Netherlands unlikely to benefit economically from NATO spending pledge

The Dutch economy is likely to benefit little, and possibly not at all, from higher defense spending, according to calculations by the Netherlands Bureau for Economic Policy Analysis (CPB). The advisory body points out that this is largely due to a tight labor market and the fact that much of the new defense equipment will likely be imported.

During the NATO summit in The Hague, member countries agreed to raise defense spending in the coming years to strengthen security and resilience. While economists anticipate that such spending could stimulate the economy in some countries, the CPB concludes that this is unlikely in the Netherlands, based on scientific research and an analysis of the Dutch context.

A key factor is how much the government can invest in domestic companies, which is likely limited in the Netherlands. While buying additional defense equipment would increase maintenance work locally, the tight labor market means that this extra work soon crowds out other economic activities.

“The overall impact on economic growth is expected to be small,” the CPB experts conclude. “In fact, depending on how the extra spending is financed, the total effect could even be negative,” they note.

Economists at the Ministry of Economic Affairs had previously cautioned in the journal ESB that increased defense spending does not necessarily boost the economy. If the government finances the extra spending by cutting other budgets or raising taxes, it could even have a negative effect on the economy in the short term.

CPB experts point out that defense spending is different from other public investments, like infrastructure projects. Generally, it contributes less to productivity growth, including defense-focused research, which is often aimed at specific military uses and less broadly applicable. “There are exceptions, for example, GPS originated from US defense research, but Dutch research operates on a smaller scale, making such breakthroughs far less likely.”