Rearmament Expands Budgets, Leading to Higher Taxation

In a world increasingly focused on geopolitical tensions and defense spending, the age-old "guns and butter" debate--the perceived trade-off between military expenditure and social programs--is more relevant than ever. This conversation with Christoph Trebesch, however, reveals a surprising historical reality that challenges conventional wisdom. Contrary to the popular notion that rearmament necessitates deep cuts in social spending, Trebesch's extensive research, spanning 150 years and 20 countries, demonstrates that governments overwhelmingly choose to expand both military and welfare budgets simultaneously. The hidden consequence? Not immediate austerity, but a delayed, significant increase in broad-based taxation. This analysis is crucial for policymakers, economists, and citizens alike, offering a clearer, albeit more costly, picture of the long-term fiscal implications of defense build-ups, and providing a distinct advantage to those who understand these delayed payoffs.

The Myth of the Zero-Sum Budget: How Rearmament Expands the State

The prevailing narrative surrounding increased defense spending is one of painful trade-offs: for every dollar spent on "guns," a dollar must be taken from "butter"--social programs, infrastructure, or public services. This intuitive, zero-sum view of government budgets has long shaped political discourse. However, Christoph Trebesch's four-year deep dive into 150 years of primary government budget documents dismantles this assumption. His research, drawing on the meticulously constructed Global Budget Database, reveals a consistent historical pattern: governments rarely, if ever, cut social spending when they rearm. Instead, they embark on a dual expansion, boosting both military and welfare budgets.

This is not merely a statistical curiosity; it represents a fundamental misunderstanding of how governments finance prolonged periods of increased defense outlays. The immediate consequence of this dual expansion is not visible cuts, but a deferred, yet substantial, increase in the overall tax burden. Trebesch's work highlights that the "bill arrives later," primarily through higher taxes.

"This is a classic view that there is a trade-off between spending on the military and spending on other civilian purposes, in particular social purposes, so health, pensions, education, etc. So this is the idea that military spending crowds out social spending. That's what the core of this guns versus butter metaphor typically means."

The implication here is profound: the perceived "choice" between guns and butter is often a false dichotomy when it comes to sustained rearmament. Governments, facing geopolitical pressures or engaging in strategic build-ups, find ways to fund both. This doesn't mean the cost isn't borne by citizens; it simply means the cost is shifted forward and broadened. For policymakers, this means that the political calculus of rearmament is not about choosing which existing program to sacrifice, but about preparing the electorate for a future of higher, broader taxation.

The Unexpected Persistence of Social Spending

The most striking finding from Trebesch's research is the resilience of social spending during periods of military build-up. While one might expect a direct competition for scarce resources, the data shows that social programs, while perhaps not growing as rapidly as they might otherwise, generally keep pace with inflation. This suggests that the political will or public pressure to maintain welfare programs is strong enough to resist direct cuts, even in the face of significant defense demands.

This persistence has a critical downstream effect: it necessitates higher overall government revenue. If both military and social budgets are expanding, the fiscal gap must be filled elsewhere. The research points overwhelmingly to taxation as the primary mechanism. This is where the delayed payoff--and potential competitive advantage--emerges. Countries that anticipate this fiscal reality and begin adjusting their tax structures proactively, rather than reactively, are better positioned.

The Taxation Cascade: Broad-Based Increases, Not Targeted Cuts

The historical record, as uncovered by Trebesch and his co-author Johannes Marzian, indicates that the increased tax revenue required to fund dual expansions of military and social spending predominantly comes from broad-based taxes. Top income tax rates, for instance, have historically risen by 10 to 15 percentage points in the decade following a military boom. Value-added taxes (VAT) and other broad-based income taxes also see significant increases.

This is a crucial distinction. Instead of targeted cuts or specific levies, governments tend to rely on taxes that affect a wide swath of the population and economy. This broad impact means that the fiscal consequences of rearmament are widely distributed, making the eventual tax increases a shared burden. For those who understand this dynamic, the advantage lies in anticipating these shifts and structuring personal or corporate finances accordingly. The conventional wisdom suggests governments will find a way to cut, but history shows they find a way to tax.

