by the new president of the United States, was dedicated to managing investment funds. That is, to speculate in financial markets.
“In defense, our men and women in uniform assume heroic risks to make our nation and the world a safer place, preserving our freedom generation after generation. And we tax with exorbitant taxes to the working Americans to finance global security,” he says. On this argumentary and the requirement of “a distribution of charges”, the imposition of tariffs to the rest of the world and the petition for more expense in defense is based. In short, to acquire military equipment from the United States, and strengthen its industry, in a climate of military climbing and geopolitical tensions in Ukraine, the Middle East or the Suez channel.
