Defence at 5%: Britain’s Strategic Investment and the Economic Choices It Demands
For decades, defence spending sat largely outside Britain’s economic debate a necessary function of the state, but rarely a defining fiscal question. That era is ending.
The emerging discussion is no longer just about moving core defence spending toward 3% of GDP. Increasingly, policymakers and strategists are considering whether the UK should move toward spending closer to 5% of GDP on defence and wider national security, reflecting a broader definition of security that includes resilience, infrastructure protection, cyber capability, and economic preparedness.
At roughly £66 billion today around 2.3–2.4% of GDP the UK already spends above NATO’s baseline, with plans to rise to 2.5% by 2027. But a broader 5% framework would represent one of the largest structural reallocations of public resources in decades, potentially requiring tens of billions in additional annual spending once wider security investments are included.
The strategic logic is increasingly clear. In a world of rising geopolitical risk, economic resilience and national security are becoming inseparable. But while the direction of travel is justified, the scale of the shift means difficult choices will shape government priorities, industrial strategy, and the wider economy for years to come.
This is not simply a defence policy, it is a defining economic decision about what Britain chooses to prioritise.
_________________________________________________________________________________
The industrial upside: reinforcing Britain’s strategic strengths
Higher defence spending has the potential to reinforce some of the UK’s most competitive industries, particularly where long-term procurement supports innovation and high-skill employment.
The Ministry of Defence already manages spending approaching £80 billion annually, with significant capital investment flowing into major programmes such as the Dreadnought nuclear submarine programme, expected to cost over £30 billion, and the Global Combat Air Programme (GCAP) the next-generation fighter jet initiative with Japan and Italy.
The government’s long-term shipbuilding pipeline, alongside continued investment in naval capabilities, ensures sustained demand across maritime supply chains.
These programmes provide decades-long investment certainty, supporting advanced manufacturing, engineering, and research-intensive industries that typically deliver strong productivity gains.
Defence procurement is also increasingly innovation-led, with commitments to direct around 10% of the equipment budget toward emerging technologies, including AI, cyber, and autonomous systems.
If aligned with industrial strategy, this spending can strengthen export capability and reinforce the UK’s position in high-value manufacturing sectors.
_________________________________________________________________________________
Regional growth: defence as place-based policy
Defence investment has historically been one of the most powerful drivers of regional industrial activity.
Shipbuilding in Scotland, aerospace in the South West, and advanced manufacturing across northern England anchor skilled jobs and supply chains that support local economies.
A sustained increase in spending, particularly when broader resilience and infrastructure security investments are included could deepen these industrial clusters, supporting regional productivity and reinforcing efforts to rebalance the economy geographically.
In effect, defence spending becomes a form of place-based economic policy creating long-term employment and investment outside London.
_________________________________________________________________________________
Technology spillovers: innovation beyond defence
Modern defence spending increasingly overlaps with frontier technologies.
Investment in cyber capabilities, space systems, advanced materials, and digital infrastructure has the potential to generate spillovers across the wider economy, much as defence R&D historically contributed to major technological breakthroughs.
Across Europe, defence innovation spending is rising sharply, reflecting a broader shift toward technological competition between advanced economies.
For the UK, this presents an opportunity to strengthen its technology ecosystem while supporting long-term productivity growth.
_________________________________________________________________________________
Learning from Europe: a shared strategic shift
The UK’s move toward higher defence spending mirrors a broader trend across advanced economies.
Germany’s €100 billion special defence fund demonstrates how governments are treating defence as a strategic investment in industrial capability and resilience.
Poland has gone further still, raising defence spending toward 4–5% of GDP, using increased budgets to expand domestic production and strengthen national resilience in response to geopolitical risk.
The lesson from these countries is clear: higher defence spending can support growth and industrial capacity, but only when supported by disciplined fiscal planning and clear strategic priorities.
_________________________________________________________________________________
The unavoidable trade-offs
Even with strong economic and strategic justification, higher defence spending will inevitably reshape priorities across government.
Recent spending plans already illustrate this dynamic. Overseas aid budgets have been reduced, while departments such as justice, local government, and environment face tighter settlements and slower spending growth.
Transport and long-term infrastructure projects are particularly exposed to shifting priorities, with some major programmes facing delays or reduced funding as fiscal pressures intensify.
These adjustments reflect a fundamental reality: expanding the security envelope does not simply increase public spending , it changes the balance of government priorities.
_________________________________________________________________________________
Fiscal credibility and the macroeconomic balance
The broader economic impact will depend heavily on how increased spending is financed.
With UK growth running at roughly 1% and public debt elevated, maintaining fiscal credibility will be essential to avoiding higher borrowing costs.
Markets will closely watch whether higher spending is accompanied by credible fiscal planning, particularly as sustained increases reduce flexibility to respond to future economic shocks.
For consumer-facing sectors, the impact may be indirect but meaningful if tighter fiscal policy slows disposable income growth.
_________________________________________________________________________________
A structural shift toward a security-led state
The move toward a 5% framework reflects a deeper change in economic thinking.
For much of the post-Cold War period, governments prioritised efficiency and social spending in a relatively stable geopolitical environment. Today, resilience, strategic autonomy, and economic security are becoming central policy objectives.
Across NATO, defence budgets are rising rapidly, signalling a structural shift toward a more security-focused model of government spending.
For the UK, this represents a recalibration of the state, one where defence and resilience play a larger role in shaping economic priorities.
_________________________________________________________________________________
The critical question: investment or consumption?
Ultimately, the long-term economic impact will depend on whether higher defence spending drives productivity and innovation.
If spending supports high-skill employment, exports, technological development, and infrastructure resilience, it could strengthen the UK’s growth trajectory.
If it primarily displaces other productive investment, it risks becoming largely consumptive spending that increases fiscal pressure without boosting economic potential.
Execution will determine which path dominates.
_________________________________________________________________________________
Winners and losers at a glance
Likely winners:
- Defence and aerospace industries
- Advanced manufacturing and engineering
- Cyber, AI, and dual-use technology firms
- Regional industrial economies
- Energy and infrastructure resilience sectors
Likely under pressure:
- Overseas aid and international development
- Justice, local government, and environment budgets
- Long-term infrastructure and transport investment
- Consumer-facing sectors if fiscal policy tightens
- Overall fiscal flexibility
___________________________________________________________________________________________
Conclusion: a necessary shift that demands discipline
Moving toward spending closer to 5% of GDP on defence and national security reflects a changing world in which economic resilience and security are increasingly intertwined.
Done well, it could reinforce Britain’s industrial base, support innovation, strengthen infrastructure resilience, and drive regional growth. Done poorly, it risks crowding out investment and narrowing fiscal flexibility.
The experience of countries like Germany and Poland shows that higher security spending can support economic resilience but only when matched with clear strategy and fiscal discipline.
For the UK, the opportunity is significant. But so is the responsibility to ensure that this shift strengthens not only national security, but the long-term foundations of economic growth.
Because once spending priorities move at this scale, they shape the economy for decades.
