Guns and Butter: The Fiscal Consequences of Rearmament and War

We study the fiscal consequences of large military buildups. To do so, we assemble the Global Budget Database, a comprehensive dataset of disaggregated central government finances for 20 countries from 1870 to 2022. We identify 114 episodes of military spending booms, in peace and war, and analyze their financing and long-term fiscal legacy. Consistent with theory, war-time booms are financed primarily through debt, while peacetime booms rely on a more bal-anced mix of debt and taxes. In contrast to the classic notion of “guns versus butter”, we find little evidence that social spending is cut during military expansions. Instead, when societies rearm, they tend to choose guns and butter, resulting in higher debt, expenditures, and taxes. Debt rises and later falls, but tax rates and tax revenues remain elevated for 15 years or more. Large geopolitical shocks, in war and peace, result in higher taxes and a lasting fiscal expan-sion.

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