Defence Investment – A Challenge The UK Cannot Get Wrong

The Autumn Budget will contain a political hand grenade for the new Chancellor John Healey to defuse in the shape of the Defence Investment Plan.

The initial announcement on defence spending at the end of June 2026, left several unresolved funding commitments to be decided at the budget.

The Chancellor previously resigned as Defence Secretary over a lack of funding. He will have no illusions about the size of the hole he must now plug nor why it is so important.

The threats facing the UK are the most serious they have been in decades. There are long-term risks to the country's national and economic security, infrastructure and computer systems from multiple actors. 

The US's new stance on NATO spending has thrown these issues into even sharper relief, while the UK must also navigate a new security relationship with the EU in a post-Brexit world. 

Yet despite the dangers, defence spending has risen only slowly above its lowest ever levels two decades ago and we face an urgent race to rearm.

During the Cold War period, military spending sat between 5 and 7 per cent of GDP. It began falling after the break-up of the Soviet Union and in 2018 was just 1.9 per cent.

But the war in Ukraine has since concentrated minds. And, along with President Trump's position on NATO, there is now a commitment to raise public investment, including security-related spending, to 5 per cent by the mid-2030s.

In 1980, defence spending was second only to welfare spending as a percentage of GDP. In 2025, it ranked sixth, behind health, pensions, welfare, education and interest payments. Reorganising those priorities will be a massive challenge.

The Chancellor needs to find an additional £4.7bn in funding, alongside savings already allocated, but not defined, from the energy and transport departments.

The government must also settle upon its trajectory to achieve the pace of growth in defence expenditure needed to hit NATO targets for the mid-2030s.  

But however the funding gap is plugged, it must not involve imposing further taxes or policy costs on business. If the plan for defence investment is going to be sustainable then it must leverage private capital.

This can strengthen sovereign capability and support the development of dual-use products, software, and technology, which have civilian and military uses.  Both the internet and GPS were answers to problems initially posed by the military.

An effective plan will deliver not just increased security but increased procurement and domestic supply chain opportunities for SMEs, developing the supply chains in key hardware areas like munitions. This could yield higher levels of skilled jobs across the UK. Meeting the long-term defence spending target of 5% of GDP could raise UK economic growth by as much as 0.8%. 

There are several other factors which could help the UK government to crowd in an essential private sector contribution. First, is setting the Defence Investors Advisory Group on a permanent footing, so the private sector voice is heard at the heart of government.

Internationally, there is also great interest in the Canada-backed proposal for a Defence, Security and Resilience Bank (DSRB) to raise up to £100bn in capital.

But the key will be creating the conditions for a virtuous circle of greater domestic and international supply chain opportunities for defence firms. This could drive higher exports, improvements in skills, infrastructure, innovation and productivity gains. 

There are significant opportunities here with defence spending rising across Europe. The UK's defence exports rose by 29% in 2023, with a significant pivot towards the continent - now the market for 49% of defence exports from the UK.  

Following a recent £50bn uplift, through UK Export Finance, for a Defence Exports Facility, the opportunity to continue strong growth in these exports remains.

But to guarantee this, the UK needs stronger key defence alliances, in Europe, in the Indo-Pacific, and the Americas. Raising investment in defence must be used as a vehicle to help facilitate this, alongside economic and industrial policy.  

This aligns with the strategic priority to reduce reliance on a small number of nations for raw materials and technologies, without jeopardising supply chain resilience or slowing expansion.

That also means finding a long-term solution on UK involvement in the EU's Made in Europe agenda, particularly the Industrial Accelerator Act (IAA), but also other legislation including the Cloud and AI Development Act (CADA).

The BCC supports a binding Economic Security Agreement as a key commitment in the upcoming 2026 Leaders' Summit. This would create a stable platform for the UK being treated as a trusted partner in pan-European supply chains. 

There is also potential in the EU's €90bn Ukraine loan deal to find procurement opportunities for UK companies in support of Ukraine's defence requirements. Alongside this, the UK could explore commercial involvement in funds like Germany's Defence and Infrastructure Fund, worth up to €500bn.

The challenges for the new Chancellor are considerable, but the opportunities for enhanced national and economic security by growing defence industries are great.