NATO’s new 5% defence commitment could become one of Europe’s most important fiscal and economic-policy questions over the next decade. For Hungary, the sums involved could run into several billion euros a year, but the economic impact will depend heavily on how much of that additional spending is retained in the domestic economy. Halftermayer & Partners’ latest defence-industrial and macroeconomic study is authored by Dr. Ferenc Antal, a defence industry and critical infrastructure expert. The analysis finds that the same headline level of defence expenditure can produce very different growth outcomes depending on whether it is spent on imported equipment or on production, services and technology that create domestic value added.

Author: Dr Ferenc Antal

At the 2025 Hague Summit, NATO Allies agreed a new Defence Investment Pledge. By 2035, Allies aim to devote at least 3.5% of GDP to core defence requirements and up to a further 1.5% to broader defence- and security-related expenditure (NATO, 2025; NATO, 2026).

This represents a significant step up from the previous 2% benchmark and moves the debate well beyond defence policy alone. Higher military and security spending can affect budget deficits, public debt, industrial output, imports, investment and employment at the same time. The economic-policy question is therefore not only whether European countries can meet the commitment, but also how the money is spent and what economic structure develops around it.

Not every euro of defence spending has the same GDP effect

One of the central findings of the study is that policymakers need to distinguish between the location of procurement and the domestic value added actually created. A company operating in Hungary may still rely heavily on imported inputs, while a foreign-owned plant producing in Hungary can generate substantial local value added through wages, taxes, engineering work and supplier contracts.

From an economic perspective, the relevant question is therefore not simply the nationality of the contractor, but how much of total public expenditure ultimately becomes domestic production and income. If a major military platform is imported as a finished product, its direct domestic GDP contribution is limited because higher public demand is accompanied by higher imports. Domestic manufacturing, maintenance, infrastructure, engineering services, R&D and supplier activity, by contrast, generate activity inside the economy.

European value capture is not the same as Hungarian domestic value added. EU defence-industrial policy increasingly seeks to retain a larger share of defence expenditure within the European Defence Technological and Industrial Base (EDTIB). This can strengthen Europe’s collective industrial capacity, but procurement from another EU Member State may still generate only limited direct value added in Hungary (European Commission, 2024, 2025; Council of the European Union, 2025).

There is no single ‘defence multiplier’

International research does not support the simple proposition that every increase in defence spending raises GDP by the same amount. Studies by the IMF, OECD, Bank of Finland and others produce a wide range of estimates. The outcome depends on what governments buy, the foreign value-added content of procurement, how expenditure is financed and whether sufficient productive capacity is available (Bank of Finland, 2025; Furceri et al., 2026; OECD, 2026).

Investment- and technology-intensive spending can generate stronger economic feedback than consumption-like expenditure. However, if domestic industry cannot absorb rapidly rising demand, part of the additional spending may show up in higher prices, longer delivery times or further imports rather than higher real output. This is particularly relevant for Europe as countries simultaneously seek to increase defence demand and expand manufacturing capacity.

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For Hungary, the scale could be EUR 6–7 billion a year

Hungary has already reached defence expenditure of around 2% of GDP. Antal’s study asks what the order of magnitude would be if, purely as an illustrative exercise, the full move to 5% were treated as three additional percentage points of GDP in new expenditure.

On Hungary’s 2025 GDP base, that would correspond to roughly EUR 6.5 billion per year; on the study’s 2026 modelling base, about EUR 6.8 billion. This should not be interpreted as the expected net fiscal cost of the NATO pledge. Up to 1.5% of GDP may include broader resilience, infrastructure, cyber and security spending, some of which could already exist elsewhere in the public budget.

Even so, the order of magnitude illustrates the policy challenge. A permanent multi-billion-euro annual increase can materially affect fiscal and debt dynamics, particularly in an economy with limited fiscal space. According to the Hungarian Central Statistical Office, public debt stood at 74.6% of GDP at the end of 2025 (KSH, 2026).

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The scenarios show how wide the economic gap can become

The study therefore uses two illustrative cases within a five-year gradual spending path. The low case assumes 10% domestic value added and represents import-dependent procurement. The higher case assumes 40% and represents substantial industrial deepening and greater domestic value capture. The 40% figure is not an estimate of Hungary’s current defence-industrial structure, but an illustrative deep-localisation case.

The associated impact multipliers are 0.30 and 0.95. These pairings are modelling choices informed by the international literature rather than an empirically estimated causal relationship between domestic value added and the multiplier. Under the five-year ramp-up, the first-year GDP effect is approximately 0.18 percentage points in the low case and 0.57 percentage points in the higher-DVA case; cumulative additional output over 2026–2030 is approximately EUR 6.8 billion and EUR 20.9 billion, respectively. These are mechanical scenario outputs, not forecasts.

Higher domestic value added must be built, not assumed

A sustained domestic value-added share around 40% across a broader procurement portfolio would require deeper qualified Tier 1–3 SME supplier networks, greater local engineering and systems-integration capability, stronger defence-related R&D and intellectual-property creation, expanded MRO and lifecycle capacity, higher-value processing and component manufacturing, and integration into export markets. These capabilities should not be assumed to arise automatically from higher procurement volumes or local-content clauses; they would have to be built progressively alongside the spending ramp-up.

This does not mean that every military system or component should be produced in Hungary. The relevant question is where genuinely competitive domestic capability can be developed and sustained. Artificially maintaining uneconomic local production can be as costly as forgoing strategically valuable capabilities altogether. International evidence also suggests that defence industries tend to pay above-average wages and operate with relatively high R&D intensity, creating the possibility of longer-term technology spillovers (AIA, 2026; ISED Canada/CADSI, 2026).

The composition of spending matters as much as its size

Europe’s debate over the next few years is likely to focus less exclusively on what percentage of GDP each country spends on defence. A more consequential distinction will be which countries can translate larger defence budgets into competitive industrial capacity, technology, supplier networks and export capability.

For Hungary, the 5% NATO commitment is therefore also a question of industrial capacity and competitiveness. If higher spending largely turns into an import bill, the fiscal burden remains while domestic economic feedback is limited. If procurement is linked to competitive domestic production, services, technology and know-how, the same security expenditure can create substantially more economic value at home.

The question is therefore not only how much Hungary spends on defence, but how much value ultimately stays in the Hungarian economy.