If Spain were to reach an agreement with NATO, as Prime Minister Pedro Sánchez announced on Sunday, to allocate just 2.1% of GDP to defense spending, this would entail additional public spending of around €9.4 billion between 2026 and 2028. However, if the country ultimately commits to allocating 3.5% of GDP, as NATO Secretary General Mark Rutte later amended, the additional public spending would be €55.8 billion over the next three years. If this commitment ultimately amounts to 5%, as US President Donald Trump is demanding, the increase in spending will be around €107 billion.
This is the calculation made by the Treasury Technicians Union (Gestha), which published this Wednesday a technical analysis of the budgetary impact that would be involved in achieving the objectives of defense capabilities in different scenarios, based on the 2% of defense spending that will be allocated in this year.
"The first scenario, with defense spending at 2.1%, will have an additional cost of almost €9.4 billion between 2026 and 2028, above the 2% in 2025. Scenario 2, which achieves 3.5% over these three years, will reach an additional cost of almost €55.8 billion. Scenario 3, which achieves 5% over the three-year period, will reach an additional cost of more than €107.2 billion," they write.
According to his calculations, this additional expenditure that would be necessary"responds by itself" to the extent to which Spain can commit to achieving the stipulated requirements.
As the president of the Independent Authority for Fiscal Responsibility (AIReF), Cristina Herrero, warned this Tuesday, military spending does fit into the budget, but it must be assumed that it will mean more public deficit and debt. Although the Government stated that some items would be transferred to others so that the impact would be zero, Herrero recalled that"in budgetary terms (this zero impact) may be possible, but not in terms of deficit and debt." "10 billion in defense spending is 10 billion in deficit and debt, no matter how much restructuring is done (...) either revenue increases or other spending decreases. There is no doubt about that," she concluded. Measures expected at the summit
Treasury officials have outlined some of the measures they expect to be approved following the summit being held in The Hague. For example, they believe the EU will agree on a zero VAT rate for the purchase of defense materials and equipment between 2026 and 2028.
"This measure could be agreed upon on Thursday or Friday by the European Council, which is meeting, among other matters, to analyze the results of yesterday's and today's NATO Summit (...) For industries, the decision to approve a zero rate is more favorable than an exemption, because companies can then continue to deduct the full amount of VAT they incur on their purchase and expense invoices," they point out.
They recall that there have already been precedents for this measure in Spain, such as when the zero VAT rate was approved for purchases of medical supplies to combat the pandemic between April 2020 and June 2022; donations of food, certain medical supplies, books, water supplies, and solar panels to NGOs from April 10, 2022; purchases of bread, flour, milk, cheese, eggs, fruits, vegetables, legumes, tubers, and cereals from the beginning of 2023 to September 2024, or olive oil from July to September 2024.
Along with this possible tax cut, Geshta believes that the SAFE (Security Action For Europe) Fund Regulation will likely be approved to distribute the €150 billion in loans over a maximum term of 45 years so that EU countries can invest in military production projects in Europe or make joint purchases with at least one other EU country or with Ukraine, both for purchases of equipment and infrastructure from European suppliers and for operational personnel expenses.
"Member countries will be able to request a portion of these funds from the Commission six months after the Regulation comes into force, with an investment plan for the European defense industry, to which European public procurement rules will apply," they point out.
EU countries will also have an escape clause from the stability rules from 2025 to 2028, allowing them to exceed their annual public spending by a maximum of 1.5% of GDP, relative to the approved fiscal path, in order to facilitate an increase in defense spending, taking 2021 as the reference year for measuring the increase in this spending. The Council will make a decision in July on the activation of the escape clauses requested by member countries.
"At Gestha, we believe that in order to achieve these objectives in such a short period of time, it is more realistic for Spain to use the very long-term European loan line, as well as the credits from the European Investment Bank (EIB), which would be compatible with leaving the increase in defense spending and the cost of borrowing outside the fiscal path of the 2023-2026 Stability Program of the Spanish Government approved by the European Commission," they conclude.
Spain starts from an unfavorable position, since in 2024 it was the country of the 30 that make up NATO that allocated the least part of its budget to defense: only 1.28% of GDP, less than half of the average of 2.71% of the Atlantic organization, and despite the fact that since 2021 it is the country that has increased its budgetary effort the most annually.
