Does War Make States? Military Spending and the Italian State‐Building, 1861–1945

ABSTRACT We present empirical evidence on the relationship between military spending and the expansion of other government budget items and tax revenues from the unification of Italy (1861) up to the end of World War II. Until 1922, investments in education and social transfers to families mainly moved in step with defence spending. This means that increases in defence spending imply an increase in both education spending and transfers. Moreover, transfers also play a compensatory role during recessions. Increases in defence spending do not crowd out investment in capital expenditure, while disinvestment in defence is associated with an increase in investment in capital. The pro‐cyclical behaviour of tax revenues is compatible with the debt‐financing dynamic of much government expenditure. Although our analytical narrative is not universally valid, it does support the persistent centrality of external wars in the discontinuous growth and expansion of central government in the Italian state, with some exceptions explained by historical events.