Defence investment can become a new engine for UK growth

The Chancellor reaffirmed the trajectory towards defence spending reaching 3% of GDP by 2030 and 3.5% by 2035, with further detail due at next year’s Spending Review. The government has also launched an Innovative Defence Financing Taskforce as it considers how its ambitions can be funded and delivered. 

But this is about considerably more than public spending.

The National Wealth Fund and British Business Bank will deploy up to £5 billion of investment and lending over the next four years, targeting defence, dual-use technology and sovereign capability. Alongside this, the government has made clear its ambition to attract substantially more private capital into the sector, including through public-private partnerships. 

Taken together, these measures send a strong signal that the government wants defence and dual-use technology to become increasingly investible growth markets.

That has potentially significant implications for UK businesses and international investors. Greater investment is likely to create opportunities throughout the defence and aerospace ecosystem, including advanced manufacturing, technology and supply chains, and could stimulate increased activity around M&A, growth capital, joint ventures and major projects.

For overseas investors considering the UK, the direction of travel is particularly interesting. Defence, aerospace and advanced manufacturing are sectors where the UK already has considerable expertise, but access to capital and the development of investible opportunities will be crucial if that capability is to translate into sustained economic growth.

The announcement of a 10-year, £2.5 billion civil and defence aerospace gas-turbine programme with Rolls-Royce, expected to support more than 3,000 jobs, provides an early example of the potential scale and longevity of investment that could follow. 

There will, however, be complexities that investors need to navigate. Defence is a highly regulated market and increased investment, particularly from overseas, will inevitably bring national security considerations into sharper focus. Transactions and investment decisions may need to take account of regulatory screening, procurement rules, export controls, intellectual property and increasingly complex supply-chain considerations.

The UK’s discussions with Finland, Poland and the Netherlands about a potential new defence financing mechanism or bank also point towards a more international approach to increasing defence investment and procurement across NATO. 

If the government can successfully combine public investment with significantly greater levels of private capital, today’s announcements could therefore have implications well beyond defence policy.

At a time when the UK is competing internationally for investment, the opportunity is to create an ecosystem in which capital, technology and manufacturing capability reinforce each other. The challenge now is turning the ambition announced today into investible projects and opportunities that give UK businesses room to grow and international investors the confidence to commit capital for the long term.

Our work with international investors, including through Irwin Mitchell’s recent FDI research, has consistently highlighted the importance of confidence, certainty and access to opportunity in attracting capital to the UK. Defence and dual-use technology could now become an increasingly important part of that investment story.

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