NATO defence spending: navigating the noise

By Fenella McGerty. International institute for Strategic Studies, 03 August 2026

NATO’s European members are rapidly increasing their defence spending, but the headline figures obscure important differences in how countries are allocating these increases. Greater transparency of this funding is key to ensuring credibility among allies, industry and the public.

The remarkable increases in European defence spending since 2022 were highlighted at the July 2026 NATO summit in Ankara. While it is evident that countries are bolstering spending on defence, it is important to understand how they are enacting these increases, whether through increasing borrowing, making cuts elsewhere in public spending or recalibrating calculations. Transparency in how countries are funding defence and where money will be spent is key to earning public support for increased spending and in gaining confidence among allies.

Four important trends are evident among Europe’s NATO members: exceptional growth, budgetary revisions, recalibrations, and difficult fiscal and political choices.

Real growth in defence spending has accelerated in recent years, from 3.6% in 2022 to 5.7% in 2023, before surging to 12.9% in 2024 and 12.3% in 2025. Based on current figures for 2026 – notwithstanding more in-year revisions – collective spending will increase by almost 10%, implying that members are still prioritising defence even after a period of elevated growth. There has not been a return to the lower-spending years before Russia’s full-scale invasion of Ukraine in 2022. As a result of recent growth, spending in 2026 is over 90% higher in nominal terms than in 2022.

Granted, much of this growth is due to uplifts in German defence spending. The German defence budget increased by 20.4%, 16.5% and 23.2% in real terms in 2024, 2025 and 2026 respectively, far higher than the average among regional NATO members. German Chancellor Friedrich Merz said that the Bundeswehr will receive all the financial resources it needs ‘to become the strongest conventional army in Europe’. The country has rapidly become the dominant spender in the region, with increases far outpacing those planned in the short term by France and the United Kingdom, where public finances face more constraints.

Budgetary revisions

European defence-spending growth has been supplemented by extensive budgetary revisions in recent years, not least in 2025, as countries revised spending plans either ahead of or following their commitments to the new NATO investment pledge to spend 3.5% of GDP on core defence and 1.5% on defence- and security-related matters by 2035. In February 2025, Denmark announced a DKK50 billion (USD7.3bn) Acceleration Fund for defence, while in Germany, the 2025 budget for the Federal Ministry of Defence was increased by EUR10bn (USD11.3bn) over the course of the year.

Notwithstanding further revisions and uplifts, total spending by members of the Alliance in Europe is currently expected to reach around USD639bn in 2026, with well over a third of that allocated to procurement, and research and development. On average, European NATO members allocated 36.2% of the defence budget towards investment in 2026, compared to 24.8% in 2020, pointing to a stark structural shift in spending. This higher allocation indicates that the ongoing 20% allocation to equipment spending recommended by NATO should be higher but has remained in place to provide budgetary flexibility for members. The current level does not reflect what countries are doing or the spending commitment needed to recapitalise and reach capability targets.

Accounting variations

Member allocations in the region are on track to reach 2.3% this year after finally exceeding 2% of GDP on average last year. According to updated data from NATO released alongside the Ankara summit, Alliance members, excluding the United States, will spend a collective 2.5% of GDP on defence in 2026.

IISS analysis often presents lower defence spending than official NATO figures, owing to NATO’s broader definition and differing national interpretations of eligible expenditure. The overarching trends from IISS analysis are broadly in line with NATO’s but differ on a country-by-country basis, where IISS data aligns with national reporting of the defence budget and removes security spending from calculations. Some countries, such as Latvia, also include spending financed through Security Action for Europe loans in their total-military-expenditure estimates submitted to NATO. While this is military expenditure, the IISS does not include it as it is separate from the allocated national defence budget. Furthermore, not all countries will provide annual allocations or include them in their calculations of defence spending, creating uneven comparisons across countries. Another example is Spain, where the agreed uplift to 2% of GDP includes spending on telecommunications and cyber-security capabilities that would arguably fall under the 1.5% of GDP commitment.

The NATO definition of core defence is comprehensive. It was agreed by all allies in the early 1950s with clarifications on what is included and excluded that cover various nuances related to military aid and the treatment of civilian-military activities. However, some ambiguity remains. For instance, the UK’s plan to reach 2.6% of GDP on defence by 2027, announced in February 2025, included 0.1% of redefined intelligence spending. The NATO definition of defence does not mention intelligence.

Germany’s road map to reach 3.5% of GDP on defence by 2029 includes civil defence and population protection, intelligence services, and protection of information-technology (IT) services that add over EUR7bn (USD8.5bn) to the core defence budget. NATO’s definition of defence is very clear that civil defence is not included. Cyber command can be included, implying that some protection of IT-services funding can be included in the 3.5%, but it is more likely that this funding will now fall under the 1.5%.

The 1.5%

In contrast to the comprehensive definition of defence that runs beyond 500 words, the level of detail regarding what counts towards the 1.5% of GDP for defence-related expenditure is fewer than 20 words.

The 1.5% of GDP for wider defence-and-security spending is intended to protect critical infrastructure, defend digital networks, ensure civil preparedness and resilience, ‘unleash’ innovation, and strengthen the defence-industrial base. The ambiguity of what is included in the 1.5% means many countries already meet this spending pledge – NATO’s own estimates, released in July 2026, find that 17 allies are predicted to meet the target in 2026 and that the non-US members will spend around 1.4% of GDP on these areas in 2026 – making progress towards the overall 5% target appear stronger.

Fiscal pain and budgetary creativity

While the 1.5% target is seemingly straightforward to reach, the path to 3.5% of GDP for core defence spending is more difficult. It will require significant increases by several countries, and not all are well positioned to do so. Countries with fiscal headroom have reformed policies to enable increases for defence, as in Germany and Sweden, but this is only temporary, and the European Union’s national escape clause is only in place until 2029, creating future uncertainty about the sustainability of increased spending.

More fiscally constrained countries are making difficult decisions or being budgetarily creative to bolster funding for defence. In the UK, for instance, the recent Defence Investment Plan committed GBP15bn (USD20.4bn) in additional funding for defence over the next four years. However, a breakdown of this uplift revealed that it was sourced from a mixture of cuts to other departments (energy and transport); Ministry of Defence (MoD) savings, asset sales and spending ‘reprioritisation’; HM Treasury taking responsibility for spending that previously fell under the MoD; and GBP4.7bn (USD6.4bn) ‘to be funded at Budget 2026’.

Greater transparency and long-term plans are crucial, not just for the credibility of member spending and confidence for domestic industry to undertake future investment, but also for the wider public. The already difficult case for higher defence spending will be undermined by any sense of creative accounting to inflate numbers rather than ensuring funding is increased sensibly, with transparent allocations and a coherent capability plan coordinated with allies.

NATO can play a key role in ensuring accountability, consistency and like-for-like comparisons in allies’ submissions to bolster credibility and confidence in their figures. Allies agreed to submit annual plans showing a credible, incremental path to reach investment goals; industry and the public would also benefit from seeing these.

Author

Fenella McGerty: Senior Fellow for Defence Economics