The security policy situation has changed significantly since Russia's invasion of Ukraine in 2022 and NATO countries are now preparing for a significant rearmament, which means that defence spending must be raised to around 3.5 per cent of GDP in the coming years.
“This is a political decision that most people can probably see the necessity of in the current situation,” said Governor Christian Kettel Thomsen. “But in a situation where there is high employment and low unemployment in Denmark, it is important to understand how the rearmament affects the economy.”
Danmarks Nationalbank points out that the macroeconomic effect depends on both the pace and, not least, the composition of expenditure. “If we buy military equipment abroad, it will not create pressure on the labour market at home. But if many of the expenses are incurred in Denmark and many more people have to be hired in the defence, it can increase capacity pressure and inflation," Christian Kettel Thomsen emphasised.
With the budget proposal for 2026, the government has set the stage for a significant easing of fiscal policy next year. “The easing of fiscal policy takes place at a time where we assess that all resources are largely already employed,” said Christian Kettel Thomsen, and continued: “Therefore, it is our recommendation that if the capacity pressure in Denmark increases significantly, it should be matched by fiscal policy measures that reduce it.”
(The presentation is in English and an analysis on defence spending can be found here).
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