18th August 2026
There is a price to war even when the bombs are falling somewhere else.
That is perhaps the uncomfortable reality facing Britain and the rest of Europe as governments embark on one of the biggest increases in defence spending for generations.
The argument for doing so is understandable as Russia's invasion of Ukraine has changed the European security landscape. The assumption that peace in Europe could simply be taken for granted has disappeared. Governments that spent decades reducing defence budgets are now rebuilding military capabilities.
Britain is no exception. The Government has committed to increasing defence spending to 2.5% of GDP from April 2027, with a longer-term ambition to go further.
Across the European Union, defence spending is expected to reach around €454 billion this year, 8.6% higher than in 2025 and more than 75% above the level recorded in 2021.
It is an extraordinary change in priorities but there is a question which seems to receive considerably less attention.
What does all this rearmament ultimately mean for the living standards of ordinary Europeans?
Because governments do not pay for defence. Ultimately, people do.
The return of the defence bill makes significant changes. For several decades Europe enjoyed what was often described as a peace dividend.
With the Cold War over and the Soviet Union gone, governments could reduce military spending and devote more resources to other priorities.
Hospitals, schools, pensions, infrastructure and welfare could take a greater share of national resources.
That world is changing and governments are now telling us that defence must take a larger share of the national economy.
Perhaps it must but there is an important economic principle which should not be forgotten. Money spent on one priority cannot be spent on another.
If Britain spends billions more on defence, those billions cannot simultaneously be spent on the NHS, local government, housing, roads or reducing taxation.
That doesn't mean defence spending is wrong. It means it has an opportunity cost and the bigger the defence budget becomes, the more important that opportunity cost becomes.
But isn't defence spending good for the economy?
There is a perfectly reasonable argument that it is benefitting building ships, aircraft, missiles, radar systems and other military equipment creates employment. It keeps factories busy and provides contracts for engineering companies and smaller suppliers.
The British Government is actively promoting the idea that increased defence spending can benefit British businesses and create jobs.
There could also be technological benefits.
Research into aerospace, electronics, artificial intelligence, communications and other military technologies can sometimes produce civilian applications.
So increased defence spending is not simply money disappearing into a black hole.
But we need to be careful about one thing.
Economic activity isn't the same thing as higher living standards.
If a factory switches from producing something for civilian consumers to producing military equipment, GDP may rise because the Government is spending more.
But that doesn't necessarily mean that families have more money in their pockets.
A country can become extremely busy producing weapons while its citizens become poorer.
That distinction is central to this debate.
The oil problem makes it more complicated
And now Europe has another problem.
Oil.
On Tuesday, Brent crude rose to around $91.49 a barrel, its highest level since late July, as the continuing US-Iran conflict and uncertainty around the Strait of Hormuz raised fears about supplies.
This matters because oil is not simply a petrol-pump commodity.
It is embedded throughout the economy.
Higher oil prices eventually affect transport, agriculture, fishing, manufacturing, construction, aviation and distribution.
The lorry delivering food to a supermarket uses fuel.
The farmer producing the food uses fuel.
The fishing boat catching the fish uses fuel.
The machinery building the new house uses fuel.
The van delivering the parcel uses fuel.
So when oil rises sharply, the effect works its way through the economy.
It can eventually reach the supermarket shelf and the household budget.
And Britain has already experienced what an energy shock can do to inflation.
The IMF's latest assessment of the UK economy specifically warns that higher energy prices are eroding real incomes and weighing on economic growth.
Then there is the rural problem
For someone living in central London, a rise in the price of petrol is inconvenient.
For someone living in rural Scotland, it can be much more fundamental.
There are communities where the car isn't a luxury.
It is how you get to work.
It is how you get to the supermarket.
It is how children get to activities.
It is how elderly relatives get to appointments.
It is how businesses operate.
A rural business may already have to absorb higher transport costs simply because customers and suppliers are further away.
The same applies to agriculture and fishing.
And in parts of northern Scotland there is another vulnerability: households and businesses without access to mains gas can have fewer options when energy prices rise.
This is why international events that appear to have little connection with Caithness can suddenly become very local.
A conflict thousands of miles away can become a more expensive journey to Inverness.
It can become a higher delivery charge.
It can become more expensive food.
It can become a higher heating bill.
That is the strange way the modern global economy works.
Governments have to find the money somewhere
There is another uncomfortable question.
If Britain wants to spend substantially more on defence, where does the money come from?
There are only a limited number of answers.
Higher taxes.
More borrowing.
Cuts or slower growth in other areas of spending.
Or stronger economic growth.
In reality, it is likely to be some combination of these.
But Britain is not starting from a position of unlimited financial resources.
The NHS needs additional funding.
Local authorities are under pressure.
Social care is expensive.
Pensions consume a huge amount of public money.
The country needs investment in infrastructure.
And the transition to a different energy system will itself require enormous investment.
The IMF has warned that European governments face an increasingly difficult fiscal squeeze as spending pressures from defence, ageing populations and the energy transition grow. Its analysis suggests that additional annual public spending in these areas could approach 5% of GDP by 2040.
