Research Article |
Corresponding author: Oleg V. Buklemishev ( buklemishev@econ.msu.ru ) © 2024 Non-profit partnership “Voprosy Ekonomiki”.
This is an open access article distributed under the terms of the Creative Commons Attribution License (CC BY-NC-ND 4.0), which permits to copy and distribute the article for non-commercial purposes, provided that the article is not altered or modified and the original author and source are credited.
Citation:
Buklemishev OV (2024) Russian economic development under forceful defense spending growth. Russian Journal of Economics 10(4): 319-331. https://doi.org/10.32609/j.ruje.10.141382
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The article examines historical aspects, general economic logic, and theoretical discussions on the policy of stimulating the economy through increased government appropriations for defense items. It provides a brief overview of empirical studies on economic effects of defense spending in Russia and other countries. The secondary nature and low manageability of economic effects of defense policy are emphasized. The size of the fiscal impulse due to defense items of government expenditure, its positive and negative effects are analyzed in the Russian economy for the period 2022–2024. In addition to the unlikely gains through security and supply channels, the limited availability of free production capacity and labor force are stressed among the factors hindering the positive demand effects of increased defense spending. This gives rise to inflationary consequences, as well as the contradiction between tightening monetary conditions and continuing fiscal stimulation. A conclusion is made about the prevalence and possible aggravation of negative outcomes of sustaining and expanding military outlays.
fiscal stimulus, military Keynesianism, defense spending, budget multipliers, inflation
Since 2014, Russia has increased its spending on defense and this effect only accelerated with the start of a large-scale military operation in 2022. However, despite the unprecedented escalation of sanctions against the country by the coalition of advanced countries and almost unanimous gloomy macroeconomic forecasts,
This term is usually understood as massive fiscal stimulation of the economy through the implementation of defense and related expenditures by the state. Economic discussions on this topic in the middle of 20th century unfolded against the backdrop of unprecedented government spending caused by the preparation and direct participation of the leading powers in World War II, as well as the subsequent arms race during the confrontation between the two world systems, known as a Cold War.
However, at the end of the century this trend was not only stopped, but reversed: according to the World Bank,
Of course, both boost and contraction in military expenditures cannot be equally expansive for economic growth. A closer look at the factors of economic impacts of defense outlays is needed to analyze the trends of current Russian economic development.
Economists were treating military assignments in different ways when discussing the impact of government expenditures on economic growth. For example,
Experts from the Gaidar Institute for Economic Policy considered expenditures on defense and related purposes as a military burden on the economy (Mau et al., 2017). According to other authors following the IMF (1995) original spirit, in the context of the Russian economy defense expenditures cannot be unambiguously classified as “unproductive,” since they make a significant contribution to improving the quality of human capital, increasing total factor productivity, production and export of high-tech products (Shirov et al., 2018). Indeed, there is evidence that reducing defense spending and redistributing it in favor of “productive” items (for example, human capital development) do not automatically lead to accelerated economic growth in the short and medium term (
Given the theoretical uncertainty of the overall effect of military Keynesianism, its numerous empirical studies (see, for example,
Specifically, studies have noted a persistent divergence in the effects in developed and developing countries, which is associated with both the institutional characteristics of planning and implementing defense spending and the quality of transfer of scientific and technical results obtained in the defense sector to civil industries (
With World War II already raging on the European continent, John Maynard Keynes wrote: “It seems politically impossible for a capitalistic democracy to organise expenditure on the scale necessary to make the grand experiments which would prove my case — except in war conditions” (
In fact, the war itself is not needed as the expensive arms race which often starts in advance also produces the same economic consequences. Moreover, thanks to the feedback between the belligerent powers, a kind of automatic international coordination of fiscal stimulus arises (see the classic model by
However, according to a recent study (Federle et al., 2024), wars have rarely been waged for economic purposes over the last 150 years: as a rule, they were fought for different (mostly security-linked) reasons. Since planning military and related expenditures requires primary consideration of non-economic strategic issues and takes a significant amount of time, a consistent implementation of the corresponding spending policy motivated by domestic macroeconomic purposes is hardly possible. One should not also forget about the lobbying of the interests of the military-industrial complex, aimed at increasing government military expenditures, regardless of the degree of their rationality (see
In other words, one should first and foremost think of military Keynesianism as a set of secondary and largely unintended effects of the development and implementation of defense and strategic policy. It is difficult to expect achievement of any rational macroeconomic goals due to defense spending in this regard. Nevertheless, it is often alleged that such spending played a significant role in the recovery of economies from the Great Depression in the 1930s and several other cases. However, this conclusion is not supported by facts.
