The West has been free riding on US defence spending
Western nations have been free riders on American defence spending for decades. We shouldn’t be surprised Trump is now calling us to account, writes Paul Ormerod
Keir Starmer has announced an increase in defence spending to 2.5 per cent of GDP ahead of his crucial summit with Donald Trump on Thursday. But even this hasty announcement falls short of what the President has called for Nato countries to ramp their spending up to five per cent of GDP.
Even the United States itself does not meet this target, with defence accounting for some 3.3 per cent of the total economy. But its economy is so vast that the level of American spending dwarfs that of any other country.
Which countries spend the most on defence?
According to the International Institute of Strategic Studies, in 2025 the US defence budget will be almost a trillion dollars. China is the next biggest spender with an estimated $235bn, not much more than a quarter of the American budget.
The current NATO guideline is for member states to spend two per cent of GDP on defence. Apart from America itself, very few countries comfortably exceed this guideline.
The most notable is Poland, where defence absorbs over four per cent of GDP and the three Baltic states, which average over three per cent.
This is an entirely rational response to historical experience. Poland, for example, was invaded by both Germany and the Soviet Union in 1939 and partitioned between them. The Germans took over completely in 1941, and the notional liberation of the country in 1944 simply placed it under effective Soviet control for the next 40-odd years.
Defence spending across NATO as a whole has risen sharply in the past couple of years. NATO itself estimates that the alliance members in Europe, plus Canada, increased spending in real terms by none per cent in 2023 and 17 per cent in 2024.
All this said, there is no doubt that for many decades Western nations have effectively been, to varying degrees, free riders on American military spending. Trump is now calling them to account. It seems to have come as a complete shock to many European governments, which in itself is surprising.
It was inevitable that at some point, some President would tell American allies to take more responsibility for their own defence. The rise of China requires the US to focus more and more on the Pacific. By implication, America has less to spend, within any given budget, on the defence of Europe.
What is Starmer doing?
Labour did commit to increasing spending in its manifesto but until now had not set out a timeline – and even at the weekend Bridget Phillipson, the education secretary, had described the notion of meeting the target by 2030 as “ambitious”. So it was quite a change in tone when the Prime Minister told the House of Commons we would be spending £13.4bn more in just two years’ time. Starmer said this would be paid for by cutting the foreign development budget from 0.5 to 0.3 per cent of gross national income. But the IFS was quick to point out that only saves £6bn a year.
So where is the £7.4bn going to come from? If the government announced it was increasing borrowing to finance additional welfare benefits, we can be almost certain that the markets would react adversely.
It is of course ultimately a matter of judgement. But in the current circumstances, a similar amount dedicated to more defence spending might very well be received with greater equanimity.
A substantial increase in defence expenditure should be seen not as a cost, but as an insurance that Europeans can in fact honour the debts which their governments have run up.
In the old days of the Cold War, and well before the Euro was thought of, a commentator said: “the Deutschmark is a strong currency, but if the Russian tanks roll, it’s Kleenex”. A very wise remark, which governments across Europe would do well to heed.
Paul Ormerod is an honorary professor at the Alliance Business School at the University of Manchester and an economist at Volterra Partners LLP