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Analysis Series
Analysis/0038/June/2026/London-Dialogue. 14 June 2026
Abstract
Global military expenditure has reached unprecedented levels, reflecting a security environment defined by renewed great-power rivalry, persistent regional conflicts, and accelerating technological competition. According to SIPRI, global military spending reached US$2.887 trillion in 2025, marking the eleventh consecutive year of growth. While governments justify these outlays as essential for deterrence and national security, they also impose significant economic costs and risk fuelling competitive spirals. This paper examines the structural drivers behind rising defence budgets, analyses the strategic and governance challenges they create, and argues that durable security requires a balanced approach combining military preparedness with economic resilience, technological governance, and sustained diplomatic engagement.
Introduction
The post-Cold War expectation that economic interdependence and multilateral institutions would dampen interstate conflict has been decisively challenged. Great-power competition has returned to the centre of international politics, driven by Russia’s war in Ukraine, persistent Middle East instability, and intensifying Sino-American rivalry across trade, technology, and military domains. Governments worldwide are responding by expanding defence budgets and accelerating military modernisation across domains spanning artificial intelligence, cyber operations, and space.
The SIPRI data underscore the scale of this shift: global military expenditure reached approximately 2.5 per cent of GDP in 2025, with Europe recording a 14 per cent increase and Asia-Pacific growth exceeding 8 per cent. These figures point toward a prolonged period of elevated defence spending shaped by strategic uncertainty and technological rivalry. The central question is whether this trajectory constitutes a necessary response to genuine threats or risks producing an arms dynamic that erodes the very stability it is intended to secure.
Drivers of Rising Defence Expenditure
Great-Power Competition
The resurgence of strategic rivalry between major powers is the primary structural driver of global defence growth. US-China competition has extended beyond traditional military domains into technology supply chains, critical minerals, and artificial intelligence governance. Simultaneously, Russia’s confrontation with the West has fundamentally altered Europe’s security calculus, with NATO members significantly raising defence allocations. Germany’s Zeitenwende programme exemplifies a broader continental shift toward rearmament. As rivalry intensifies, governments increasingly view military modernisation as indispensable to preserving deterrence and geopolitical standing.
Ongoing Conflicts and Industrial Lessons
Active conflicts have exposed systemic vulnerabilities in military readiness. The Russia–Ukraine war has demonstrated the enduring importance of conventional capabilities, artillery mass, integrated air defence, and the depth of defence industrial capacity. Supply chain fragility and ammunition shortfalls have prompted NATO members to expand domestic production. Meanwhile, instability across the Indo-Pacific and Middle East has reinforced concerns about strategic resilience, driving procurement increases across both advanced economies and emerging powers.
The Technology Competition
Technological transformation is reshaping military competition in ways that amplify both capability and risk. AI is being integrated into intelligence analysis, surveillance, and decision-support systems, while cyber operations have emerged as a primary instrument of coercive statecraft. The widespread use of drones in Ukraine and the Middle East has demonstrated how low-cost autonomous systems can produce decisive battlefield effects. Space, once a permissive domain, has become a contested environment critical to navigation, communications, and intelligence.
Unlike previous military revolutions centred on state arsenals, today’s competition increasingly involves private-sector actors and dual-use technologies. The absence of effective international governance frameworks for AI, autonomy, and cyber operations heightens the risk of miscalculation and unintended escalation.
Strategic Challenges of the Spending Surge
The Security Dilemma
Expanding military budgets do not automatically translate into greater security. The security dilemma describes how unilateral defence investments, however defensive in intent, can trigger reciprocal responses from rivals, generating competitive spirals that leave all parties less secure. Contemporary dynamics exhibit many characteristics of previous arms races: rapid technological modernisation, declining inter-state transparency, and eroding strategic trust. Historical precedent suggests these conditions elevate the risk of conflict rather than suppress it.
Fiscal and Developmental Trade-offs
Military expenditure carries high opportunity costs. A UNDP analysis warns that record defence outlays directly crowd out investment in healthcare, education, climate adaptation, and infrastructure. The burden falls disproportionately on developing states, which must navigate genuine security imperatives while managing acute development needs. Even advanced economies face difficult trade-offs as ageing populations and fiscal pressures compound the costs of sustained rearmament. An OECD assessment highlights the macroeconomic risks when defence growth outpaces underlying productivity gains.
