Budget 2026: can the UK afford its defence spending plans?
This article is brought to you by RSM in collaboration with Walker Morris.
Are existing defence commitments affordable?
Over the past year, the debate around defence spending has largely centred on a single number: whether the UK will commit to spending 3% of GDP on defence. The Autumn Budget has now provided a clear answer to the immediate funding question, with the Chancellor committing to fully fund the Defence Investment Plan (DIP). The focus must now shift from whether the government can afford its existing commitments to how quickly and effectively it can deliver them.
The publication of the DIP in June represented a significant shift in both defence and industrial policy. At its heart is a £298bn commitment to UK defence capability between 2026 and 2030.
The plan sets out a clear vision for the future of UK defence, including major investment in nuclear deterrence, autonomous systems, artificial intelligence, cyber capability, munitions production and next-generation combat aircraft.
Importantly, it also recognises something policymakers have become increasingly willing to acknowledge: national security and industrial strategy are no longer separate agendas. Defence capability increasingly depends on industrial capability, and economic resilience is becoming a strategic asset in its own right. The challenge is that ambition is running ahead of available funding.
Defence Investment Plan funding remains the key challenge
While the DIP includes an additional £15bn of spending compared to the previous settlement, the Ministry of Defence originally sought approximately £28bn. Even after the publication of the plan, a near-term equipment funding gap of around £4.7bn remained, which has now been fully funded in the Chancellor’s Budget announcements.
That funding gap helps explain why the government has already signalled that a commitment to spending 3% of GDP on defence will not be made in this Budget. Instead, any pathway towards 3%, and ultimately the wider NATO ambition of 3.5% of GDP on defence alongside an additional 1.5% on wider security resilience, is expected to be considered through future spending reviews.
For defence businesses, the funding announced in the Budget should provide greater certainty around the projects already contained within the DIP. That will support continued investment across programmes such as the Global Combat Air Programme (GCAP), drones and autonomous systems, cyber capabilities, digital targeting systems and munitions production.
Defence opportunities extend beyond traditional suppliers
The Government's plans include £5bn for drones and autonomous systems, £7.6bn for digital technologies, £11bn for munitions and weapons, and significant investment in AI, cyber, radar systems and advanced electronics. These are areas where the UK's middle market is particularly strong.
Opportunities to win defence business go well beyond large prime contractors. Many of the companies likely to benefit over the coming decade will not even be traditional defence businesses. Software developers, advanced manufacturers, electronics specialists, engineering firms, materials businesses and cyber security providers all have the potential to play a role in supporting expanding defence supply chains.
The planned creation of at least six new energetics factories – facilities that manufacture chemical compounds such as explosives – by 2030 and increased focus on domestic production capability also point towards a broader policy objective: improving sovereign resilience by rebuilding industrial capacity that has been allowed to erode over time. However, delivering that ambition will require more than defence contracts alone.
Why defence needs a stronger UK industrial base
The UK defence sector remains constrained by many of the same challenges that face the wider manufacturing economy, including high energy costs, skills shortages and uncertainty around future investment conditions.
Defence manufacturing cannot be separated from the health of the broader industrial base.
New aircraft, autonomous platforms, naval programmes and weapons systems all rely on skilled workers, resilient supply chains and businesses with the confidence to invest. If those underlying conditions are weak, defence investment alone will not deliver the industrial capacity the government is seeking to build.
How should higher defence spending be funded
That brings us back to the central question facing the Chancellor: how should higher defence spending be funded?
The government has already demonstrated its preferred approach. Previous increases in defence expenditure have been funded through reallocations from other spending areas, including overseas aid, while reports suggest that infrastructure, energy and other capital programmes have already been scaled back to help accommodate defence priorities.
According to the Office for Budget Responsibility estimates referenced in the research, reaching 3% of GDP could require a further £17.3bn of funding, while meeting longer-term commitments of around 3.5% of GDP by 2035 could carry a much larger fiscal cost.
Borrowing is unlikely to provide a complete answer. Departmental budgets are already stretched and there appears to be limited room for additional efficiency savings. As a result, attention is increasingly turning towards welfare reform and other structural spending decisions.
As we argued previously, simply preventing welfare spending from rising as a share of the economy could create a significant proportion of the fiscal headroom required to support higher defence spending, without requiring deep reductions in support. These are politically difficult choices, but they reflect a broader reality.
The UK is entering a period where security and resilience are becoming central economic issues. The debate is no longer solely about tanks, aircraft and defence budgets. NATO's evolving expectations include wider investments in national resilience, infrastructure, technology, cyber security and industrial capability.
Turning defence spending commitments into lasting industrial capability
Against that backdrop, the Budget should be judged on whether it has provided a credible funding plan for the commitments already on the table. Protecting the existing DIP, closing the immediate funding gap and giving businesses confidence that the government can deliver on its promises would represent meaningful progress.
The bigger decisions can wait for the Spending Review, but businesses need confidence now that the commitments already made can be delivered. If the government wants to build a stronger defence sector, it must also recognise that defence capability ultimately rests on something much broader: a productive, competitive and resilient UK industrial base. Without that, even the most ambitious defence spending targets risk remaining little more than numbers on a spreadsheet.
Why defence investment depends on business confidence
The Budget is undoubtedly a step forward for defence. The government has fully funded the DIP and committed to reaching 3% of GDP on defence by 2030. But the detail of how it will reach that target will not emerge until next year's Spending Review.
For industry, that distinction matters.
The challenge is no longer simply securing greater public expenditure on defence. Government increasingly needs businesses and investors to commit their own capital, whether to expand manufacturing capacity, develop technology, strengthen supply chains, or support the next generation of defence businesses. Indeed, the creation of the Innovative Defence Financing Taskforce is an acknowledgement of the role private and international capital will need to play.
But private capital responds to confidence, not ambition alone.
Businesses will invest ahead of demand where they have sufficient certainty over future requirements. Investors will back growth where they can see a credible and sustained market. That requires more than spending targets. It requires consistency, visibility and a sufficiently clear pipeline to allow the market to make decisions now.
The Budget has strengthened the signal to industry. The question is whether it is yet strong enough to change behaviour. If the government wants the private sector to invest alongside it at the scale required, turning political commitment into commercial confidence must now be the priority.
To explore how your organisation can scale within the evolving defence and manufacturing landscape, please contact Emily Sawicz, or your usual RSM contact.