News in Charts: Will the US meet NATO’s new spending target?

The US may have pushed for more military spending by NATO members, but they themselves might struggle to raise defence spending to 5% of GDP given their already large budget deficit. The challenge is reflected in the chart below, which shows each NATO member’s budget balance and the required increase in military spending to hit the 5% target. The US had a budget deficit of 7.3% of GDP in 2024, the second highest among NATO members. It would need to raise military spending by a further 1.6% to hit the 5% target — resulting in a combined shortfall of 8.8% of GDP. This is second only to Romania among NATO members, which has a budget deficit of 8.6% and will need to increase military spending by a further 2.7% to reach the target.

Refresh this chart in your browser | Edit the chart in Datastream

The decision to raise defence spending comes at a time of increased pressure on public finances in many NATO countries, with debt levels and borrowing costs much higher than they were just a few years ago. Indeed, the chart below shows the rise in government debt levels in NATO’s largest economies in recent years. Along with the US and Romania, Slovakia, France and the UK are the three other NATO members that may struggle the most to raise military spending, given their current military spending and budget positions.

Refresh this chart in your browser | Edit the chart in Datastream

Want more charts and analysis? Access a pre-built library of charts built by Fathom Consulting via Datastream Chartbook in LSEG Workspace.

Refresh this chart in your browser | Edit the chart in Datastream

At the other end of the spectrum sits Norway and Denmark, which have much healthier fiscal positions than most: they are two of only four NATO members that had a budget surplus in 2024, and the only two that also spent more than 2% of their GDP on military (Portugal and Luxembourg, spent 1.5% and 1.0% respectively). Norway and Denmark also have more scope to borrow than other NATO members, with government debt to GDP ratios of 42.7% and 28.0% respectively, compared to the NATO average of 67.3%. It is no surprise then that their borrowing costs are lower than average too.

Will the US increase its military spending to 5% of GDP? Does it need to? The target includes 3.5% on ‘core defence’ like weapons and troops, with the remainder spent on security-related domestic infrastructure. The US spent 3.4% of its GDP on its military in 2024, meaning that it could probably get to the 5% target when security-related infrastructure is included. As a share of its GDP its current military spending is second only to Poland among NATO members, and it has consistently spent more than others on this measure. In nominal terms, given the size of the US economy, its spending dwarfs that of the next highest NATO member, Germany, and accounts for approximately two-thirds of the alliances’ total spending on military. However the US adjusts its own military spending, the push by the US President to get NATO members to spend more seems to have made European defence stocks great again.

Refresh this chart in your browser | Edit the chart in Datastream

Refresh this chart in your browser | Edit the chart in Datastream

The views expressed in this article are the views of the author, not necessarily those of LSEG.

______________________________________________________________________________________