14 charts reveal the massive challenges facing UK and NATO defence spending
Defence spending is casting a shadow over Downing Street. Military officers are in a state of despair. The choices facing Sir Keir Starmer are stark.
The political calculus for the Chancellor, Rachel Reeves, has become more complicated than ever as the Iran war puts public finances in danger.
Their difficulties go back to February 2025 when US President Donald Trump looked set to impose a Russian-influenced peace plan on Ukraine. Successive presidents had urged Europe to catch up and make a fair contribution to Nato. With this US administration, the demand was urgent.
Starmer set out his government’s commitment to raise defence spending, which includes resources for intelligence services, to 2.6 per cent of GDP from 2027 through to the next General Election in three years.
He also laid out a bold-yet-flimsy commitment that the UK would get to three per cent some time between 2029 and 2034.
Four months later, Starmer went further. He agreed to raise core defence spending to 3.5 per cent of GDP by 2035, with an extra 1.5 per cent to be spent on resilience and security.
Reeves’ Treasury has intervened on these costly commitments. It has insisted that the “ambition” to get to the three per cent mark will only be achieved “when economic and fiscal conditions allow”. It has steered clear of providing a comment on how the UK could ever get to 3.5 per cent.
As the government has delayed the publication of the much-awaited Defence Investment Plan (DIP) by more than six months – a strategy paper that will set out funding for defence projects and the design of the armed forces – Starmer has now been besieged by Ministry of Defence (MoD) officials to overrule the Treasury.
Military officials have reportedly warned that there could be a £28bn funding shortfall for the armed forces and security services over the next four years due to spiralling costs – more on this later.
Starmer himself admitted that he needed to know “where the money’s coming from” before publishing the DIP.
The economics of defence spending is now one of the major issues looming over Downing Street every day. The political and economic dilemmas unsettling the Prime Minister and the Chancellor are made clear by this series of charts and the bleak choices they help reveal.
Starmer’s battle against NATO
Whitehall was not well-prepared for the return of a reinvigorated Trump to the White House.
The government was dealing with complex security arrangements across the network of intelligence-sharing nations known as the “Five Eyes – Australia, Canada and New Zealand, alongside the US and the UK. Throughout, London has remained dependent on Washington for the maintenance of the UK’s nuclear deterrent.
In recent years, the US has ramped up defence spending at an astonishing pace while Europe and Canada have struggled to keep up. A Nato estimate now suggests the US accounts for about 60 per cent of total expenditure across the 32 members.
If Trump carries out his threat to leave Nato, it could leave Europe and Canada exposed, forcing members to rethink the purpose of the alliance altogether.
Without the US, the UK becomes Nato’s second biggest spender behind Germany, strengthening its relative position in the alliance.
When Nato measures the contributions of member states to ensure they have kept their promises, it looks at military spending as a share of GDP. This makes oversight more of a political matter than an underlying economic cause. In these terms, the UK fares less well.
A wider geographical trend emerges: countries that are closer to Russia spend more on defence as a portion of their economy.
Even if it finds the political will to lift defence expenditure to 2.6 per cent of GDP, the UK will only be on a par with the Netherlands. It will lag far behind Germany, which rewrote its national borrowing rules to permit deeper investment in defence.
Government officials have said that Nato recorded a lower level of expenditure as a share of GDP than previously estimated, because GDP figures have been revised several times. There is credibility to this assessment.
The UK economy could have ended 2025 on a vastly different note than was thought at various points by key forecasters at the Office for Budget Responsibility (OBR) and Bank of England.
Perhaps the UK government need not worry too much about missing the target for 2026. Growth, after all, is set to be a lot lower in 2026 due the war in the Middle East. Capital Economics’ worst case scenario has the figure at 0.3 per cent.
Off target: How UK defence spending is missing
The defence budget will be protected especially when tough economic times are matched by bleak geopolitics. The bulk of spending belongs to the MoD rather than the Foreign Office or Home Office, Nonetheless, a look at the deeper characteristics is revealing.
The MoD puts more focus on capital than seen in other departments. This comes at a cost of spending on other day-to–day activities, which covers areas like soldiers’ wages, management of naval bases and airfields or costs incurred by missions.
This breakdown of the MoD’s spending makes it clear that capital expenditure is essential to defence, making it distinct from most other departments such as health or the Home Office.
Nato sets a target for 20 per cent of members’ expenditure to go towards equipment, with the rest going towards personnel and other day-to-day spending. The UK spends about 33 per cent on equipment.
Apart from the F-35s or the fleet that makes up the Royal Navy, there is one clear reason why the UK spends so much on equipment: nuclear weapons.
