Who Will Pay the Cost of Freedom in Europe?

‘We are making difficult choices that require something from all of us. We are asking citizens and businesses for a freedom contribution to cover part of the costs of our national security,’ Henri Bontenbal, leader of the Christian Democratic Appeal (CDA), declared at a press conference presenting the new Dutch coalition agreement earlier this year.

This was a surprisingly straightforward statement on how the recently inaugurated Dutch government intends to tackle the challenge of financing defence spending. However, the Dutch government will face several challenges, including securing strong public support for what is essentially the introduction of a new tax. As a NATO Ally, the Netherlands has committed to bringing its core defence spending up to 3.5% of its GDP by 2035 – up from an estimated 2.49% in 2025 – a budgetary dilemma that governments across Europe are seeking to solve.

Despite a heightened threat perception among European citizens, communicating the reforms needed to raise defence spending will not be an easy task. Some of the policy options generally lack public support, such as tax hikes or welfare cutbacks. While these measures can prove to be necessary in certain cases, governments should mainly focus on growth measures to raise public revenues for defence investment. European competition in a common defence market would be a key engine for such change, one that can be communicated as a positive, long-term growth-oriented step.

How to Finance Defence Spending

Most NATO Allies are behind the Netherlands in reaching their defence investment target, yet few governments have presented reforms to cover the costs. To finance their investments in defence, countries have three conventional options: increase the deficit (public debt), increase their revenue (raising taxes and/or raising productivity), or redistribute the budget (welfare cuts).

Increases in public debt are the most feasible in the short term as they generally enjoy higher support from citizens, allowing governments to spend more without causing immediate redistributive pain. The European Commission’s SAFE programme fits into this pattern, as well as the German Bundestag’s decision to lift the constitutional brake on public spending. However, as Belgian budget minister Vincent Van Peteghem noted, ‘every euro that’s a deficit today . . . is a euro that will be debt, and that debt will be one day a tax or a cut and in the social welfare state’. While public borrowing offers a short-term solution, it should not become the permanent basis of defence funding.

On taxes, the Netherlands launched an ambitious plan with the ‘freedom contribution’, which is yet to be implemented. The Estonian government announced the introduction of a temporary ‘defence tax’ in September 2024, which was presented in the media as raising money from across all sectors of society to fund defence investments. The Estonian defence tax was to be made up of a VAT hike of two percentage points, a two percentage points rise in income tax, and a 2% tax on corporate profit. However, by May 2025, the government abandoned the ‘defence tax’ framing, maintaining the VAT and income tax hikes, while scrapping the tax on corporate profit. This led to controversy, with opposition politicians pointing out that cancelling the corporate profit tax goes against the original idea of the whole of society shouldering the burden of defence costs.

Cutting welfare expenditures to boost defence spending is generally unpopular, as research shows, with defence expenditure being a less preferred budget item compared to other public spending items. In the announcement of the ‘freedom contribution’ of the new Dutch government, the coalition partners underlined that no welfare cuts are to be made. However, they also noted that the government will work on ‘reforms in healthcare and social security so that they remain available to everyone who needs them in the future’. In Germany, Chancellor Friedrich Merz highlighted in September 2025 that his government will have to push for ‘brave reforms and change structures’. However, while two-thirds of Germans agree that the welfare state is too costly to be sustained, no single proposed reform enjoys majority support according to a poll from February 2026.

How to Frame Defence Spending

Europeans’ heightened threat perception does not automatically translate into support for higher defence spending. While over two-thirds of EU citizens feel that their country is under threat, 56% think their country is already investing (more than) enough in defence and only 34% think it needs to invest more, according to the February 2026 Eurobarometer. Rather than framing potential welfare cuts and defence spending hikes as a reaction to a crisis, policymakers should emphasise practical considerations and long-term policy planning, according to research at the Bundeswehr University Munich and Sciences Po.

Policy communication is key to bridging this gap and securing public support for policies aimed at funding defence. In line with the idea of communicating rising defence spending not only as a reaction to Russia’s aggression against Ukraine, but as a long-term policy, the Dutch coalition partners explained that ‘we choose freedom, security, justice, and a good life for everyone . . . we do this by investing. With a greater focus on the long term’. In a similarly long-term oriented vision, German Chancellor Friedrich Merz has framed foreign and security policy as inextricable from interior policy, highlighting that ‘external action serves the preservation of freedom, peace and prosperity within the country’.

Another possible framing is the focus on defence investment’s impact on economic growth. However, there is no consensus supporting that defence spending leads to stronger GDP growth in all cases. Rather, its impact depends on country-specific attributes, including the share of imports in defence. As part of the Spring 2025 Economic Forecast, the European Commission published a study estimating that defence spending reaching 1.5% of GDP by 2028 would allow ‘real GDP to rise by 0.5% above the baseline by 2028’. The European Central Bank came to similar conclusions regarding economic growth, their model-based assessment of government spending shocks suggesting ‘a positive effect on real GDP growth’ and a modest effect on inflation, ‘with significant uncertainty surrounding estimates’.

However, country-specific analyses show different results. The Netherlands Bureau for Economic Policy Analysis noted in 2025 that ‘higher defence expenditures are expected to have little effect on the Netherlands’ economic growth . . . The increase in GDP per additional euro spent by the government – is likely to be close to zero’. Therefore, the Dutch government would have difficulties in attempting to link defence spending and GDP growth.

Focus on Competitiveness

Rather than focusing on how defence spending can boost the economy, it could be more useful to look at how boosting the economy can help bolster defence, research argues. Focusing on making the European economy more competitive, through initiatives such as the European Commission’s Competitiveness compass, could help raise public revenues and create more fiscal space for defence investment. European competition in a common defence market could also drive down the price of military equipment, which has already happened in standardised markets such as artillery shell ammunition. In the meantime, other defence markets such as infantry fighting vehicles are still dominated by national champions, keeping prices higher, research by Bruegel shows.

Europe needs leaders who do not shy away from addressing the difficult question of financing defence expenditures through more sustainable means than public debt. Framing the shouldering of defence costs as a whole-of-society effort, involving both citizens and businesses, is necessary for securing public support for such policies.

Furthermore, politicians should not see current threat perception levels as an indicator of support for future defence spending. Focusing on long-term reforms related to overall competitiveness and economic growth, as well as the creation of a competitive European defence market would help approach rising defence expenses through a more positive lens. However, more difficult measures such as tax increases might still be necessary in certain contexts.

The ultimate cost of freedom is paid by those Ukrainians who lose their lives defending their country against Russia’s war of aggression. For deterrence to work and to ensure peace within the EU, leaders will have to boost defence funding – an effort that needs lasting public support to succeed.

© RUSI, 2026.

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