2026 Perspectives for the Public Sector

the previous year and a 37% rise since 2015—continuing a decade-long upward trend across all regions, according to SIPRI. 2 The top five spenders— the United States ($997 billion), China, Russia, Germany, and India—accounted for 60%of the total, with the E.U. also contributing significantly as a bloc. 3 Europe is at the center of a renewed arms race driven by fears of Russian aggression and the ongoing conflict in Ukraine. Nations like Germany and Poland are allocating billions to acquire new weapons systems, underscoring the financial stakes in this fractious new world order. The continent’s defense industry is undergoing a renaissance, with companies like Rheinmetall and BAE Systems rapidly expanding production facilities funded by both public budgets and private capital. Infrastructure upgrades are also underway as NATOmembers invest heavily in ports, airfields, roads, and bridges to improve military mobility —Poland alone is spending €2.3 billion reinforcing its eastern border, 4 while Germany upgrades airfields for F-35 deployments. 5 At the 2025 NATO Summit in The Hague, an ambitious target was set: defense spending should reach 5% of GDP by 2035, split between 3.5% for core defense and 1.5% for broader security needs. This could add $2 trillion in spending annually. However, in 2024, only 23 members met the organization’s long-standing and considerably- lower 2% defense-spending goal. 6 In order to reach the new higher targets, regional initiatives are pivotal. As such, the EU’s Security Action for Europe (SAFE) program specifically allocates €150 billion for joint European defense projects, 7 while the ReArm Europe initiative loosens fiscal rules to allow national defense budgets to increase by up to 1.5% of GDP annually over four years, potentially unlocking up to €650 billion. 8 European governments primarily fund defense through national budgets, which cover costs for jointly procured goods and servicing loans; debt financing is increasingly used to spread the high upfront costs of large 1 https://www.ft .com/content/ce617187-43ed-4bec-aebf-b1b346c4cfb1 2 https://www.sipri.org/publications/2025/sipri-fact-sheets/trends-world-military-expenditure-2024 3 https://www.sipri.org/publications/2025/sipri-fact-sheets/trends-world-military-expenditure-2024 4 https://www.politico.eu/article/poland-to-spend-e2-3b-to-reinforce-border-with-russia-belarus/ 5 https://defence-industry.eu/germany-modernises-air-force-with-f-35-jets-a-leap-in-defence-and-nato-collaboration/ 6 https://www.sipri.org/commentary/essay/2025/natos-new-spending-target-challenges-and-risks-associated-political-signal 7 https://www.consilium.europa.eu/en/press/press-releases/2025/05/27/safe-council-adopts-150-billion-boost-for-joint-procurement-on-european-security-and-defence/ 8 https://commission.europa.eu/topics/defence/future-european-defence_en This strategic turbulence extends across Asia. Concerns have escalated over recent years around Taiwan and the South China Sea. There is apprehension over North Korea’s continuing missile tests. Tensions have escalated between India and Pakistan, as well as Cambodia and Thailand, leading to actual military confrontations between these states. The Quad — comprising the U.S., Japan, India, and Australia — is deepening cooperation across the region. Consequently, we are seeing a significant focus on security issues and a rise in defense spending across Asia. Amid these shifting geopolitical tensions, technology is reshaping warfare, adding complexity to these threats. Cyberwarfare has introduced asymmetrical, borderless conflicts, with state-sponsored hacks targeting infrastructure in Ukraine and the Middle East. AI-driven cyberattacks, capable of rapid reconnaissance and automated exploits, are escalating the digital arms race. Drones and autonomous weapons, including those used in Ukraine’s strikes on Russian targets, have become cost-effective tools, lowering barriers for non-state actors and making conflicts unpredictable. In Europe, arms factories are expanding rapidly to meet surging demand for artillery shells, drones, and missiles, driven by NATO’s push for readiness and Ukraine’s urgent needs. Companies like Germany’s Rheinmetall and France’s Nexter are investing billions to scale up production, with Rheinmetall alone planning to triple its artillery shell output by 2027. 1 Defense Spending is Here to Stay: Global Military Spending & Challenges Ahead These converging global threats have forced governments to reprioritize budgets toward defense. In 2024, worldwidemilitary spending reached a record $2.7 trillion—a 9.4% increase from 8 Fueling Defense: The Financial Front