The aim is to design and evaluate balanced budget policies that reallocate federal funds from investments in national defence to the education system. The research focuses on changes in income of the institutional sectors, on output changes at the commodity level and on the increase in the stock of human capital that originates in higher education. The latter is estimated by a cost–based approach on the basis of the changes in the production of human–capital related services. A suitable framework for conducting this kind of analysis is a dynamic extended multi–sectoral model. In this framework it is possible to account for direct, indirect and induced effects produced by the policy proposed. The observed results show that education expenditure is superior to defence expenditure. Indeed, reallocating federal funds from investment in national defence to the education system is convenient in terms of income, production activity and human capital accumulation.