Small States, Middle Powers, and the Indian Ocean
The Nuclear Suppliers Group was founded in 1974 in direct response to India’s nuclear test, with the ex
The dynamics of great-power competition impose particular pressures on smaller states and middle powers. Countries positioned along critical maritime corridors, including the Indian Ocean littoral, face intensifying pressure to align with competing powers while safeguarding strategic autonomy. The Indian Ocean has emerged as a principal arena of naval competition, with Chinese naval expansion, India’s maritime ambitions, and heightened US engagement reshaping regional security architectures.
For states such as Sri Lanka, Singapore, Indonesia, and the Maldives, the priority should be maritime domain awareness, coast guard capacity, and regional economic cooperation rather than expensive conventional force expansion. Sri Lanka’s approach illustrates the value of strategic restraint: avoiding entanglement in major-power competition while pursuing development and measured maritime security investment. Regional frameworks, including IORA and ASEAN-centred mechanisms, can facilitate confidence-building and lower the costs of independent security provision.
plicit purpose of preventing nuclear proliferation by controlling nuclear exports. In 2008, the NSG exempted India from its full-scope safeguards condition, making India the first country permitted to conduct nuclear trade with NSG members while retaining its nuclear weapons programme.
The waiver was achieved after immense US political pressure and a frantic Indian lobbying campaign, with Chinese opposition only overcome after President Bush telephoned President Hu Jintao directly. The Indian elite sought the waiver not merely for energy purposes but as an important step toward great-power status, with the NSG waiver going a long way toward legally recognising India as a nuclear weapons state, a designation previously reserved for the P5. The waiver formally incorporated India’s commitment to NFU and its moratorium on nuclear testing as conditions. Both have since been progressively undermined, and neither the US nor the NSG membership has treated this erosion as grounds for revisiting the privilege granted.
India has since concluded bilateral nuclear cooperation agreements with at least 10 NSG supplier states and is actively pursuing full NSG membership. If Modi’s government secures full membership, it would eclipse its political rival the Congress party, which negotiated the original 2008 waiver. NSG membership has thus been transformed into a BJP political trophy, making a non-proliferation governance mechanism an instrument of domestic electoral competition.
The 2008 NSG waiver front-loaded all strategic rewards while leaving non-proliferation obligations almost entirely unenforced. It has created a precedent of exceptionalism: that sufficient strategic importance to a great power can be exchanged for non-proliferation legitimacy without the obligations that NPT membership entails.
Future Trajectories
Three scenarios shape the medium-term outlook. First, competitive militarisation, in which geopolitical rivalry intensifies, defence spending continues to climb, and the risk of miscalculation rises. Second, managed competition, in which states invest in defence while simultaneously pursuing transparency mechanisms and selective arms control agreements—competition persists but remains bounded. Third, cooperative security, in which major powers prioritise conflict prevention, governance frameworks, and multilateral engagement. Current trends make managed competition the most plausible scenario for the coming decade, though the path toward cooperative arrangements remains available if political will can be mobilised.
Policy Recommendations
- Strengthen multilateral dialogue on the governance of artificial intelligence, autonomous systems, and cyber operations, including binding transparency requirements for military AI applications.
- Expand confidence-building measures and communication mechanisms between major powers to reduce the risk of miscalculation, particularly across contested maritime and space domains.
- Develop comprehensive security strategies that integrate military preparedness with economic resilience, energy security, climate adaptation, and human development, avoiding the conflation of defence spending with security.
- Empower regional organisations, including IORA, ASEAN, and NATO, to play more active roles in preventive diplomacy, crisis management, and cooperative security arrangements.
- Encourage defence-industrial cooperation and resource-pooling among allies and partners to reduce duplication, lower costs, and strengthen collective deterrence without accelerating overall spending trajectories.
Conclusion
Global defence spending has reached historic levels in response to a genuinely transformed security environment. Geopolitical rivalry, active conflicts, and technological disruption have combined to make military modernisation an urgent priority for governments across the world. Yet higher defence budgets do not automatically produce greater security. The security dilemma, fiscal trade-offs, and the absence of governance frameworks for emerging technologies all represent structural risks that unchecked spending growth will not resolve.
Durable security requires more than military strength. It demands economic resilience, credible governance of dual-use technologies, sustained diplomatic engagement, and international cooperation. As the world enters a new era of strategic competition, the choices governments make about defence investment will do much to determine whether the outcome is managed stability or intensifying rivalry.
Colonel Nalin Herath RSP
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