Adam Smith Business School

Dr Vytautas Valaitis (University of Surrey)

Optimal Fiscal Policy under Endogenous Disaster Risk: How to Avoid Wars?
Thursday, 23 October 2025, 15:00–16:30
Room 588AB, Adam Smith Business School

Abstract

We examine the role of government investment in defense capital as a deterrence tool. Using an optimal fiscal policy framework with endogenous disaster risk, we allow for an endogenous determination of geopolitical risk and defense capacity, which we discipline using the Geopolitical Risk Index. We show both analytically and quantitatively that financing defense primarily through debt, rather than taxation, is optimal. Debt issuance mitigates present tax distortions but exacerbates them in the future, especially in wartime. However, since additional defense capital deters future wars, the expected tax distortions decline as well, making debt financing a welfare-improving strategy. Quantitatively, the optimal defense financing in the presence of heightened risk involves a twice higher share of debt and backloading of tax distortions compared to other types of government spending.

Biography

Vytautas Valaitis is a senior lecturer in economics at the University of Surrey. His research focuses on optimal fiscal policy and quantitative macroeconomics and his work has been published in journals such as the Review of Economic Studies and Quantitative Economics.

Vytautas holds a Ph.D. from Duke University and prior to that he studied at the Central European University in Budapest and the ISM University of Management and Economics in Vilnius. Before joining the University of Surrey, Vytautas was a Max Weber Fellow at the European University Institute.

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First published: 1 October 2025