For instance, in the United States, defense spending in 1939 still amounted to 1.4% of GDP (with total federal expenditures of about 11% of GDP). The military budget exceeded 2% of GDP only in 1940, and 10% in 1941 (with the maximum level 45% of GDP in 1944). Government military outlays rather supplanted private consumption and capital investment, the main driver of the previous recovery, which were able to return to normal levels only after the war. As a result, labor productivity growth in the United States in the 1940s was minimal for the period 1900–1970 (
The rapid economic recovery in Germany, partly reflecting the magnitude and depth of the recession, began in 1932, well before Hitler’s ascent to power and start of active militarization. But even after that, the fiscal impulse remained relatively small until 1937. Then private consumption, as in the United States, was being displaced by government spending on rearmament. And when military expenditures fell from 70% of GDP to almost zero after the war, civil output jumped by 30% in 1947 compared to 1943 (
Of course, it might be said that regarding the size of military effort, the current Russian case is more comparable to lesser conflicts such as Korean or Vietnam wars by the U.S. The size of the U.S. military expenditure was equivalent to 14.1% of GDP in the last year of the former (1953), broadly similar to WWI, as the latter culminated at 9.5% in 1968. Nevertheless, in both cases the U.S. economy was affected by tax and debt increases, price and wage controls limiting private sector consumption and investment which went below the pre-war trends. Inflationary consequences of the Vietnam War complicated fighting stagflation brought on by the 1973 oil crisis (Labonte and Levit, 2004).
Undoubtedly, the additional fiscal impulse associated with defense spending has played and continues to play a significant role in maintaining the current dynamics and structural transformation of the Russian economy. However, given the mixed macroeconomic results of 2022–2024, the extent of such an impact, the direction of the influence of these changes, and their sustainability are not entirely clear. In fact, Russia has been spending much more on defense than other leading powers in terms of GDP share since 2014 (Fig.
There are different approaches to assessing the fiscal impulse, usually considering the cyclical component. In this case, it is difficult to be isolated, since the pandemic, war and sanctions shock impacts of the 2020s on the Russian economy. The subsequent fundamental structural shifts in it (
The Ministry of Finance of the Russian Federation (Minfin RF) assessed the total size of the fiscal impulse for 2022–2023 at 10% of GDP (Minfin RF, 2023). The Ministry interprets fiscal impulse as a total volume of net injections of funds that are at the direct disposal of the state, including not only government expenditures themselves, but also quasi-budgetary operations, in particular, the provision of budget and interstate loans, investments of the National Welfare Fund (NWF) in financial assets of Russian organizations (Minfin RF, 2023). A significant part of fiscal easing in 2023 was allegedly caused by a revision of the parameters of “basic oil and gas revenues,” that is, a relative reduction in budgetary transfer to the NWF savings and increase in expenditures compared to the originally planned figures. The Ministry considers three channels of the fiscal impulse’s impact on the economy — income, credit and expectations, and this impact is generally ambivalent: along with an increase in domestic demand and business activity, strengthening of inflation and devaluation expectations also takes place (Minfin RF, 2023).
Of course, not all additional government expenditures concerned relate to the defense sector (in addition to the NWF financial investments, the document also mentions social, infrastructure and other outlays). Despite the relative importance of quasi-budgetary operations, they are mainly aimed at solving problems other than defense, and — due to the special mechanism for their implementation — should be analyzed separately. The available data on Russia’s defense spending are presented in Table
In total, during the entire period under review, additional military expenditures in 2024 prices amounted to about 5 trillion rubles (or approximately 2.8% of 2024 GDP). This actually corresponds to a real doubling of defense spending over three years. It should be noted that the growth rate of defense items in real terms in 2022–2024 is much higher than for total budgetary disbursements. As a result, there has been a notable shift in the structure of government spending, with the share of defense spending in consolidated budget increasing sharply, while the shares of most other major spending categories, including social policy, declined.
Indicator | 2021 | 2022 | 2023 | 2024 (plan, estimate) |
Minfin RF | ||||
Plan a), trillion rubles | 3.1 | 4.8 | 5.0 | 10.8 |
Actual, trillion rubles | 3.6 | 4.7 b) | 6.5 b) | – |
SIPRI | ||||
In trillion rubles | 4.9 | 7.2 | 9.3 | 12.8 |
In constant 2022 dollars | 65.9 | 102.4 | 109.5 | – |
Real growth, % c) | –5.8 | +27.0 | +24.0 | +29.0 |
Share of GDP, % | 3.61 | 4.69 | 5.86 | 7.1 |
Share of consolidated budget expenditure, % | 10.31 | 12.94 | 16.14 | 18.6 |
For reference: | ||||
Total volume of federal budget expenditures, trillion rubles | 24.76 | 31.12 | 32.35 | 36.66 |
Increase in federal budget expenditure in real terms, % c) | –9.0 | +8.5 | –1.3 | +7.0 a) |
Now let us consider economic effects of increased government defense spending. In principle, there are three groups of factors that could have a positive impact on economic activity:
However, there are forces pulling in the opposite direction and slowing economic growth (perhaps not earlier than in the medium term). These factors can include additional fiscal burden (under tax financing of extra expenditures), the crowding-out effect on private investment due to increased public borrowing and interest rates (under debt financing), and unfavorable changes in the balance of payments due to persistent fiscal deficits (
If the beneficial supply side effects due to military spending (infrastructure, technology, etc.) exist, they are unlikely to be realized in the short term. In any case, there are much more direct and cheaper alternative ways to achieve the same outcomes without the involvement of the military-industrial complex and military organization, which obviously do not consider economic efficiency as their main goal. Moreover, there is some evidence of a reduction in the productivity of military research and development in Russia in the context of limited resources and the concentration of the system on solving current urgent problems (including “regressive import substitution”;
Security threats in Russia have only increased in recent years. For instance, this can be evidenced by the dynamics of the Security Threat Index, calculated since 2007 (Fig.
