UK needs £800bn of new funding by 2040 to meet defence pledge, says report

Open Editor’s Digest for free

Rula Khalaf, editor of the Financial Times, picks her favorite stories in this weekly newsletter.

The UK government will need to mobilize more than £800 billion of new funding for defense and wider strategic infrastructure projects by 2040 if it is to meet ambitious NATO targets set after pressure from Donald Trump, analysis shows.

The UK has promised to raise defense spending to 3.5% of GDP by the middle of the next decade, with an additional 1.5% spent on wider security-related needs, while the US President is urging allies to contribute more to their defence.

Meeting the 5 per cent target means the government will need to mobilize a cumulative £804bn by 2040 to pay for projects for which no funding is currently allocated, according to consultancy EY Parthenon. This will represent 41 percent of total unfunded capital projects by the end of the next decade.

The report is based on an assessment of the UK’s pipeline of more than 1,000 capital projects due to start or complete by 2040, ranging from health programs and transport schemes to energy infrastructure.

It counts government investments for which funding has not yet been formally allocated in official plans, or for which only some of the necessary funding has been allocated. The government’s spending review in June set out detailed capital spending plans, but these only last until 2029-30.

The unfunded defense pipeline includes construction of new barracks, development of new autonomous systems, munitions factories, and spending on naval centers. More investments in roads and railways will be needed to enhance military mobility, supply chain resilience and technologies of strategic importance.

NATO allies promised at a summit in The Hague in June to spend 5% of their GDP annually on defense requirements and security-related spending by 2035. Of this amount, at least 3.5% of GDP will depend on NATO’s agreed definition of defense spending.

Governments agreed to submit annual plans outlining a credible, gradual path to reaching this goal. But senior figures in the British military called on Prime Minister Sir Keir Starmer to toughen his ambitions to increase defense spending, amid fears that difficult choices will be postponed.

Labor plans to raise core defense spending to 2.5 per cent of GDP by 2027 – up from about 2.3 per cent when it took office – by reallocating money from foreign aid.

However, the commitment to raise defense spending to 3 percent of GDP in the next parliament and 3.5 percent by 2035 has not yet been set in the fiscal forecast.

Taking into account other unfunded projects in areas such as energy, health and transport, the UK will need to mobilize a total of £1.96 trillion of funding for capital projects between now and 2040, with defense getting the largest slice, assuming the 5 per cent target is met, EY said.

If the UK achieved the defense spending benchmark of just 3 per cent, the total value of unfunded programs would still be £1.7 trillion over this period.

Using historical patterns of government spending, EY estimates that around £1.1 trillion of the total investment gap covering all sectors including defense will eventually be covered by higher government spending by 2040. But this leaves an additional shortfall of £817 billion that will need to be closed.

“New defense priorities are reshaping the country’s capital agenda,” said Mats Persson, UK macroeconomics and geostrategy leader at EY. He added that the UK faces increasing financing requirements in the next 15 years due to “simultaneous transformations” in the energy, infrastructure, health and defense sectors.

A Treasury spokesman said: “In the Budget, the Chancellor protected more than £120bn of additional capital spending compared to previous government spending plans and previously changed the fiscal rules so we can invest in our long-term future, alongside the private sector.”

“We have already provided £5 billion of additional defense funding in 2025-26, and our ambition is to spend 3 per cent of GDP on defense in the next Parliament when economic and financial conditions allow.”