War delivers a bigger hit to the economy than natural disasters or governments defaulting on debt, new research has revealed, alongside warnings that any substantial increase in defence spending will require cuts to health and education services.
As a two-week ceasefire between the United States and Iran appears to give the world economy some respite from recent turmoil that has embroiled fossil fuel markets, two reports from the International Monetary Fund released overnight point to ongoing economic tensions that will also reverberate through the Australian budget.
Australian taxpayers are already paying for the Iran war, from the surge in the price of petrol and fertilisers, to the cost of a reduction in fuel excise and the deployment of an E-7A Wedgetail aircraft to help the United Arab Emirates.
The IMF research, which looked at both the long-term cost of war and the move by many countries, including Australia, to lift their overall defence spending, is based on the economic fallout from hundreds of wars and expenditure booms across the globe since World War II.
It found a major war, which is one in which there are at least 1000 battle-related deaths, leads to a cumulative loss in GDP over five years of 7 per cent. The economic scar from war, the researchers found, can last well over a decade.
By contrast, the economic hit from a natural disaster is less than 6 per cent, while a sovereign debt crisis – such as a situation where a nation defaults on its official debt – costs a nation about 4.25 per cent of GDP.
While wars leave a long-term cost, the IMF also explored the move by nations to increase their defence spending, which has been led by US President Donald Trump.
In Australia, the government is planning to increase defence spending to 2.4 per cent of GDP, while the Coalition has promised to increase it to 3 per cent.
Between 2020 and 2024, the researchers noted, more than half of all nations had increased their defence budgets. Two in five nations were now spending at least 2 per cent of their GDP on defence, compared to 27 per cent in 2018.
Arms sales by the world’s largest arms manufacturers had doubled in real terms over the past two decades.
But the IMF said a defence spending boom would be likely to put pressure on the economy, through a lift in inflation that could force a central bank to increase official interest rates, and on a government’s budget.
Past increases in defence spending had, within three years, increased government debt by 7 percentage points and led to a deterioration in budget deficits by 2.6 per cent of GDP. In Australia’s case, that would translate into an extra $70 billion in debt and a similar sized increase in the deficit.
IMF researchers Hippolyte Balima, Andresa Lagerborg and Evgenia Weaver said the run-up in government spending on defence could “crowd out” the private sector and force a competition for skilled workers that would harm non-defence industries.
They said while there may be some productivity gains from an increase in defence spending, as firms lifted research and development, governments would have to cut spending to accommodate extra expenditure on the sector.
This often became a “guns versus butter trade-off”, the three said in a joint statement.
“The build-up of fiscal vulnerabilities can be mitigated by durable financing arrangements, especially when the increase in defence spending is permanent.
“However, raising revenues come at the cost of reducing consumption and dampening the demand boost, while re-ordering budget priorities tends to come at the expense of government spending on social protection, health and education.”
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Shane Wright is a senior economics correspondent for The Age and The Sydney Morning Herald.Connect via X or email.