Defense spending in the broader Central and Eastern European (CEE) region is growing, but very unevenly. According to the SGH (Warsaw School of Economics) and the Economic Forum 2025 report, the share of defense in total public expenditure ranges from 2.5% to 7.2%. These outlays are deepening fiscal deficits, though in Poland they are not yet the main driver of budget imbalance. SGH experts recommend adjustments to the financing model to make defense spending more fiscally neutral and supportive of economic growth.
NATO commitments and regional disparities
“We analyzed how national defense expenditures evolved over time. A key turning point was the 2014 NATO Newport Summit, which required member states to gradually increase defense budgets to reach 2% of GDP by 2024. Most countries failed to achieve this target,” explains Dr. Hab. Paweł Felis, professor at SGH.
The SGH and Economic Forum report, focusing on fiscal policy challenges during armed conflicts, shows wide disparities in the region. Estonia has the most ambitious plan – in 2026 it intends to allocate a record 5% of GDP to defense, funded in part by a special defense tax. Poland is also among the leaders, aiming for 4.8% of GDP, with actual spending already above 3% since 2023. By contrast, Bulgaria, Slovakia, and Romania have seen declines in defense spending as a share of GDP in recent years, even though Romania previously met the 2% NATO threshold. Slovenia and the Czech Republic posted the lowest ratios in the analyzed period.
Share of defense in public spending
In 2023 – the first full year after Russia’s invasion of Ukraine – defense accounted for 2.5% to 7.2% of all public spending in CEE. The share was highest in the Baltic states (6.8%), while the lowest levels were recorded in the Czech Republic (2.7%), Slovenia (2.6%), and Slovakia (2.5%). In Poland, the share was 4.4%, slightly above the regional average (4.3%).
New financing mechanisms
To cover growing defense needs, countries are introducing new funding models. Lithuania established a National Defense Fund, financed by higher taxes. Bulgaria created a Military Modernization Investment Fund, partly funded by unused budgetary resources.
“So far, these expenditures have not been the decisive factor in driving national deficits. But this will likely change with the expected sharp rise in defense spending,” warns Prof. Felis.
The report notes that in Poland, even without the defense buildup, the deficit already exceeded 3% of GDP in 2023 – a situation mirrored in many neighboring countries.
Poland’s Defense Support Fund – benefits and risks
“The key scenario concerns the Defense Support Fund, established at Bank Gospodarstwa Krajowego under the Homeland Defense Act. This fund has the greatest impact on the structure of public debt. Since it sits outside the public finance sector, we must ask how future defense financing should be organized,” stresses Wojciech Decewicz, SGH student and co-author of the report.
According to SGH experts, the Defense Support Fund, excluded from the official budget, accounts for over 20% of total defense spending.
“The problem is that loans, credits, and bonds issued through the Fund cannot be rolled over – they must be repaid. At present, repayments are made from the Ministry of Defense’s budget, which will increasingly limit funds available for technical modernization, as part of that budget will go to servicing debt and interest,” Decewicz explains.
This issue has also been flagged by Fitch and Moody’s, which recently downgraded Poland’s credit outlook to negative. Fitch noted that overall public sector spending rose from 43.6% of GDP in 2021 to 49.4% in 2024, driven mainly by increases in public-sector wages, pensions, social programs, and debt servicing costs.
Long-term strategies needed
Despite fiscal risks, defense spending will remain unavoidable. The challenge is to design a sustainable financing model. Options include abolishing the Defense Support Fund in favor of direct budget financing or repaying the Fund’s debt from non-defense budget sources.
“If we want defense spending – which we must incur for political and strategic reasons – to be as budget-neutral and economically effective as possible, we need a long-term strategy. It must align military procurement plans with the capacity of Polish industry to meet these needs. Equally important is raising the share of R&D spending in defense. In the 2026 state budget, defense R&D is planned at just PLN 1 billion, or 0.5% of total defense spending. In technologically advanced countries like South Korea, the ratio is typically 2–3%. Clearly, there is much room for improvement,” Decewicz adds.
He also highlights the need to reform Polska Grupa Zbrojeniowa (PGZ), currently hampered by fragmentation, as well as the Armament Agency, responsible for defining operational equipment requirements, initiating R&D projects, and managing procurement.
“The Armament Agency may require broader competencies to better coordinate the defense industry. So far, it has lacked such instruments,” concludes Decewicz.
