‘Guns vs. butter’: IMF flags tough trade-offs as governments ramp up defense spending

A new era of higher defense spending has prompted the International Monetary Fund to warn of an emerging "guns versus butter" trade-off, with governments expected to face tough choices on debt and public spending.

The so-called "guns versus butter" dilemma refers to the trade-off governments face when allocating resources between defense spending and social programs.

In its latest World Economic Outlook, the IMF said approximately half of the world's countries have raised their military budgets, noting that arms sales by the biggest global defense firms have doubled in real terms over the last two decades.

These trends appear set to persist as geopolitical tensions intensify, the IMF said, raising serious questions about whether higher defense spending could crowd out other outlays such as social spending.

Citing analysis of 164 countries' experience since the end of World War II, the IMF warned that history shows defense spending booms typically weaken fiscal and external balances, and tend to be followed by sharp increases in public debt and large reductions in social spending.

French Finance Minister Roland ‌Lescure acknowledged that the defense versus social spending trade-off poses a backlash risk to the government ahead of the country's 2027 presidential election.

He stressed, however, that higher defense spending can create a "double dividend" by shoring up sovereignty and creating more domestic jobs.

"We have to rethink war. Obviously, drones and new forms of combat have erupted — and we need to address them," ‌Lescure told CNBC's Karen Tso on Wednesday on the sidelines of the IMF and World Bank Group Spring Meetings in Washington this week.

"I don't think we're missing any social spending in France; I think we have the highest level of spending. And this is good. This is our model," ‌Lescure said.

"If defense spending is also an industrial strategy that creates jobs, including in areas where people have felt disenfranchised from globalization, they felt left aside from the big movement towards digital innovation, where we're going to have a double dividend of defense spending, which is more sovereignty, but also more jobs," he continued.

"If we don't do that … we're going to have a backlash. We don't want that."

Ajay Banga, president of the World Bank, said defense spending has clearly become a priority for many countries, while funding for overseas development has shrunk across the developed world.

"On the other hand, even in that period last year, we raised a record amount for IDA21, which is the part of the bank that goes to the poorest countries," Banga told CNBC on Wednesday.

The International Development Association's (IDA) 21st funding round secured an additional $24 billion in late 2024, which resulted in $100 billion in financing after leveraging. These funds are used to support 78 of the world's lowest-income countries to enable investment in sectors such as health and education, as well as climate resilience.

"So, you know, I still have faith in the system. You have to make a case to the countries that are donating as to why this is in their own self-interest," Banga said.

"Why does investing in creating jobs for young people in the developing world, why is it in the interest of a taxpayer in the developed world? And mostly it's because you get better middle classes, better growth there, in which case your companies, your intellectual property, your products, your jobs, will benefit," he continued.

"But also, you get a more stable economic system, and you get there for better opportunities for young people with lower illegal migration. Both things are important, the plus and the minus."

The European Union has recently recognized security and defense as a top priority, partly driven by Russia's ongoing invasion of Ukraine.

Defense spending across the 27-nation bloc is expected to reach 381 billion euros ($448.8 billion) in 2025, reflecting an 11% increase from the prior year and a nearly 63% jump compared to 2020.

The U.S.-Israeli war with Iran, meanwhile, is set to complicate both the bloc's rearmament efforts and support for Ukraine, while also further denting confidence in Washington as a reliable guarantor for Europe's defense, according to the European Union Institute for Security Studies.

Polish Finance Minister Andrzej Domański told CNBC that the government is "really closely" monitoring the prospect of social unrest manifesting at the ballot box, particularly as the IMF warns of a "guns versus butter" trade-off.

Domański conceded that Poland's target of spending 5% of the country's gross domestic product on defense "is a lot."

"But, also [the] geopolitical situation is serious, yes? [Russian President Vladimir] Putin is threatening us, threatening NATO, threatening some of our neighbors. Well, we need to be serious about security, and this is a top priority of our government," Domański said.