That is not a small adjustment.
It is a fundamental change in the demands being placed upon government finances.
Borrowing doesn't make the cost disappear
There is a temptation whenever a government announces a major spending programme to say that it will simply borrow the money.
But borrowing is not free.
Today's borrowing becomes tomorrow's debt.
Tomorrow's debt requires interest payments.
And those interest payments have to be financed from future taxation or future reductions in spending.
That doesn't mean governments should never borrow.
Borrowing for productive investment can make sense.
But borrowing billions to meet permanently higher defence spending is different from borrowing to build infrastructure that might generate economic returns for decades.
At some point, the bill comes due.
And that bill is ultimately paid by taxpayers.
The danger of confusing GDP with prosperity
This is where I think politicians and economists sometimes speak different languages from ordinary people.
Politicians talk about GDP.
They talk about investment.
They talk about jobs.
They talk about productivity.
All of those things matter.
But families think about something rather different.
They think about what is left in the bank account after the bills have been paid.
If wages rise by 3% but food, energy, transport, council tax and mortgage costs rise faster, the family doesn't feel richer.
If the Government spends more on defence and GDP increases but taxes rise and public services are squeezed, people may reasonably ask where the prosperity has gone.
That is why living standards are a much more useful measure of the success of an economy than GDP alone.
There is a historical warning here
Wars have a remarkable ability to make economies appear busy.
Factories operate around the clock.
People find employment.
Governments spend huge sums.
GDP can rise.
But none of that tells us whether the population is becoming wealthier.
A missile is expensive to manufacture but it doesn't provide a family with a better home.
A tank can cost millions but it doesn't reduce a household's electricity bill.
An aircraft carrier may be strategically essential but it doesn't put food on the table.
That is the opportunity cost.
Resources that could have produced civilian goods and services are being devoted to military purposes.
If the spending is necessary to protect the country, perhaps that is a price worth paying.
But we should at least recognise that it is a price.
And what happens if there is another oil shock?
This is where the current situation becomes particularly worrying.
Imagine Britain and Europe are increasing defence expenditure while oil remains around $90 or moves towards $100.
Governments are spending more.
Energy costs are rising.
Transport costs are rising.
Inflation becomes harder to control.
Interest rates may have to remain higher for longer.
Households have less disposable income.
Businesses face higher costs.
And governments face increasing demands for financial support.
It is not difficult to see how the different pressures could reinforce each other.
The IMF is already warning that higher energy prices are damaging the UK's growth outlook and real incomes.
This is why defence policy and energy policy cannot really be considered separately.
A country that depends heavily on imported energy is vulnerable to geopolitical shocks.
A country that is simultaneously increasing military spending and dealing with high energy costs has to be particularly careful about how it allocates its resources.
There is no easy answer
None of this means that Britain should abandon its defence plans.
That would be far too simplistic.
The security situation has changed.
If European countries genuinely face a greater military threat, then maintaining an adequate defence capability is an essential responsibility of government.
There is also a legitimate argument that Britain should use the opportunity to rebuild domestic industrial capacity.
If billions are going to be spent on defence, it would surely be preferable for as much as possible to support British companies, British workers, British engineering and British technology.
The question is whether that can be achieved efficiently.
And whether governments can prevent the additional burden from simply being passed down to households.
Perhaps the real issue is priorities
For decades, Europe effectively assumed that defence could be kept relatively low because somebody else would provide the ultimate security umbrella.
That assumption has now changed.
Europe has to spend more.
But Europe is also ageing.
It needs more healthcare.
It needs more social care.
It needs new energy infrastructure.
It needs better transport.
It needs housing.
It needs stronger productivity.
And families need a reasonable standard of living.
There isn't enough money to do everything without difficult choices.
That is the reality politicians need to explain.
So are European families paying for the new arms race?
In one sense, they already are.
They will pay through taxation.
They will pay through government borrowing and eventually the taxes needed to service that debt.
They may pay through reduced growth in other areas of public spending.
And if geopolitical tensions keep oil prices high, they may also pay through higher fuel, transport, food and energy costs.
But there is another sense in which the answer is more complicated.
If increased defence spending makes Europe safer, strengthens domestic industry and prevents a much more destructive future conflict, then some of that expenditure may be an investment rather than simply a cost.
That is the argument governments will make.
And it may be correct.
But there is a danger in assuming that security and prosperity are automatically the same thing.
They are not.
A country can become more heavily armed while its population becomes poorer.
It can have a larger defence industry while families have less disposable income.
It can record GDP growth while people feel that their standard of living is going backwards.
That is why the debate over Europe's new arms race needs to move beyond the headline figures.
The important question isn't simply whether Britain should spend 2.5%, 3% or more of GDP on defence.
It is:
What are we giving up to pay for it?
And if the answer turns out to be higher taxes, weaker public services, more debt and lower household living standards at the same time as expensive oil is pushing up the cost of almost everything, then governments need to be honest with their populations about the trade-off.
Europe may have little choice but to spend more on defence.
But there is no such thing as a free defence budget and Somebody always pays. And ultimately, that somebody is the taxpayer and the consumer.