A Balancing Act: The Trade-Off Between Debt and Defense

This defense proposal is unlike its predecessors in both scale and priorities. In prior years, supplemental funding, which traditionally adds on to funds allocated to defense in the national budget, has been focused on conflicts abroad, aiding allies like Ukraine and Israel. The $1.5 trillion budget proposal, however, leans further into the domestic agenda. It’s looking to fund modernization priorities like multi-layered missile defense systems, space capabilities, shipbuilding, a 5%-7% pay raise for troops, AI technology and nuclear funding, among other goals. But passage of the full request remains far from assured.

With a Republican majority in both the U.S. House of Representatives and the Senate, it’s natural to assume an increase in defense spending would not only be welcome, but encouraged given the party has generally advocated for a stronger national defense. But this time, the scale of the spend competes with the fiscal priority of bringing down the national debt.

With the U.S. debt-to-GDP ratio at over 120% and a global market that has proven more sensitive to fiscal responsibility (or the lack thereof), increasing the defense budget by such a margin could face pushback by congressional policymakers, especially during a midterm election year. That being said, even a scaled-down compromise would still represent an acceleration in procurement, investment and research spending.

Ramp-Ups and Backlogs

Across the Atlantic, the investment case looks somewhat different. Europe’s shift toward higher defense spending reflects a more strategic reassessment after decades of underinvestment. Unlike in the United States, where defense infrastructure is already mature, Europe’s challenge lies in capacity rebuilding – from munitions and maintenance to logistics and integration.

The onset of the war in Ukraine and a push to increase contributions to the North Atlantic Treaty Organization (NATO) have created a crisis-driven urgency. But uneven industrial readiness in the region has slowed execution. As a result, the European rearmament story may be more gradual, but potentially more durable, especially with Germany’s fiscal pledge.

The German government boosted military spend in 2025 by 20%-25%, using both its traditional budget and special funds for the Bundeswehr, its armed forces.² In doing so, Germany – a country renowned for its budget discipline – saw its largest public-sector deficit since reunification. For some, the trade-off between debt and defense is worth it. After all, even with the investment, Germany’s debt-to-GDP ratio only sits at 64% – a far cry from the global average of G7 economies of 128%.³

Even as that nation and the broader European continent mobilize, slower implementation and long-term investment plans breed capacity restraints. Take a look at the book-to-bill ratio of Rheinmetall, one of the world’s largest defense manufacturers, as one example of the broader trend. This measure shows how quickly new orders are accumulating relative to current production. It’s spiked since German spending priorities zeroed in on defense.

The backlogs are so large, ensuring future contracted revenue, that the sector’s stock market value has surged.  To best illustrate the shift, it’s worth noting that Rheinmetall has been trading at a higher valuation than even Nvidia – the largest company in the world by market capitalization – for the last 12 months.⁴

Balancing Ambition and Affordability

And Germany is not alone. Even Japan has changed its tune. Grappling with a debt burden, low purchasing power, reliance on foreign energy and aging demographics, Japan is ramping up its defense spending with a 2026 budget at a record ¥9 trillion (~$58 billion), marking a 10% annual increase. Even with political consensus to invest in maritime security and strengthen deterrence against China and North Korea, Japan’s economic constraints prove to be the biggest hurdle. The country has to balance its 2% of GDP defense spend goal with a debt-to-GDP ratio of 237%.

Japan is just the latest example of a fragmenting world that’s prioritizing defense. Global spend is expected to rise at a 5% compound annual growth rate by 2030, with earnings expected to grow in double digits after posting an average annual growth rate of 8% over the past decade. And that doesn’t yet take into account the latest $1.5 trillion defense proposal from the White House.

Even with these global increases, it's still the United States that tops the list in defense spending as it places an emphasis on security across the Western hemisphere, engages in maritime and counter-narcotics operations, encourages NATO contributions and spurs a broad rearmament cycle around the world. And the market is not only pricing that in, but awaiting the green light on additional funding that could take the sector even higher.