Increased defence investment stands to deliver a significant windfall for the British economy, with new analysis suggesting that the government’s ambitious spending commitments could add £30 billion a year to national output within two decades.
Research by EY, the professional services giant, has found that raising defence expenditure from its current level of 2.5 per cent of GDP to between 3.5 per cent and 5 per cent by 2035 would produce what the firm describes as “significant long-term benefits” for growth and productivity.
The findings lend economic weight to what has until now been framed largely as a security imperative. Sir Keir Starmer pledged at the Nato summit in June 2025 to spend 5 per cent of GDP on national security by 2035, including 3.5 per cent on core defence, as geopolitical tensions and pressure from Washington compelled allies to bolster their military budgets.
Yet translating ambition into action has proved problematic. The government’s ten-year defence investment plan, expected last autumn following the publication of its strategic defence review, has been repeatedly delayed owing to a £28 billion funding gap in the Ministry of Defence budget over the next four years. Neither the Treasury nor the MoD has set out a clear pathway to meeting the spending targets.
EY’s analysis, drawing on Office for Budget Responsibility forecasts and GDP projections, estimates that reaching the 3.5 per cent target would require an additional £31 billion of real-terms spending by 2035. Hitting 5 per cent would demand an extra £77 billion.
The potential returns, however, are considerable. The proposed increases could lift GDP by 0.8 per cent, generating £30 billion in additional annual economic output by 2045, according to the firm’s modelling.
Central to EY’s thesis is the relatively self-contained nature of Britain’s defence industry. Approximately two thirds of annual private sector spending by the MoD flows to UK-based suppliers, with just 31 per cent going overseas either directly or through the supply chains of domestic companies. That high proportion of domestic retention means more of every pound spent stays within the British economy, supporting jobs and underpinning industrial capacity.
Peter Arnold, UK chief economist at EY, said the defence sector is more capital-intensive than other areas of government spending, particularly in its support of manufacturing. A considerable share of the MoD’s budget is also directed towards research and development, which has the potential to produce dual-use technologies with commercial applications in fields such as aviation and cybersecurity.
Nearly a third of the MoD’s budget, roughly £20 billion, is allocated to capital expenditure on infrastructure, equipment and technology, rather than routine operational costs such as salaries and accommodation. That balance between current and capital spending gives defence investment an outsized economic multiplier compared with many other areas of public expenditure.
EY’s report also urged ministers to accelerate procurement processes and provide greater clarity over equipment priorities to encourage private sector investment. The call echoes longstanding frustrations among smaller defence contractors. The Federation of Small Businesses has argued that the procurement system remains skewed towards larger firms, leaving smaller enterprises struggling to compete for contracts.
The MoD said it was delivering what it described as the biggest uplift in defence spending since the Cold War, with £270 billion of investment across the current parliament. Since last July, the department said it had signed almost 1,200 major contracts, with 93 per cent of that spend directed to UK-based companies. It also pointed to the launch of a dedicated Defence Office for Small Business Growth earlier this year and a commitment to increase spending with SMEs by £2.5 billion a year by May 2028.
Whether these measures will prove sufficient to close the gap between political rhetoric and fiscal reality remains to be seen. But EY’s analysis makes a compelling case that, if managed wisely, increased defence spending need not be viewed solely as a cost of security. it could become a genuine engine of economic growth.
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Higher defence spending could unlock £30bn annual boost for UK economy
