National Defense – how to achieve NATO goals without sacrificing the Welfare State?

In this article I show how we can reconcile the increase in defense spending and the welfare state.

The NATO summit (acronym for the North Atlantic Treaty Organization), held in The Hague on June 24 and 25, approved a bold defense spending target for its members, foreseeing that each allied country dedicate 5% of GDP to defense by 2035.

This new goal is divided into two components:

(i) 3.5% of GDP (70%) for “core defence” (forces, equipment and operations), the traditional component, which thus represents a significant increase compared to the previous target of 2% set in 2014, and

(ii) 1.5% of GDP (30%) in a new component of investments related to defense, security and resilience, covering critical infrastructures and networks (including telecommunications, cybersecurity and energy, in particular), civil readiness and resilience (such as civil protection and health, for example), and strengthening the industrial and technological base (which could include, for example, investment in the exploration of rare earths, according to experts in the field, or even innovation in materials).

This means that this second component works as a kind of 'box' that holds a lot of things and, therefore, it will not be very difficult for states to reach the target with some 'creativity', with the advantage of these being important investments and several of them having been neglected in the recent past - just think of the pandemic crisis, with the lack of materials to produce vaccines in Europe, or the current tariff war, in which rare earths are used by China as an important negotiating weapon.

In the case of Portugal, investments in the health sector, in the exploration and refining of lithium (rare earth), or even the new airport (within the scope of critical infrastructures) – if it actually goes ahead – could fit into this 'box' and allow the target of 1.5% of GDP to be reached with relative ease.

Therefore, I focus my analysis on Portugal's ability to achieve the new target of 3.5% in the traditional component – ​​forces, equipment and operations – without harming the welfare state.

Before that, I would like to point out that the new NATO Agreement requires each country to submit a credible and time-bound plan outlining the investments and capabilities envisaged and the trajectory towards the agreed targets, providing the necessary flexibility to accommodate them within the budgetary specificities of each member. A mid-term strategic review is planned for 2029 to assess progress and adjust targets and trajectories if necessary, taking into account the geopolitical context at the time.

The Portuguese government has committed to achieving the target of 2% of GDP in the traditional component by 2025 – which it previously expected to achieve only at the end of the decade –, compared to a budgeted value slightly above the 1.5% recorded in 2024. This will be possible with relative ease, through expenditure reclassifications and some anticipation of the implementation of the Military Programming Law, taking advantage of the current budgetary slack.

The problem will be if the European and Portuguese economies grow less than expected, in which case the slack may not be enough and public investment will have to be sacrificed to save the budget target, as in the past , with the caveat that special care will have to be taken not to jeopardize the co-financing required for projects with European funds, especially those from the RRP, to be implemented until 2026. The external situation has improved with the easing of the conflict between Israel and Iran; however, uncertainty remains regarding the stability of this truce and the evolution of the tariff war, factors on which the impact on economic growth in Europe and Portugal will largely depend.

As for the near future (2025 and 2026), all we know is that the government does not plan to reprogram PRR funds for new defense projects. I consider this to be a prudent decision, as there is no longer any room for any slippage and it is better to continue with what is planned.

The main issue, therefore, is long-term: how to increase the traditional spending on defence from 2% to 3.5% of GDP by 2035 without compromising the funding of essential areas such as health, education and pensions. As this is a decade-long process, the trajectory can be gradual, allowing time to develop the national defence industry. This will be able to meet the needs of the Portuguese State and its other allies, especially European ones, generating exports, economic activity and tax revenue that will, in the long term, compensate for the additional public effort.

This is the vision that I present here in a structured way.

1. Strategically (re)evaluate investment in defence and security capabilities, including the Military Programming Law, in order to respond to Portugal’s specific needs – such as the protection of our vast maritime space – and to defence commitments within the scope of NATO and the European Union (EU), preparing the country to respond to the various challenges. The evaluation of the traditional component must be linked to the new component of related investments, in a logic of acquiring strategic capabilities that, at the same time, value the national industry. This implies prioritising the dual civil and military use of equipment, alignment with European defence programmes (such as Readiness 2030, the 150 million euro European fund, and, in general, the European Defence Industrial Strategy), enabling access to technology and integration into value chains, as well as the negotiation of counterparts in external acquisition contracts. The definition of defence capabilities must, therefore, incorporate from the outset the perspective of creating economic value, promoting budgetary sustainability and the preservation of the welfare state.

2. Development of the national defence industry, focusing on dual civil/military use, advanced technology and export capacity, contributing to raising the profile of specialisation of the Portuguese economy, with greater intensity in knowledge and technology. By investing in products with industrial and military applications – such as sensors, drones, satellites, surveillance systems and cybersecurity – we boost GDP, foster qualified employment and strengthen national skills. I would like to remind you that Portugal already has some installed capacity, both in the private sector (e.g. drones) and in the public sector, through idD - Portugal Defence, which manages holdings in companies in the defence sectors: navy (Arsenal do Alfeite); information technology (EMPORDEF); ship repair (Navalrocha); aeronautics (OGMA); electronics (EID); software (EDISOFT) and explosives (Extra – Explosivos da Trafaria).

3. In terms of financing, actively promote (via AICEP) the attraction of foreign investment in the defence sector, complementing general investment attraction measures, with emphasis on the reduction of corporate income tax and personal income tax. Industry should also be given easier access to European defence funds that may be foreseen, and the viability of public-private partnerships in this area should be assessed as a complementary mechanism to meet NATO targets without involving too much public funding and, at the same time, stimulate the private sector and economic activity.

4. Invest in the training and qualification of human resources in areas that are critical for the defense sector, coordinating investment with the higher education and technical-professional education system, and promoting synergies with research centers and universities.

5. Evaluate the creation of a defense technology and industrial hub with a strong innovation component, promoting synergies between companies, R&D centers, universities and the Armed Forces, thus accelerating the specialization and export capacity of the sector.

After the previous analysis, I conclude that increasing defense spending does not have to be incompatible with the sustainability of the welfare state.

If this reinforcement is accompanied by an industrial strategy geared towards dual civil-military use – with a focus on R&D, qualification and creation of economic value –, enhanced by counterparts in external acquisitions, attracting external investment and public-private partnerships, in particular, the effort could generate returns in activity, employment and revenue, becoming part of the solution.

There are, in fact, good examples within NATO itself: several Nordic countries, known for maintaining strong social states, already reached defense expenditure values ​​above 2% of GDP in the traditional component in 2024, namely Finland, Denmark, Norway and Sweden, all above the median for that year.