Poland’s rapid rise in defence spending won’t translate into a broader economic boom unless deeper structural shifts happen that will take bolder reforms, contrasting with relatively easy decision-making on allocatingbns to buy equipment.

Poland is attempting to build up the largest conventional army in Europe and already spends just under the 5% of GDP agreed at the Nato summit in the Hague earlier this year. The need to bolster its defences was thrown was thrown into sharp relief by the  Russian drone incursion on September 10. Warsaw has always seen itself as the wall on Europe’s eastern flank against Russian aggression. But the investment into defence has been plagued by various problems.

While the large and fast increase in military outlays has put a strain on public finances and fed some new orders to the industry, three structural factors — accounting rules that delay GDP recognition, heavy reliance on foreign arms manufacturers, and a weak state-dominated defence industry — mean the growth payoff has been small so far and could well remain muted for years.

Poland’s rearmament has been dramatic. Defence outlays rose from about 2.2% of GDP in 2022 to roughly 4.2% in 2024 on a Nato cash basis, and the government plans spending 4.7% of GDP in 2025, rising to 4.8% in 2026.

The sharp rise is dictated by Poland’s worries that Russia could one day encroach on Polish territory, especially if it manages to bring Ukraine to heel. So far, more than three years into the war, Russia remains stuck in eastern Ukraine in a grinding war of attrition.

But Russia can and in fact has demonstrated just now it could test Poland (and, by extension, Nato). In the early hours of September 10, 19 Russian drones - most of them decoy Shahed lookalikes known as Gerbera - violated Polish airspace, alarming Nato, which scrambled jets and neutralised the drones.

EU and Nato leaders rallied behind Warsaw - with a notable exception of US President Donald Trump, who only delivered an ambiguous “Here we go!” line on his Truth Social before calling Poland President Karol Nawrocki to assure him, in Nawrocki’s words, of “allied commitment.”

Made in Poland

Poland is facing a growing Russian threat and has set out to expand its armed forces and modernise equipment. The state wants to grow the active army towards 300,000 personnel and direct roughly half of the defence budget to equipment investment, up from a third in 2022. Yet those headline numbers overstate the near-term impact on output.

“The rise in Poland’s military expenditure – from 2.2% of GDP in 2022 to 4.2% last year – has amounted to an overall fiscal loosening, but there’s little evidence that it has boosted GDP in any meaningful way,” Capital Economics said in a recent analysis. The consultancy’s verdict rests on three interlocking explanations that give grounds to why a defence-led boom remains unlikely.

First, statistical mechanics mute the immediate boost to GDP. Nato-style figures record defence spending when payments occur. National accounts recognise it when equipment is produced or delivered.

That timing disconnect means much of the apparent spending surge shows up as higher imports or future investment rather than an instant rise in gross fixed capital formation on the books. The economic stimulus therefore spreads over time rather than producing a single, sharp uplift to growth.

Secondly, the import content of procurement has been large. Capital Economics’ review of the biggest recent contracts finds that roughly half of major deals are foreign-supplied and that only about 30% of equipment value will be produced in Poland.

Imported systems lift measured investment only on delivery and appear simultaneously as imports, leaving only a fraction to support domestic value-added and downstream supplier networks. Poland lacks domestic engine manufacture for heavy tracked vehicles and imports key components such as radar and command systems, so much of the spending leaks abroad.

(Polish Prime Minister Donald Tusk said recently that reducing dependency on imports will be one of his government’s priorities.)

Finally, Poland’s military-industrial complex remains structurally weak, Capital Economics argues. The sector is overwhelmingly state-owned, led by the Polish Armaments Group, PGZ, which critics describe as bureaucratic, under-innovative and poorly incentivised.

Private defence firms play a modest role, mainly in niche areas such as drones. Procurement often bypasses competition, favouring established state suppliers and discouraging cross-industry partnerships and private investment. Research and development spending in defence is tiny, at about 1% of the defence budget — far below peers — and annual R&D totals only about $300mn. Those features limit the capacity for sustained productivity gains, technology transfer and multiplier effects.

