Deficits and Defense: How Fiscal Imbalances Shape Military Spending in Nato Countries

This paper examines the relationship between fiscal deficits and military expenditure in NATO countries over the period 2000–2021. Using fixed-effects panel models, the results show a positive and statistically significant association between fiscal deficits and defense spending. A semilog specification suggests that increases in fiscal deficits are linked to economically meaningful changes in military expenditure. Tests for non-linearity using quadratic models do not provide evidence of a smooth functional form. However, non-parametric estimates reveal signs of threshold behavior, with the relationship becoming less stable at higher deficit levels. Extending the analysis to the composition of military expenditure, the findings indicate that personnel spending increases at moderate deficit levels but declines under larger fiscal imbalances. Overall, the results suggest that fiscal deficits influence both the level and allocation of defense spending, with important implications for fiscal sustainability and defense policy.