The UK is set to significantly increase its defence expenditure, with the Defence Investment Plan (DIP) targeting £80 billion by 2029. This uplift, however, is still expected to fall short of the NATO target of 5% of GDP. The move comes as global military spending continues its upward trajectory, reaching a record $2.9 trillion in 2025 – the eleventh consecutive year of growth, according to figures cited by Tom Bailey, head of research at ETF issuer HANetf. While Europe saw a substantial 25% increase in military spending in 2025, the UK’s defence spend actually fell by 2% in the same year, prompting concerns about its long-term strategic standing.
Over the past decade, the UK’s defence spending has risen by 32%, a figure that appears modest when compared to sharper increases seen in countries like Germany, Poland, Spain, Japan, and Italy. This relative underperformance has led to criticism of the DIP, with former defence secretary John Healey and armed forces minister Al Carns both resigning on 11 June, citing insufficient funding and concerns over investment in outdated systems. The imperative to bolster defence capabilities is clear, but the path to achieving this is complicated by fiscal constraints and sluggish economic growth. Neil Wilson, UK investor strategist at investment bank Saxo, highlighted that increased borrowing for defence could be met with resistance in debt markets, underscoring the delicate balance facing the government.
The current iteration of the DIP allocates £298 billion for defence investment over the next four years, representing an additional £15 billion in spending. Key areas of investment include an extra £20 billion for the country’s nuclear deterrent over the next four years compared to the previous four, which encompasses the acquisition of F-35A stealth fighter jets. Furthermore, the plan earmarks £5 billion for drones and autonomous systems, £3.2 billion for space capabilities, and £2.5 billion for cyber and electromagnetic defences. While the £5 billion for drones may seem modest next to the US’s multi-year Drone Dominance programme, it represents a significant proportion of the UK’s 2025 defence spending, indicating a strategic focus on future warfare technologies.
For UK businesses, particularly those in the defence sector, this increased spending presents potential opportunities. Historically, around 45% of the Ministry of Defence’s procurement spending has gone to UK-headquartered firms since 2019. This trend is expected to continue, benefiting UK-listed companies as well as foreign-listed entities with a significant presence in the UK defence market. There is also a stated aim to reduce reliance on US firms, driven by recent unpredictability in US foreign policy. Companies like BAE Systems, with its central role in the Tempest jet project alongside Italy and Japan, are well-positioned to benefit from these strategic shifts.
However, the economic implications extend beyond direct defence contractors. Funding these increases will inevitably place pressure on the national budget. While specific tax implications are not yet clear, any significant rise in government borrowing could influence gilt yields and, consequently, the cost of borrowing for both the government and UK households. The Bank of England will be closely monitoring fiscal policy decisions, which could impact its stance on interest rates, affecting mortgage holders and savers. Investors will be watching the FTSE 100 for movements in defence-related stocks, though a broader economic impact from increased government spending and potential borrowing cannot be ruled out.