Why military aid to Ukraine has a positive effect on Western economies?

In the short term, the increase in military spending due to the war in Ukraine has a stimulating effect on the GDP of the Western allies’ countries.

It was reported by Ukrainian media, quoting the National Bank of Ukraine’s Inflation Report (July 2023). Various factors have been mentioned in the report.

According to the report, one US dollar spent by donor governments on military needs generates $0.79-0.87 of GDP in these countries within one to two years, and the overall positive effect does not disappear even after five years.

There are several additional positive effects for nations providing military aid to Ukraine, such as the possibility of sharing military experience, more efficient allocation of defence resources, a boost for arms exporters, and increased productivity due to additional investment in research and development.

According to estimates by the Kiel Institute for the World Economy, in 2022 alone, total commitments to military assistance to Ukraine amounted to more than $66 billion. In 2022, 32 countries provided military support, although its amount, both in absolute terms and relative to GDP and defence budgets of partners, was not uniform.

The largest donor in nominal terms of military support was the United States – more than $40 billion; in relative terms, Estonia and Latvia (0.75-0.90% of GDP, 35-40% of military spending), as well as Lithuania and Poland (0.35-0.45% of GDP, 15-20% of military spending).

At the same time, the total amount of military aid to Ukraine in 2022 was approximately 5% of the entire military expenditures of Western allies, according to the Stockholm International Peace Research Institute. For none of the partners, the amount of military aid relative to GDP exceeds 1%.

According to the NBU report, when governments spend money, a significant portion stays within the country, creating the basis for a fiscal multiplier. Its concept is that each monetary unit spent generates not only a direct contribution to value creation but also triggers a chain reaction of further processes through its impact on consumption, investment, and other economic activity, creating additional growth.

The fiscal multiplier from military spending generates additional GDP and compensates for the cost of aid. According to the study’s preliminary results, the fiscal multipliers for the countries that provided military assistance to Ukraine in 2022 are statistically and economically significant.

A $1 increase in military spending in donor countries is associated with a $0.65 increase in real GDP in those countries during the same year, $0.87 in a year, and $0.79 in two years. Cumulative multipliers decrease over a longer period but remain positive and significant.

Military support to Ukraine also helps Western allies optimise resource allocation in the defence sector. Evaluating the advantages and disadvantages of provided weapons in real combat conditions allows countries-producers to allocate funds to produce more effective equipment with the greatest impact.

At the same time, examples of successful use of weapons provide an impetus for defence exporters, which is already reflected in the growth of share prices of arms manufacturers.

According to the Pentagon, since the start of Russia’s full-scale invasion of Ukraine, Washington has provided Kyiv with $43 billion in military aid.