Nordea Chief Economist Helge J. Pedersen discusses how Denmark’s strong public finances and rising employment provide a solid base to absorb sharply higher defense spending mandated by NATO’s new 5% of GDP target. He warns that rearmament will constrain future fiscal space for welfare and tax reforms and increase pressure to boost productivity, including via artificial intelligence.

Higher defense outlays squeeze fiscal space

"Ever since 2014, NATO has had a target that member countries should spend 2% of GDP on defense, but only a few countries lived up to this target."

"After Donald Trump put pressure on European NATO countries, it was decided as part of the Hague Agreement from June 2025 that all NATO countries, including Denmark, must spend 5% of GDP on defense expenditures from 2035."

"Although the fiscal space (or available room for maneuver, as it is now also called) is not being used to its full extent in the 2035 plan, it is a fact that the markedly increasing expenditures mean there will be less available for ordinary welfare improvements or tax reforms in the coming years."

"Compared to the time before the world went off track, we now face annual additional defense expenditures of almost 75 billion kroner."

"So rearmament is costly and places great demands on the prioritization of public expenditures in the future."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)