Chancellor Rachel Reeves has unveiled a bold new direction for the UK’s defence strategy, pledging to transform Britain into a “defence industrial superpower” as part of a broader economic plan to spark innovation, support jobs, and strengthen national security.
In her spring budget, Reeves committed to increasing defence spending from 2.3% to 2.5% of GDP by 2027–28 — an injection of £6–8 billion — with a longer-term ambition of reaching 3%, equivalent to an extra £17 billion by the end of the decade. The strategy goes beyond traditional military procurement, aiming to boost domestic production of drones, AI defence systems, and cutting-edge military technologies incubated in British start-ups.
“We want the benefits of defence spending to be felt across the whole country,” Reeves said, signalling that the plan is as much about economic growth and innovation as it is about security.
Her announcement aligns with a wider European trend. Countries like Germany have established off-balance-sheet military funds, and the EU is advancing a €150 billion joint loan facility for defence projects — a shift that some economists are calling a new era of “military Keynesianism.” The European Commission is also allowing defence spending to bypass deficit rules, a significant departure from traditional fiscal constraints.
But the economic payoff of this strategy remains uncertain. Historically, defence spending has had limited long-term impact on growth and productivity. A European Commission study of 15 countries over five decades found no consistent correlation between military spending and economic expansion. In the UK, Ministry of Defence contracts support less than 1% of jobs, despite steady increases in spending since the 1980s.
Some economists argue the key lies not in how much is spent, but where it is invested. Treasury advisor and London Business School professor Paolo Surico suggests that traditional military expenditure returns just 60p to £1 per pound spent. However, when directed at research and development in emerging technologies, that return could double.
Critics, however, warn that Labour’s current strategy risks becoming a form of “military austerity” by reallocating funds from other industrial projects, such as the proposed National Wealth Fund. Others point out that a large share of the UK’s defence procurement — up to 50% — still goes to foreign firms, particularly American contractors.
Unlike the EU, the UK remains bound by strict fiscal rules, limiting its ability to borrow for defence investment. Without a coordinated industrial strategy and supply chain support, experts warn that the UK may struggle to realise the economic benefits Reeves envisions.
Nonetheless, with geopolitical instability mounting and limited levers for economic growth, the Chancellor’s defence-led strategy signals a major shift in how Britain sees the role of military investment in its economic future.
