Initial response to the Defence Investment Plan

Max Warner, a Senior Research Economist at IFS, said:

“Today, the government published the long-awaited Defence Investment Plan (DIP). As part of delivering the plan, it announced an average of £3.8 billion extra funding per year over the next four years (totalling £15 billion). This will mean that planned NATO-qualifying spending will be at 2.6% of GDP in 2026–27, rising to 2.7% in 2027–28 and 2028–29, about 0.1% of GDP higher than previous plans. The government also set out, for the first time, plans for total defence spending in 2029–30, which will also be 2.7% of GDP. 

Notably, the government has not set out how it will pay for around a third of this increase – an average of £1.2 billion each year – leaving this decision to be made at the Budget later this year. This means there will be further impacts on other areas of spending, tax or borrowing on top of those set out in today’s announcements – implying one key early decision for the next Prime Minister.

Around half of the increase – an average of £1.7 billion each year – will be paid for through cuts to other departments’ capital (investment) budgets. 1% cuts will be made across most non-defence departments, with larger cuts to transport and energy projects. 

How the final part of the increase – £0.9 billion per year – will be funded is less clear, with the government describing it as being met by ‘asset sales and Treasury support’. Part of this appears to be a reprioritisation within the Ministry of Defence, while part seems to be a transfer of responsibilities for covering ‘international objectives and procurement’ from the Ministry of Defence to the Treasury, leaving more money for other spending by the Ministry of Defence. Of course, if these new Treasury responsibilities require any spending, this will need to be paid for from somewhere else, potentially squeezing other budgets further.

Zooming out, the UK is currently committed to spending 3.5% of GDP on defence by 2035, alongside NATO allies. Defence spending was 2.2% of GDP in 2023–24, and today’s plans imply it will reach 2.7% next year and remain there until 2029–30. While the announced increases today are quite small, the overall increase in defence spending since this government came to office remains substantial – but even so, only gets us just over a third of the way to 3.5%.

Defence spending will likely remain one of the biggest fiscal pressures facing the UK in the medium term. If the UK is to get to 3.5% of GDP spent on defence in 2035, this will mean finding around an additional £25 billion each year by 2035 in today’s terms relative to the newly announced plans. Given the clear difficulties of finding less than a sixth of this per year as part of the DIP process, this will be one key challenge facing the next Prime Minister, along with deciding how a substantial share of today’s top-ups will be funded.”