Honouring NATO defence spending commitment would reshape British state

The government – alongside NATO allies – has committed to increasing defence spending from 2.3% of GDP last year to 3.5% by 2035. This increase would be equivalent to £36 billion, or £500 per person, a year in current terms. Such an increase would mark the end of the decades-long ‘peace dividend’, whereby spending a declining share of GDP on defence has allowed for higher spending on the welfare state without similarly sized tax rises. 

The last time the UK spent 3.5% of GDP on defence, in 1987–88, health spending was at 4.0% of GDP. By 2035, when defence spending is planned to return to 3.5%, health spending could reach 9.2% of GDP. Funding concurrent increases in health and defence spending on this scale would pose a considerable fiscal challenge.

For the UK, permanently higher borrowing to fund higher defence spending is unlikely to be sustainable. Funding the rise in defence spending entirely through cuts to non-defence spending would require reductions in spending equivalent to the combined budgets of the Ministry of Justice and the Home Office. That is, the cuts required would be equivalent to the entire amount the government currently spends on the police, border force, courts and prisons. Funding the rise through higher taxes would require substantial tax increases, on the order of 3–4p on all rates of income tax or 4p on the standard rate of VAT. 

Either the shape or size of the state – or both – must change if the latest NATO defence spending commitment is to be met. There will be particular pressure on this government at the 2027 Spending Review, when plans for defence spending in 2028–29 will be revisited.

Some countries – notably Germany and Poland – have set out plans to increase defence spending as a share of GDP further and faster than the UK, albeit from lower starting points, and with lower starting levels of national debt. The UK has long had the second-highest level of defence spending in NATO, behind the US. But in 2024, the UK was overtaken by Germany. And Poland has already achieved in two years what the UK has committed to doing in ten, having increased defence spending from 2.2% of GDP in 2022 to 3.8% in 2024.

These are among the key findings of a new chapter published today from this year’s IFS Green Budget, funded by the Nuffield Foundation and produced in association with Barclays. Other findings from the chapter include:

• The government has emphasised the growth benefits of higher defence spending. Defence spending could boost growth through higher research and development, and the UK could benefit from higher defence-related exports as other countries also increase their defence spending. But it is not clear that defence spending is more growth-friendly than other areas of public spending, such as transport or education, which it could well be crowding out. More broadly, impacts on growth will depend on how higher defence spending is funded.
• Defence spending will also affect where growth happens within the UK. Based on past patterns of Ministry of Defence spending with UK industry, it is likely to particularly benefit the South West of England and is less likely to benefit the North East.
• The composition of the UK defence budget is changing to be more focused on equipment and less focused on personnel. The share of funding allocated to capital investment was constant at around 25% between 2002–03 and 2019–20. It then increased, reaching 35% in 2023–24, and is set to rise to 43% by 2028–29. 

Bee Boileau, a Research Economist at IFS and an author of the report, said:

‘Increasing defence spending to 3.5% of GDP by 2035 will be a major fiscal challenge over the next decade. It is, of course, not certain that we will reach this level of spending: the world could look very different in a decade, and future governments might decide to change tack. But other countries have signed up to the same commitment – and, indeed, countries such as Germany and Poland are moving further and faster. The UK may yet decide it needs to follow suit, but just the increase to 3.5% of GDP is equivalent to the combined amount we currently spend on the Home Office and Ministry of Justice – not a sum that can be found painlessly.’

Mark Franks, Director of Welfare at the Nuffield Foundation, said: 

‘Although defence spending will increase over the next couple of years, a large proportion of the rise towards 3.5% of GDP will not come until the 2030s. This delay will limit the immediate pressure on the public finances and defer the toughest choices about how to balance defence investment with funding for public services. However, this approach is likely to result in slower and more limited improvements in the UK’s defence capabilities. It may also reduce the chances of securing good value for money, if it results in spending being ramped up over a short space of time as the commitment date approaches.’