The UK’s ultimate deterrent is managed by a body which accounts for a sixth of the MoD’s £60bn budget, the Defence Nuclear Enterprise.
France’s expansion of its nuclear arsenal and extension of its deterrent to cover European countries has prompted some, including the Liberal Democrats, to argue that the UK should build its own nuclear missile infrastructure to end dependence on the US.
The US both builds and maintains Trident warheads under a service-life programme. The UK builds its own Vanguard-class submarines and the new Dreadnought vessels that carry nuclear weapons.
But a recent Policy Exchange paper found that there is a long history, particularly throughout the Cold War, of military officials and political figures arguing in favour of a full UK control of its deterrent. But plans to build weapons were consistently unaffordable.
Financial pressures are just as tight today.
Despite Starmer’s pledge to focus on defence, the UK is lagging far behind the linear trend needed to get to 3.5 per cent of GDP.
The OBR has warned that, according to today’s prices, the UK government needs to spend £6bn more in the financial year ending 2029, the last year of the current Spending Review period, to keep defence expenditure on a linear path to get to 3.5 per cent by 2035.
Its linear path assumption is based on defence spending needing to be 2.6 per cent of GDP.
The chart above suggests that spending as a share of GDP would be slightly higher in 2028-29 if the government wished to stay on a linear track. Reeves always has the option of announcing an emergency budget or re-opening the 2028-29 settlement when the Treasury sets departmental limits again in 2027. However, substantial spending commitments would require the fiscal watchdog to make another assessment on public finance.
If the UK wished to get to 3.5 per cent immediately, then it would have to spend around £40bn more a year.
Other Nato countries have ramped up expenditure at a much faster pace.
Germany has committed to hitting the 3.5 per cent target by 2029. According to Nato, it spent just 1.2 per cent of GDP on defence as recently as 2018.
Poland has also ramped up defence spending from around 2.2 per cent of GDP after the pandemic to as much as 2.8 per cent of GDP in 2024.
Reeves would struggle to find the cash to get the UK war-ready, even if she was to fully commit to the policy. A huge increase in borrowing would be needed, making her politically cherished fiscal rules the first casualty of any such move.
A combination of deep spending cuts and steep tax hikes, plus other policy adjustments, would be the likelier option for Reeves but such a cocktail is politically perilous.
Alternatively, the windfall of much higher growth could support an increase in expenditure.
Can defence drive growth?
Government strategists have also attempted to frame defence expenditure as a pro-growth measure, through the creation of a new taskforce and enforcing recommendations to support British businesses.
Economists say otherwise. The growth benefits of defence expenditure depends on how it is funded, Bee Boileau from the Institute for Fiscal Studies said.
According to Owen Good, head of economic advisory at the Centre for Economics and Business Research (Cebr), defence spending “often does not inherently increase productive capacity within the economy”. The Cebr estimated that every £1 in defence spending brings a return on average of 83p to GDP, smaller than the benefits that may be reaped from spending on infrastructure.
The best hope of a growth surge may be in expanding research and development spending, which could spill over into growth across non-military sectors. Think radars used in WWII now used for tracking civilian aircraft. Or, more famously, microwaves, which purportedly found their day-to-day application when a researcher accidentally melted chocolate.
King’s College London defence lecturer Dr Bence Nemeth, however, suggested that the days where the Pentagon accounted for 69 per cent of global R&D are gone.
“During the Cold War, the military’s R&D spending and efforts spilled over to civilian ecosystems or civilian economy but now it’s going the other way,” Dr Nemeth said.
“We can see that the civilian companies like Amazon and Fujitsu and these kinds of IT service companies are coming to the defence sector. They are providing the stuff that they are good at, and they are much better than what the military can develop.”
A moral case for defence expenditure and growth could also be made.
Penny Mordaunt, a former defence secretary and senior Tory figure, said she would argue for more spending to secure the “foundational capabilities” of growth in the UK economy: keeping businesses such as M&S and Jaguar Land Rover protected from cyber attacks, or ensuring nuclear plants and underground sea cables can’t be attacked.
The UK and Nato vs Russia and China
The prospect of war arriving on Britain’s shores appears to have been psychologically shunned by voters and treated with quiet trepidation by policymakers.
Mordaunt admitted that she ultimately failed, along with former Chancellor Jeremy Hunt, to get Rishi Sunak to back the armed forces before the 2024 General Election.
In an interview with City AM, she suggested that the only thing that would get the current government to “wake up” and sort funding for defence would be a trigger from the real world: the death of British citizens or soldiers.
