Increased defense investment is likely to represent a significant windfall for the UK economy. New analysis suggests the government’s ambitious spending commitments could boost national output by £30 billion a year within two decades.
Research from EY, the professional services industry giant, has found that increasing defense spending from the current 2.5 percent of GDP to 3.5 percent to 5 percent by 2035 would result in what the firm calls “significant long-term benefits” for growth and productivity.
The results give economic weight to what has so far been largely formulated as a security imperative. Sir Keir Starmer pledged at the NATO summit in June 2025 to spend 5 percent of GDP on national security by 2035, including 3.5 percent on nuclear defense, as geopolitical tensions and pressure from Washington forced allies to increase their military budgets.
But turning ambitions into reality has proven problematic. The government’s 10-year defense investment plan, expected last autumn following the publication of the strategic defense review, has been repeatedly delayed due to a £28 billion funding gap in the MoD’s budget for the next four years. Neither the Treasury Department nor the Defense Department have laid out a clear path to meeting spending targets.
EY’s analysis, based on Office for Budget Responsibility forecasts and GDP forecasts, estimates that meeting the 3.5% target would require £31 billion of additional real spending by 2035. Reaching 5 per cent would require an additional £77 billion.
However, the potential returns are significant. The proposed increases could boost GDP by 0.8 percent and generate £30 billion in additional annual economic output by 2045, according to the firm’s modeling.
Central to EY’s thesis is the relatively independent nature of the UK defense industry. Approximately two-thirds of the MoD’s annual private sector spending goes to suppliers based in the UK, with only 31 per cent flowing overseas either directly or through domestic companies’ supply chains. This high level of domestic retention means more of every pound spent stays in the UK economy, creating jobs and strengthening industrial capacity.
Peter Arnold, chief UK economist at EY, said the defense sector was more capital intensive than other areas of government spending, particularly in supporting manufacturing. A significant portion of the Defense Department’s budget also goes toward research and development, which has the potential to produce dual-use technologies with commercial applications in areas such as aviation and cybersecurity.
Almost a third of the Ministry of Defense’s budget, about £20 billion, is earmarked for investment in infrastructure, equipment and technology, rather than routine operational costs such as salaries and accommodation. This balance between current spending and capital spending gives defense investment an outsized economic multiplier compared to many other areas of public spending.
The EY report also called on ministers to speed up procurement processes and provide greater clarity on equipment priorities to encourage private sector investment. The call reflects longstanding frustration among smaller defense contractors. The Federation of Small Businesses has argued that the procurement system remains biased towards larger companies and smaller businesses are finding it difficult to compete for contracts.
The Ministry of Defense said it had delivered what it said was the biggest increase in defense spending since the Cold War, with £270bn of investment across the current Parliament. Since last July, the department said it had signed almost 1,200 major contracts, with 93 percent of that spending going to UK-based companies. It also pointed to the establishment of a dedicated defense office for small business growth earlier this year and a pledge to increase spending on SMEs by £2.5 billion a year by May 2028.
Whether these measures will be enough to close the gap between political rhetoric and fiscal reality remains to be seen. However, EY’s analysis convincingly shows that, when managed wisely, increased defense spending does not have to be viewed only as a security cost. it could become a real engine of economic growth.