"The long-run legacy of these choices of going up with military spending and social spending is indeed higher taxation. You see an expansion of total expenditures and you see an expansion of the fiscal state and the taxation state. So you see increases in the top income rate of 10 to 15 percentage points, quite massive, in the decade following a military boom."

This pattern also highlights a potential failure of conventional political thinking. Politicians often frame rearmament as a choice that necessitates austerity in other areas. However, the historical data suggests this framing is misleading. The real fiscal challenge is not about cutting existing programs, but about managing the inevitable increase in tax revenue required to sustain both defense and welfare. Those who grasp this will be better prepared for the fiscal landscape that emerges years after a rearmament push begins.

The Swiss Anomaly: Unveiling the True Cost of War

The research's methodology, particularly its reliance on primary archival sources rather than secondary datasets, is critical to uncovering these hidden consequences. The case of Switzerland during the World Wars serves as a stark illustration. Standard datasets, like the Correlates of War (COW) dataset, suggest Switzerland maintained relatively low military spending (around 2% of GDP) due to its neutrality. However, Trebesch's deep dive into primary budget documents revealed actual military spending surged to 10% of GDP--a five-fold increase--when off-budget items were included.

This discrepancy underscores a fundamental challenge in analyzing military spending: official figures can be misleading, particularly during times of conflict or rapid build-up. Off-budget expenditures, emergency funding, and the sheer chaos of wartime economies can obscure the true fiscal impact. By digging into primary sources, Trebesch and Marzian were able to capture the "realized expenditures," providing a more accurate picture of the fiscal burden. This meticulous approach to data collection is itself an example of the effort required to understand complex systems. The "advantage" here is for researchers and analysts who adopt such rigorous methods, and for policymakers who trust their findings over more superficial data.

Peacetime Rearmament: A Different Fiscal Equation

While wartime spending is often financed by debt, the research also sheds light on peacetime military build-ups, a scenario highly relevant to current European policy. Trebesch notes that these peacetime booms are financed by a more balanced mix of taxes and debt and tend to be more permanent. This is because the drivers of peacetime rearmament--geopolitical threats, strategic shifts--are often longer-term than the immediate pressures of war.

The implication for policymakers is that a sustained increase in defense spending, even in the absence of active conflict, will likely lead to a more enduring expansion of the fiscal state and a lasting increase in taxation. This is where the "competitive advantage from difficulty" comes into play. Implementing the necessary tax reforms or fiscal adjustments during peacetime rearmament requires foresight and political will. Teams that can map these long-term consequences and advocate for proactive fiscal management, even when it involves immediate discomfort (like raising taxes or restructuring budgets), are building a more sustainable future.

Key Action Items

• Immediate Action (Next Quarter): Review current government budget proposals and public statements regarding defense spending increases. Identify any explicit mentions of tax increases or fiscal adjustments designed to fund these build-ups.
• Immediate Action (Next Quarter): Analyze the composition of proposed defense spending. Is it for immediate operational needs (more akin to wartime financing) or long-term modernization and expansion (peacetime build-up)? This distinction impacts the likely financing method.
• Short-Term Investment (Next 6 Months): Research historical tax reforms enacted in countries that have previously undergone significant military build-ups. Focus on the types of taxes increased (income, VAT, corporate) and their duration.
• Medium-Term Investment (Next 12-18 Months): Develop financial models that project the impact of potential broad-based tax increases (e.g., 10-15% on top income tax rates) on personal and corporate finances.
• Long-Term Strategy (1-3 Years): Advocate for fiscal transparency and long-term fiscal planning in public discourse. Emphasize the historical tendency for rearmament to lead to sustained higher taxation, not just temporary debt.
• Strategic Advantage (Ongoing): Understand that "cutting butter" is historically rare during rearmament. Focus instead on the inevitability of higher taxes and prepare for that fiscal reality.
• Personal/Organizational Resilience: Consider diversifying income streams or investment portfolios to mitigate risks associated with potential broad-based tax increases.