(Revised July 2026)

How should optimal policy manage disaster risk? We study an optimal fiscal policy problem with defense capital that both deters war and insures against wartime spending needs. Calibrating the war-risk channel with the Geopolitical Risk Index, we show analytically and quantitatively that optimal defense financing relies heavily on debt. Borrowing lowers current tax distortions; although it raises future distortions, defense investment reduces the probability that costly war states occur. Heightened geopolitical risk therefore calls for larger debt-financed defense spending and delayed taxation compared to financing other types of spending. Results are robust to optimal monetary policy and preemptive-strike incentives.