Successive governments have made the most of the so-called peace dividend. Starmer has trumped up overseeing the biggest hike in defence spending since the Cold War but exactly that time frame is when major Western economies believed Russia would play ball with international rules.
Even so, Russia’s defence expenditure as a share of GDP far outpaced the UK’s – and since its invasion of Crimea in 2014, the US’ too.
In total expenditure too, Russia has been beating the UK on defence ever since George Osborne introduced his austerity measures after 2010, which hit the military hard.
Research by the Stockholm International Peace Research Institute (SIPRI) covers a much smaller portion of defence spending than Nato, hence why the UK’s defence spending estimate is smaller than Nato’s estimate. It excludes benefits for veterans, for example.
It’s not just Russia that is speeding ahead of the UK. China, which spends a lower share of its GDP than the UK, has a budget that is now virtually unreachable.
As military experts will say time and time again, it is not wholly down to the size of defence expenditure. Intelligence, strategy, technology and talent are also crucial to defence.
The numbers may also highlight the relevance of Nato in a time where it faces calls for reform. Trump’s repeated warnings that he may not support allies in future wars, particularly after their refusal to join the US’ war in Iran, has pushed the EU to create a new loan fund to expand military procurement.
Zack Polanski’s Green Party, which has surged in UK national polls, has vowed to reform the alliance “from within” and push for global nuclear disarmament while the popular German far-right party AfD has called on the government to expel US troops from the country.
From Trump’s own point of view, pulling the plug on Nato would amount to an enormous re-allocation of both political and military capital: getting Congress to agree, bringing home thousands of troops stationed abroad.
Adrian Kendry, a former defence economist for Nato, suggested the alliance’s breakup would be unlikely as the UK and the US are “locked by virtue of agreements”.
The alliance then looks relatively strong on a purely financial basis.
Trump, however, may not be fully trusted by allies’ leaders.
Initiatives to reform Nato independently of the US are almost useless without other members trying to plug any US expenditure gap.
Without the contribution to the alliance from the world’s largest economy, the collective might of the remaining members is almost matched by Russia, China and Iran, whose military might cannot be properly accounted for given the Islamic Revolutionary Guard Corps’ underhand funding.
The question is how the UK hopes to ramp up spending to levels that would allow it to support itself – let alone its allies.
Dr Nemeth argued that relying on the private sector to fund an uplift was off the table. But Aimie Stone, chief economist at ADS, the industry group for defence firms, said more private investors were looking towards the sector. Morningstar analysis in 2025 showed that even ESG funds took a keen interest in defence firms.
Stone said the investment could contribute towards resources for innovation and boost exports, which the group’s research said had increased by around 50 per cent in the last decade.
But referring to the absence of the government paper, ADS’ Stone added: “Vague promises, without clear dates, do not provide the certainty needed to plan, invest or scale.”
It’s not just the cash that’s needed.
Research by Peter Robertson at the University of Western Australia, and updated by SIPRI and the International Institute for Strategic Studies, might make for some more torrid reading for Starmer and other defence officials.
It suggests that when a measure of military purchasing power parity is taken into account, which compares cost pressures for governments investing in their armed forces, the UK slides down the pack of major spenders.
Military chiefs have reportedly warned that the multi-billion pound funding shortfall over the next four years was due to spiralling costs.
The purchasing power parity data may begin to explain why the spending gap exists. It suggests that if Russia wanted to build a drone, it would cost the UK five times as much to build the same model.
One reason for this may be that manufacturers pay workers less. They may also not have to navigate through the labyrinth of Britain’s planning laws. Mordaunt said regulations around areas such as testing were adding to burdens on defence providers.
The measure may not be useful given the UK’s high import volume, a source of relative currency weakness for the pound. The quality of technology in Russia may not be as high as the same product in the West.
There is more to defence than spending. Ukraine has largely held the line despite funding pressures. Iran retains the upper hand in its war with the US and Israel, according to both the military expert Michael Clarke and former MI6 chief Sir Alex Younger.
Nonetheless, the head of the UK’s armed forces, Sir Richard Knighton, has suggested that the UK was “not as ready as we need to be for the kind of full-scale conflict we might face” due to poor funding. He said ministers would have to make “difficult trade-offs”.
Starmer has vowed that after the end of the Iran war, there will not be a return to ‘business as usual’.
“We will make Britain a fairer and more secure country because that hope is what is needed as the country comes together and because how we emerge from this crisis will define us for a generation.”
It now falls on Starmer and Nato allies to follow through on their bold rhetoric. They may have to convince millions of hard-pressed voters and taxpayers first.