Higher defence spending and its impact on household expectations

Prepared by Adam Baumann, Cristina Checherita-Westphal, Georgi Kocharkov, Steffen Osterloh

Published as part of the ECB Economic Bulletin, Issue 5/2025.

Fiscal policies in the euro area are increasingly shaped by a focus on defence spending in response to heightened geopolitical tensions. The February 2025 Munich Security Conference, the launch of the European Commission’s Preparedness Union Strategy in March and the conclusions of the June 2025 NATO Summit all underscored EU governments’ commitment to increasing defence spending.^[1] This box uses data from the ECB Consumer Expectations Survey (CES) rounds conducted in February and May 2025 to assess euro area household expectations regarding defence spending, in terms of both its economic impact in their respective countries and its implications for their personal financial well-being.

The majority of households expect increases in government deficits and defence spending (Chart A). According to the May 2025 CES results, 66% of respondents believe that the government deficit in their country will increase over the next 12 months, with nearly one-third predicting a significant increase and only 10% expecting a decrease (Chart A, first bar). An even larger share (81%) of respondents believe that defence spending will increase over the next 12 months, with close to half (47%) expecting a significant increase (Chart A, second bar). The difference between the two categories may be partly explained by how households expect higher defence spending to be primarily financed. Specifically, 43% of respondents believe that the primary source of financing would be increased public debt. Meanwhile, 29% expect any increase in defence spending to be financed by reducing other spending, and 28% believe it would be financed through increased taxes (Chart A, third bar). The latter two methods would, in principle, limit a potential increase in the government deficit.

A large proportion of households view the level of public debt in their country as problematic. 68% of respondents tend to agree or fully agree that the level of public debt is a major issue in the country they live in, while only 12% disagree (Chart A, fourth bar). This perspective largely reflects concerns stemming from existing debt burdens. When analysed together, these insights on public debt and the financing of defence spending might offer a clearer understanding of the reasons behind household expectations on the potential effects of increased defence spending.

Chart A

Household expectations about fiscal policy changes and views on public debt

(percentages of respondents)

While the overall impact of different defence spending beliefs on expectations remains limited so far, most households expect inflation to increase somewhat in response to higher defence spending, while their expectations about the impact on growth are more varied (Chart B, panel a). Respondents were asked how a potential increase in defence spending in the country they live in would affect prices, economic growth and the financial well-being of their household. A significant share of households (67%) believe that increased defence expenditure will lead to higher inflation, with about half expecting a limited increase in inflation. Expectations for effects on economic growth are more varied and broadly pessimistic, with only 27% of respondents anticipating an increase in economic activity and 33% expecting activity to remain the same, while 41% expect it to decline (of which most expect only a small decline).

Chart B

Household expectations about the effects of increased defence spending

a) Expected effect of increased defence spending on inflation, economic growth and financial well-being

(percentages of respondents)

b) Expected effect of increased defence spending by expected primary source of financing

(percentages of respondents)

c) Expected effect of increased defence spending by view on public debt

(percentages of respondents)

Households expect their own financial well-being to remain largely the same. Most households also believe their financial well-being would stay the same (44%) or decrease a little (32%). This suggests the majority of households do not expect that the defence spending pledged in recent announcements will eventually make them more confident to spend more.^[2] It is worth mentioning that the results in Chart B, panel a) do not change significantly if the sample is restricted only to respondents who expect defence spending in their country to increase.^[3] That being said, the quantitative impact of different defence spending beliefs on expectations for inflation and growth remains limited so far.

Household expectations about the impact of defence spending on the economy and their financial well-being are closely linked with their beliefs about how such spending will be financed and their country’s level of public debt. Households who believe future defence spending will be financed through higher taxes are more likely to expect an increase in inflation, and to hold pessimistic views about the ensuing impact on economic growth, compared with those who believe it will be financed through new debt or cuts in other spending (Chart B, panel b). The former belief may be driven by the direct and short-term inflationary impact of tax increases, particularly in the case of indirect taxes. This pattern is also more pronounced among households who view public debt as a significant problem in their country (Chart B, panel c), possibly because they interpret higher defence spending as a signal of heightened geopolitical uncertainty and worsening economic conditions. Additionally, some households may perceive the increased defence spending as a misallocation of resources. Finally, the result that a potential build-up of public debt increases household inflation expectations – especially if debt is already high – is consistent with findings from other surveys.^[4]

At country level, government deficit expectations are markedly different and the February and May results differ in many countries, broadly reflecting expectations about defence spending and its financing (Chart C, panels a and b). The cross-country heterogeneity of expected government deficits is very large in general, with the share of households expecting the deficit to increase ranging from 41% in Portugal to 83% in Germany for the May survey round. The expectations of higher deficits have increased overall since February but developed very differently across countries. The standouts in terms of increases are Germany and Belgium (Chart C, panel a). This coincides with the plans of the German Government to substantially increase spending over the coming years, in particular on defence and infrastructure, and mainly funded through debt. Belgium and other countries also announced similar increases in defence spending, which affected consumer expectations (Chart C, panel b).^[5] In contrast, in Greece in particular, but also in Portugal, the percentage of respondents expecting a significant increase in the government deficit dropped between February and May.^[6]

Views on whether the level of government debt is a major problem are also very different at the country level but have remained broadly stable since February (Chart C, panel c). Notably, Netherlands, Ireland and Germany are among the countries with the smallest percentage of respondents that consider government debt a major problem, while Italy, France and Greece^[7] are among those with the largest percentages. At the same time, some changes in perceptions seem to have occurred for households in Germany (more pessimistic), Greece and Portugal (more optimistic).

Chart C

Household expectations and views over time and by country

a) Expected change in government deficit

(percentage of respondents)

b) Expected change in defence spending and expected primary source of defence financing

(percentage of respondents)

c) View on whether level of public debt major problem

(percentage of respondents)

References

Baumann, A., Caprari, L., Dossche, M., Kocharkov, G. and Kouvavas, O. (2025), “Consumer confidence and household consumption decisions”, Economic Bulletin, Issue 5, ECB.

Checherita-Westphal, C., Huber, C., Rodríguez-Vives, M. and Müller, G. (2025), “Fiscal aspects of European defence spending: implications for euro area macroeconomic projections and associated risks”, Economic Bulletin, Issue 5, ECB.

Coibion, O., Gorodnichenko, Y. and Weber, M. (2021), “Fiscal Policy and Households’ Inflation Expectations: Evidence from a Randomized Control Trial,” NBER Working Paper, No 28485, February.

Grigoli, F. and Sandri, D. (2023), “Public Debt and Household Inflation Expectations,” IMF Working Paper, No 23/66, March.