Therefore, currently we could associate a potential positive role of defense spending only with the demand effects. Let us look at the situation in this sphere.
Several authors (
But even if we assume that all the defense expenditure multipliers are that high, it is hardly possible to talk about a significant volume of aggregate fiscal stimulus for 2022–2024. And our assumption also seems quite strong. Firstly, state defense orders represent only a part of military expenditures; although the fiscal role of other components is more difficult to assess, it should apparently be lower. Secondly, a noticeable increase in defense spending should be accompanied by a decrease in multipliers. Thirdly, there exists anecdotal evidence of a reduction in the export of Russian weapons and military equipment, including high-tech,
Then, a traditional Keynesian assumption of the availability of underutilized resources needs to be examined. According to the enterprises’ polls, in recent years, capacity utilization in the Russian economy has increased, wavering around 80%. We also note the relatively high capacity utilization in industrial production — about 78% (Fig.
According to the data, the situation with the available labor force is even worse (Fig.
Limitations associated with the unavailability of free capital and labor, in fact, mean that fiscal stimulus will lead to price imbalances (relative rise in the cost of scarce resources) and a general increase in prices. Growth in production and incomes under such conditions is inevitably associated with increased inflationary pressure.
The growth of inflation causes a predictable reaction from the Bank of Russia gradually raising its key rate (to 21% in October 2024, the highest sustained level so far both in nominal and real terms). However, prices and inflationary expectations practically don’t decelerate, despite the sharp tightening of monetary conditions in recent months (Bank of Russia, 2024a). This, among other things, means that the examined fiscal stimulus is increasingly neutralized due to the high level of interest rates, and the corresponding multipliers are getting lower.
Another important outcome of fiscal stimulation is related to changes in inflation expectations: their increase naturally leads to a redistribution of future consumption in favor of current one, which surges demand from households in the current period, while simultaneously undermining it in the longer term. The frontal growth of prices is aggravated by consumer fever in the high-cost goods sector, which is caused, among other things, by increasing disruptions in supplies and payments for imports due to sanctions.
Security Threats Index for Russia, 2016–2024.
Note: Index values range between 0 and 10 points, where 10 points correspond to the highest threats. Source: Fund for Peace.
From an economic point of view, the functioning of the military organization and the military-industrial complex generally represents costs for the economy and general welfare. It is no coincidence that the first attempts to calculate national income in the United States used a fundamental approach according to which only elements of household income were to be included in the calculation (see, for example,
This transfer also inevitably entails certain macroeconomic consequences. Even if we agree with the presence of positive short-term economic effects of defense spending, their scaling with the significant growth of military outlays is not at all guaranteed. The results observed in a static state of equilibrium cannot be automatically transferred to nonlinear dynamic processes with large-scale structural shifts — meanwhile, it is precisely such processes that can describe changes in the Russian economy in 2022–2024. Rapid growth of the economy and population incomes due to additional government expenditures in the context of current resource, capacity and technological limitations, as well as sanctions pressure, inevitably turns into a feverish race in prices, interest rates and wages.
The possibility of financing increased defense spending using fiscal savings from previous years — the National Welfare Fund — has been almost exhausted. Fiscal expansion can be maintained at the current level and even expanded either by increasing the tax burden on the economy or by activating domestic borrowing (the external market is currently closed). The first option is already being implemented — the personal income tax progression and the profit tax rate are increased since 2025. However, this may not be enough, and then further steps in the same direction will be required. The second option, under high real interest rates, is fraught with an increased effect of crowding out private borrowing and further degradation of a significant and important competitive segment of the domestic economy, which is unable to finance its current activities and investment projects without attracting loans at market rates.
This competitive part of the Russian economy matters and will matter even more. Last, but not least, post-war reduction of defense spending will be an uphill struggle not only in political terms. Redistribution of resources back to civil industries could take time and become recessionary (Congressional Budget Office, 1992). The painful experience of the Soviet Union bloated military industry’s abrupt collapse teaches a key lesson here (