Guns and Butter: The Fiscal Consequences of Rearmament and War

What are the fiscal consequences of large military buildups? To address this question, we assemble the Global Budget Database, a comprehensive dataset of disaggregated 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, wartime booms are financed primarily through debt, while smaller peacetime booms rely on a more balanced 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 substantially higher debt and taxes long after the military boom ends. Tax rates and tax revenues remain elevated for 15 years or more, as tax increases during the buildup are not rolled back. Large geopolitical shocks expand the fiscal state and result in a persistently higher tax burden.

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