Government commitments to raise defence spending could help to lift UK GDP by 0.8 per cent and add an extra £30 billion ($39.7 billion) a year to the economy by 2045, according to analysis by accountancy firm EY.
Proposed increases in defence expenditure to between 3.5 per cent and 5 per cent of GDP by 2035 would create significant long-term benefits for UK growth and productivity, it said.
Its analysis showed that 69 per cent of UK Ministry of Defence private sector spend goes to UK-based supplies and expenditure is capital and research and development intensive.
The UK is under pressure to increase its defence spending, with US President Donald Trump urging Nato states to make bigger contributions to the alliance. The Russian invasion of Ukraine alongside the Iran war has also increased the need at Westminster to scale up Britain’s military related manufacturing.
In March, Prime Minister Keir Starmer committed to spending billions to get Britain on a “war footing”, saying the country was preparing for a lengthy war in Iran and must raise funding to build effective defences in an evolving international situation.
The economic opportunities are matched by Germany’s rearmament, which last year meant a 20 per cent increase in its defence budget to €63 billion. Its core defence budget is expected to grow each year to 2029 when it is forecast to hit €153 billion, triple the amount spent before Russia’s invasion of Ukraine four years ago.
It is also keeping the expenditure close to home, with 160 of 178 recent defence project tenders being awarded to German contractors.
However, EY said the scale of the opportunity for the UK will depend on overcoming obstacles, including accelerating procurement and maximising supply chains.
Using Office for Budget Responsibility forecasts and GDP projections, it calculates that raising defence expenditure from the present 2.5 per cent to the government’s 3.5 per cent target – which is not reflected in current budget allocations – would require an additional £31 billion of real terms spending by 2035.
Meeting 5 per cent would require an additional £77 billion of real terms spending by 2035.
“If spent appropriately, increased defence budgets provide a dual opportunity to bolster UK security and generate lasting economic benefits that support the government’s growth agenda.” said Peter Arnold, EY UK chief economist.
“The UK’s relatively self-sufficient defence sector consists of a number of large ‘prime’ businesses and their interconnected supply chains of contractors, so the bulk of spending remains within the domestic economy. Accelerating industrial production and research and development has the potential to support growth within the UK’s borders and create productivity benefits that resonate far beyond defence companies.
“Defence is more capital-intensive than other areas of government spending, particularly in its support of manufacturing activities that yield long term economic advantages. A considerable proportion of government defence spending is also targeted towards R & D, which can produce dual-use technologies that can be commercially applied, stimulating productivity growth. Maintaining this approach as budgets rise would help galvanise the UK’s manufacturing and industrial base, while defence-driven innovation could create spillover benefits in areas of the civilian economy like aviation or cyber security.”
Idris Memon, EY UK defence leader, said achieving the UK’s defence priorities demands a national effort reminiscent of the coronavirus pandemic response, involving close collaboration with large and small businesses to drive innovation and reliably scale results.
“The extent to which extra defence budget translates into real-world security and economic growth will be determined by what the extra money is spent on, as well as how, where and when it is spent,” Mr Memon said.
“Strategic planning and co-ordination will be required to strike a balance between plugging immediate equipment gaps through imports and investing in the UK’s own sovereign production capabilities and security readiness.”
Maintaining or even increasing the ratio of spending to UK suppliers rather than overseas as budgets rise would substantially stimulate the UK defence industry and generate economic momentum throughout the supply chain, EY said. It could also present significant scale-up opportunities for UK businesses and attract domestic and international institutional capital.
UK defence expenditure is also more capital-intensive than most other areas of government spending. Almost one third of the Ministry of Defence budget – about £20 billion – is currently allocated to capital expenditure (CDEL) for infrastructure, equipment and technology, rather than routine operational costs (RDEL) such as day-to-day spending on salaries and accommodation, which generate temporary economic stimulus.
The report identifies barriers that must be overcome by government, industry, and investors, such as the need to balance immediate military readiness through off-the-shelf equipment purchases with the self-sufficiency brought by long-term investment in domestic manufacturing capabilities.
The report highlights the need to widen the supplier ecosystem to include innovative smaller businesses, noting that currently 4 per cent of Ministry of Defence spending is directed at SMEs.