Put together, these factors imply a low fiscal multiplier. Capital Economics estimates a multiplier of roughly 0.3 for Polish defence spending since 2022, below its typical 0.5 for European economies and far below Germany’s estimated 0.8. That multiplier translates, the consultancy calculates, into a boost to GDP growth of only about 0.2 percentage points per year since 2022.

Even with optimistic assumptions — rising local production and greater servicing activity — the multiplier might climb to 0.5 later this decade, but a structural deepening of the domestic military-industrial base looks unlikely before the 2030s. In practical terms, the bulk of the current buildup will not materially re-shape Poland’s medium-term growth trajectory.

The limited output effect shows up in official data. Machinery and equipment has risen fast in gross fixed capital formation, but similar surges appear in other regional economies with no big rearmament push, suggesting part of the rise is civilian investment. Industrial production in finished metals and transport equipment — the sectors most closely tied to defence procurement — has largely tracked broader manufacturing trends rather than outperforming them.

Budget burdens

On public finances, the near-term fiscal loosening has been evident but not yet crippling. The general government deficit on an ESA basis widened substantially to almost 6.6% of GDP in 2024. Defence spending contributed to the loosening, but so did higher health and social outlays and rising interest costs.

Capital Economics projects public debt rising toward about 70% of GDP by 2030, driven by persistent deficits and the life-cycle costs of equipment. With initial procurement typically accounting for only about 30% of total life-cycle costs, operating, modernising, maintaining and ultimately disposing of high-tech systems absorb the rest over decades. Those recurrent costs imply enduring pressure on budgets even after initial deliveries taper off.

From a market perspective the bond reaction has been muted so far, despite Fitch Rating’s recent downgrade of Poland’s debt outlook from stable to negative. Polish analysts said, however, that markets could react if Moody’s and S&P both follow Fitch in their rating updates, due in the coming weeks.

For now, yields and spreads have crept up but not spiked, which Capital Economics attributes to Poland’s still moderate debt ratio, favourable debt dynamics and credible communication about medium-term consolidation. Still, the consultancy firm argues that a sustained upward trajectory in debt will gradually raise sovereign premia and intensify pressure for fiscal tightening — perhaps after the 2027 election cycle, another risk to fiscal stability — making future adjustment politically more fraught.

Lessons learned

Poland’s experience offers lessons for other European governments considering large defence build-outs. Countries without a sizable domestic defence industry face a high import content and therefore a low multiplier. Germany’s large industrial base and spare capacity give it a stronger chance of capturing domestic benefits from higher defence spending; smaller states face a tougher trade-off. The Baltic states aim for 5% of GDP on defence and, with low debt ratios and high public support, may manage that spending more sustainably; but they too will depend heavily on imports.

For all the economic and social differences, Poland’s chief adversary Russia serves as a cautionary counterpoint. Moscow has channelled vast fiscal firepower into defence and related spending in a move underpinned by the Kremlin’s 2022 fateful decision to attack Ukraine.

As blitzkrieg plans collapsed, Russia switched to war economy, buoying headline growth while masking deeper imbalances: overheating, capacity constraints, labour shortages, and Russia’s economic problems that recently are getting worse as it prepares to rebuild its military capacity. All that against the political backdrop that prevents President Vladimir Putin from letting go. That strategy could well prove expensive and unsustainable, as once stimulative effects will fade, the macroeconomic costs - compounded by sanctions - will become stark.

Back to Poland, now a trillion-dollar economy (compared to mammoth Russia with just over $2 trillion output size in 2025 in nominal GDP, according to the World Bank), if it wants a stronger growth payoff, it must do more than sign off large contracts. It must use procurement to stimulate domestic supply chains, open the sector to competitive private investment, boost defence R&D and modernise state enterprises to accelerate technology transfer. That would raise the multiplier and widen the domestic share of future contracts. Yet even with such reforms the payoff will be gradual: building indigenous capacity and competitive private suppliers takes years, not months.

Poland’s rearmament buys security and strategic depth; its economic dividend will be modest in the short term and uncertain in the medium term unless policymakers address the import dependence and structural weaknesses that now blunt the impact of higher spending. The country can grow its domestic share and lift the multiplier, but that requires sustained industrial reform, incentives for private investment and credible fiscal planning for long-term maintenance costs — steps that extend well beyond the current procurement cycle.