IMF Warns Defence Spending Must Come From Cuts, Not Debt

By Daniel Okafor

The IMF has told European governments that persistent defence-spending pressure must eventually be funded through spending cuts, because higher taxes and more borrowing are both off the table. Rodrigo Valdes, head of the IMF's fiscal affairs department, delivered the warning in Bangkok on October 14, 2026.

The message is blunt. Borrowing can cover defence budgets only for a limited window. After that, budgets have to adjust.

Valdes told reporters: "I think what countries should do from the macro perspective depends a lot in terms of their initial position. In general, however, the the defence spending will be persistent, so even if you accommodate it temporarily with debt, you have to be prepared at some point to recognise that that debt cannot forever finance this part."

The mechanism he describes is simple. A one-off shock can be financed with debt. A permanent cost cannot. Defence budgets across Europe are rising on a lasting basis, not a temporary one. So the debt used to bridge the gap becomes a structural liability rather than a cushion.

Why can't Europe raise taxes instead?

Valdes closed that door too. He pointed to the level of taxation Europe already carries.

"And the second issue is that...in general, Europe has really high revenue ratios. So the space for a lot more revenues is not easy: it distorts, at the end of the day. So, the discussion about the social contract behind spending is very, very urgent."

That is the analytical core of his argument. European governments already collect a large share of national income in tax. Pushing rates higher runs into economic distortion. That leaves a narrower set of options than politicians often admit.

The comparison is with a household that has already maxed out both credit cards and overtime hours. The only remaining lever is what gets bought, not how it gets paid for.

What does the IMF want governments to do?

Valdes said the answer is political, not technical. Governments must renegotiate priorities with their publics.

He said: "Given the fact that many of these spending pressures are going to be persistent, there are going to be difficult trade-offs, and countries are going to have to assess carefully, in communication and dialogue and discussion with the public, in terms of what the priorities are, what needs to come first, and what governments need to spend on."

The instruction to governments comes down to three steps:

• Treat defence spending as permanent, not temporary.
• Do not plan on higher revenues to close the gap.
• Open an explicit public debate about which existing programmes give way.

The phrase "social contract" carries the weight here. Valdes is saying the bargain between European states and their citizens on what the state funds needs rewriting, and that the rewrite is urgent.

What else is in the frame?

The warning landed as part of the IMF's broader alarm over rising government borrowing costs. Pressure to increase defence spending is one factor pushing sovereign borrowing upward, the Fund indicated.

The same day's coverage carried a related warning from UK Energy Secretary Ed Miliband, who said the global financial system is failing developing countries. Higher global borrowing costs do not fall evenly. Countries that borrow in their own currency, mostly advanced economies, absorb the shock with more room than those that do not.

What happens next?

The pressure Valdes describes will not resolve on its own. Defence budgets are set by security conditions, not fiscal calendars. If European governments defer the spending debate, the adjustment arrives later and harder, through debt-service costs rather than deliberate choices. Valdes's closing point is the one markets will watch: the priorities conversation with the public is not optional, and the window for having it voluntarily is closing.