The UK’s defence investment outlook has become notably more uncertain following last week’s resignation of the Defence Secretary over funding concerns, raising fresh questions about the credibility and deliverability of the long-awaited Defence Investment Plan.

The UK defence sector has the potential to be a strategic driver of economic growth. Estimates suggest that increased defence spending could generate around £30bn of additional economic output annually by 2045, demonstrating the scale of the opportunity for the wider manufacturing base.

However, while the strategic direction is clear, execution challenges remain significant. Structural constraints across procurement, funding, skills and supply chains are limiting the ability of UK manufacturers to fully capture this upside.

At a time when geopolitical tensions are accelerating defence spending across Europe, the UK risks falling behind more coordinated and better-funded industrial strategies.

How UK defence investment can drive manufacturing output

Defence investment has the potential to deliver a meaningful boost across the economy because a large proportion of defence spending flows through domestic supply chains. The sector is inherently capital-intensive, with the ability to stimulate advanced manufacturing, engineering and research and development (R&D) activity.

Evidence from other European economies illustrates how this can translate into tangible industrial growth. Germany, for example, has seen defence spending growth of around 50% year-on-year in early 2026 with traditional industrial firms pivoting towards defence markets.

For the UK, the opportunity is similar. Defence supply chains can play a key role in supporting regional clusters, while R&D investment linked to defence activity could generate wider productivity gains.

However, unlocking this potential requires the right conditions.

Demand uncertainty and procurement challenges

One of the most significant barriers facing the UK defence industrial base is the lack of clear and consistent demand signals. The continued delay in publishing the Defence Investment Plan (DIP), originally expected in 2025, has created uncertainty across the sector.

This uncertainty impacts investment behaviour. Without visibility on future demand, manufacturers are less able to commit capital to expand capacity, increase workforce capability or scale innovation programmes. This is particularly acute for small and medium-sized enterprise (SMEs), which rely on predictable contract pipelines.

Current procurement processes also present challenges, often being overly complex, slow and focused on detailed specifications rather than outcomes. More agile, solution-led procurement models – similar to those seen in other markets – allow innovation to emerge more effectively and reduce barriers to entry for smaller businesses.

In addition, opacity in procurement decisions continues to limit external financing, as lenders struggle to assess long-term revenue certainty within defence businesses.

Supply chain resilience and dependency

Supply chain resilience remains a central concern for UK manufacturers operating in defence. While elements of fabrication and assembly are carried out domestically, many critical inputs are sourced internationally, exposing production to geopolitical risk. For example, reliance on globally concentrated materials like carbon fibre limits domestic control of key production processes.

The reality of modern defence manufacturing is that supply chains are spread across many countries. European defence projects involve hundreds of organisations, reinforcing the importance of access to international markets and collaboration.

UK manufacturers face a dual challenge: maintaining access to integrated supply chains while managing the additional friction introduced by cross-border trade. Reduced efficiency in supply chains can raise costs and cause longer lead times, reducing competitiveness.

Drone warfare and advanced manufacturing: the technology gap facing UK defence

Technological change is rapidly redefining defence requirements. Nowhere is this more evident than in the evolution of drone warfare, which is shifting the focus towards cost-efficient, scalable and rapidly deployable systems.

This places new demands on manufacturing models, with the emphasis on cost per exchange, speed of production and the ability to quickly adapt to evolving threats.

However, the UK faces a gap between innovation and execution. There is strong capability in early-stage development but scaling domestic production remains a challenge, particularly given the fragile supply chains already discussed.

Despite strong underlying strengths, current procurement processes limit the ability of UK drone manufacturers to respond quickly or bring new technologies to market at pace. SMEs in particular remain constrained by a lack of clear demand signals, restricting their ability to scale.

There is a growing case for more agile, solution-led procurement, in which the government communicates a problem and enables industry to respond iteratively.

Skills shortages and defence R&D funding: constraints on UK industrial capacity

Skills shortages are another persistent issue across both defence and manufacturing. Competition for talent, particularly contending with higher-paying technology sectors, limits the ability of defence organisations to recruit and retain skilled workers.

The sector is operating within a constrained fiscal environment. The UK defence budget faces a funding gap of around £28bn over the next four years, with proposed increases not expected to close this gap.

Beyond public spending, access to private capital remains limited. Defence start-ups face structural challenges in attracting investment, driven by ESG considerations, the long-term nature of R&D cycles, and the uncertainty of procurement outcomes.

Other European markets are taking more proactive approaches to support innovation and scale, such as introducing dedicated funding mechanisms and coordinated investment programmes.

Without similar interventions, there is a risk that UK defence growth will be constrained not by demand, but by the ability to finance and deliver it.

Unlocking UK defence and manufacturing potential: what needs to change

The UK has a strong foundation in defence capability and industrial innovation but, ultimately, the system is not optimised to turn this into sustained economic benefit.

Other European economies are moving with greater pace and clarity. Germany has combined increased spending with broader industrial policy support, while France has committed to multi-year funding programmes that provide industry with clear signals. By contrast, the UK continues to face uncertainty around funding, policy direction and delivery mechanisms.

For manufacturers, opportunities in the defence sector are real but accessing them requires navigating structural barriers across procurement, financing and supply chains.

Increased defence spending alone will not be sufficient. Unlocking the full economic potential of the sector will require a more coordinated approach, encompassing clearer demand signals, more agile procurement, improved access to capital and stronger supply chain integration.

Without this, the UK risks underutilising one of its most strategically important industrial opportunities.

To explore how your organisation can scale within the evolving defence and manufacturing landscape, please contact Emily Sawicz, or your usual RSM contact.

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