The impact of defense spending on ODA: Outlook and trends

Introduction

In the current geopolitical landscape, the intersection between defense spending and ODA has become increasingly relevant as rising security concerns and geopolitical tensions have led many countries to raise their defense budgets, potentially at the expense of ODA.

This Donor Tracker Commentary explores the current and future impacts of defense spending on ODA in prominent donor markets, highlighting key trends and potential implications.

Rising defense spending targets

The NATO plays a crucial role in shaping defense spending among its member countries. In 2014, following Russia's annexation of Crimea, NATO members committed to allocating 2% of their GDP to defense. Despite initial low adherence, the full-scale invasion of Ukraine in 2022 spurred significant increases in military expenditures. By 2024, 23 out of 32 NATO members had reached the 2% target, including Germany, the Netherlands, Norway, and Sweden. Many members that have fallen short, including Spain, Canada, and Italy, have expressed greater commitment to accelerate progress towards the target.

The US, which has accounted for 65%-70% of NATO 's total annual spending in previous years, has consistently pushed for other countries to increase defense spending. The 2026 US budget proposal contains a record US$1.01 trillion for defense, despite previous suggestions from Trump that he might indeed decrease the defense budget as well as initiatives to cut costs within the Department of Defense.

Even outside of NATO and the 2% target, DAC donors like Australia, South Korea, and Japan have looked to increase defense budgets, sensitive to a decreased sense of US reliability in the face of China’s growing influence in the Asian and Indo-Pacific regions.

The US effect: At home and abroad

The US administration has also suggested increasing the defense spending target to 5% of GDP, with this proposal has been met with skepticism in European NATO members and support from others. NATO leaders are expected to establish a new spending target at the summer 2025 summit in the Hague.

Beyond pushing for higher NATO contributions from its European counterparts, the US has shaped defense spending trends on a wider scale. US President Donald Trump remarked in early 2025 that Europe must “fend for itself,” causing great uncertainty in and around the bloc, and has pushed vigorously for European nations to spend more on defense.

There has been a trend to increase defense spending both to appease the US’ demands for increased contributions to NATO and increase defense spending to ameliorate a traditional dependence on the US for military protection. Spain, which was the NATO member that contributed the least of its GDP in 2024, noted that it would meet the NATO defense goal in 2025 rather than the planned 2029 in a move apparently designed to appease US demands following a meeting with US Treasury Secretary Scott Bessent. In contrast, in February 2025, the UK pledged to increase its defense spending to 2.5% of GDP by April 2027, intending to reach 3% by 2029, amid fears that the US will no longer be a reliable security partner.

Between the two narratives, however, it seems that the latter is predominating. The White Paper for European Defence – Readiness 2030 was published by the European Commission in March 2025, outlining a vision for a unified defense market and substantial enhancement of military investment. The European Parliament's resolution on the white paper stated that “Europe cannot take the US security guarantee for granted and must substantially step up its contribution to preserve NATO.”

In April 2025, it was reported that over half of EU countries plan to invoke an emergency clause for defense investments exceeding budgetary limits. Germany, Europe’s largest economy, voted to significantly increase defense and infrastructure spending in March 2025. The law exempts these expenditures from previously strict debt rules. German Chancellor Friedrich Merz noted that the vote was a major step towards a new European defense community. Canadian Prime Minister Mark Carney emphasized Canada's interest in participating in the rearmament initiatives in Europe and pledged an acceleration towards the 2% goal, with similar commentary about reducing overreliance on their North American neighbor.

Market trends

Among the Donor Tracker’s core OECD DAC donor countries, defense spending is expected to grow by approximately US$57 billion from 2024 to 2025. Notable increases are projected in countries like Germany, the UK, France, Japan, Sweden, Spain, and Canada. Spain, historically reticent to increase defense budgets, is set to increase defense spending by nearly US$12 billion, the most of any market examined in this publication.

Potential impact on ODA

Historically, defense spending and ODA have grown in tandem, as the overlap and competition between defense spending and ODA budgets are limited, with the occasional exception of humanitarian assistance, as they are typically financed from distinct budgets. Some countries, including Spain, have indicated that the increase in defense budgets will not be excised from existing budget schemes. However, since 2022, this trend has generally diverged, with defense spending rising significantly while ODA disbursements have fallen. The UK, for example, recently announced a cut to development budgets, bringing ODA/GNI from 0.5% to 0.3% to boost defense spending.

The overlap and competition between defense spending and ODA budgets are limited, with the occasional exception of humanitarian assistance, as they are typically financed from distinct budgets. However, in times of fiscal constraint, such as the current economic challenges faced by European countries, difficult trade-offs may arise. Governments may choose to cut less visible spending areas like ODA to avoid reducing social programs and minimize public backlash.

This trend may partly be offset by the fact that conflicts usually drive up both defense spending and ODA due to reconstruction and humanitarian needs. Conflicts often drive up both defense spending and ODA due to the immediate in-donor refugee costs, reconstruction funding, and humanitarian assistance. For example, the increased support to Ukraine in 2022/2023 led to higher ODA levels, even as military spending rose. Similarly, the influx of refugees during the Afghanistan and Syrian crises around 2015 drove up ODA costs for hosting refugees in Europe.

However, while these expenditures contribute to immediate needs, they do not align with ODA 's core purpose of poverty eradication and promoting economic welfare, which is exemplified by the fact that some markets choose not to report IDRCs as ODA. Rising IDRCs reported as ODA in not all markets are considered a concerning trend, as they inflate overall ODA numbers. There is a real risk that funding may be diverted away from long-term development objectives towards short-term humanitarian and refugee assistance, addressing short-term problems over creating sustainable solutions.

Funding Channels and Eligibility

The eligibility and funding channels for defense spending and ODA show some overlap, particularly in areas like humanitarian assistance. However, these overlaps are typically marginal and do not significantly mitigate the risk of trade-offs. For example, parts of Germany's defense spending in 2024 came from budgets designated for crisis prevention and peace promotion: 1.1% and 0.95% of all defense spending came from the BMZ’s and Foreign Office’s budget, respectively, for crisis prevention and peace promotion. In 2023, the Ministry of Defense provided 0.04% of Germany’s bilateral ODA with participation in international peacekeeping operations and disaster relief. However, these overlaps are typically marginal and do not significantly mitigate the risk of trade-offs.

Conclusion

The future implications of increased defense spending targets on ODA are complex and potentially concerning. In a constrained fiscal environment, ODA will likely face pressure from rising defense budgets and might experience further cuts. While immediate security concerns often take precedence, it is crucial to maintain a balance between defense, development, and diplomacy to ensure long-term stability and address the root causes of conflict.

It is essential for development advocates to monitor these trends and advocate for balanced increases in both defense spending and ODA to fulfill their respective objectives and contribute to global peace and development.