Approximate read time: 10 minutes

On 31 October 2024 the House of Lords will consider the following question for short debate:

Viscount Trenchard (Conservative) to ask His Majesty’s Government what progress they have made in laying out the roadmap to spending 2.5 per cent of gross domestic product on defence.

1. NATO’s 2% of GDP defence spending target

In 2014, NATO heads of state and government agreed to commit 2% of their national gross domestic product (GDP) to defence spending to help ensure the alliance’s continued military readiness.[1]

Defence expenditure is defined by NATO as payments made by a national government (excluding regional, local and municipal authorities) specifically to meet the needs of its armed forces, those of allies or of the alliance.[2] For the purposes of this definition, the needs of the alliance are considered to consist of NATO common funding and NATO-managed trust funds.

A major component of defence expenditure is payments for armed forces financed from within the ministry of defence budgets.[3] Armed forces include land, maritime and air forces as well as joint formations, such as administration and command and special operations forces. They might also include parts of other forces such as national police according to various conditions, including whether they are trained in military tactics. Retirement pension payments made directly by the government to retired military and civilian employees of military departments and pensions for active personnel are also included in the NATO defence expenditure definition.

Defence spending by NATO member countries has been a focus of attention in recent years, particularly following Russia’s invasion of Ukraine and its potential implications for collective security in Europe. The latest estimates of NATO member defence spending are outlined in figure 1 below (and as compared with 2014 levels).

Figure 1. Defence expenditure as a share of GDP (%) (based on 2015 prices)

Figure 1. Defence expenditure as a share of GDP (%) (based on 2015 prices)
(NATO, ‘Defence expenditure of NATO countries (2014–2023)’, 14 March 2024)

As illustrated by figure 1, the UK is on course to spend approximately 2.33% of its GDP on defence in 2024. If the UK were to increase its spending to 2.5%—and assuming other member states’ spending commitments remained constant—the UK would overtake Finland and Denmark but remain behind other NATO member nations including Greece and the United States.

2. UK defence spending

In the 2023/24 financial year, the UK spent £54.2bn on defence.[4] According to plans published under the previous Conservative government, this was expected to rise to £57.1bn in 2024/25, a 4.5% increase in real terms.[5]

The Ministry of Defence received a four-year settlement at the spending review in 2020, when the then Conservative government allocated an additional £16.5bn to the defence budget over the period 2020/21 to 2024/25. Following Russia’s invasion of Ukraine, the spring budget 2023 allocated an additional £5bn to defence spending over the next two years (2023/24 and 2024/25), and a further £2bn per year in subsequent years up to 2027/28.

As noted in analysis from the House of Commons Library, these projections would mean that the annual defence budget rose £11.2bn across the spending review period (£57.1bn in 2024/25 compared with £45.9bn in 2021/22).[6] However, when adjusted for inflation, the increase was expected to be closer to £4.4bn (8.4%). Further, most of this additional funding was allocated to capital budgets whereas the Ministry of Defence’s day-to-day budget was forecast to decline in real terms over the same period.

Updated defence expenditure figures will be published as part of the government’s budget announcement on 30 October 2024.

3. Labour government’s commitment to spend 2.5% of GDP on defence

The Labour manifesto pledged that Labour ministers will “set out the path to spending 2.5 per cent of GDP on defence”.[7] This is similar to a commitment made by the previous Conservative government in April 2024 to increase defence spending to 2.5% of GDP by 2030.[8] The Labour manifesto did not commit to a specific target date by which this would be achieved. When asked about this on 10 July 2024, Prime Minister Keir Starmer said that the forthcoming strategic defence review (SDR) would set out a “roadmap” to reaching the 2.5% target.[9]

The subsequent terms of reference for the SDR, published on 17 July 2024, said:

The SDR will determine the roles, capabilities and reforms required by UK defence to meet the challenges, threats and opportunities of the twenty-first century, deliverable and affordable within the resources available to defence within the trajectory to 2.5% [of GDP to be spent on defence].[10]

It said that setting out the path to 2.5% would be “dealt with at a future fiscal event”.[11]

Defence Secretary John Healey has indicated, however, that “tough choices” on defence spending may also be required, arguing that the government had inherited a challenging fiscal climate.[12] He argued that the government was dealing with public finances that were “far worse” than it had anticipated before the election. When pressed on whether decisions would have to be made on the defence budget, he said:

Including on defence […] we have to get a grip of the public finances, we have to see growth back in the economy, and that’s the way that we can rebuild both the wealth of this country as well as the public services.[13]

In a recent debate in the House of Lords, defence minister Lord Coaker reiterated the government’s commitment to 2.5%:

The government have an absolute commitment to 2.5%. I know that that is not what some people want to hear and that there is no timeline given to it, but there is an absolute commitment to 2.5%. It is not an aspiration.[14]

4. What defence challenges exist and will spending 2.5% of GDP on defence be sufficient to address them?

Some analysts have questioned whether even a rise in defence spending to 2.5% of GDP will be sufficient to combat the rising threats facing the UK. For example, Olivia O’Sullivan, director of the UK in the world programme at Chatham House, contends that to confront Russia and play a leading role in NATO the UK may need to consider moving closer to states like Poland which spend over 3% on defence. She argues that 2.5% is “likely to only fill existing gaps for the current defence equipment plan” (the Ministry of Defence’s 10-year spending plan for equipment and support).[15]

Speaking in the House of Lords, crossbench peer and former chief of the defence staff Lord Stirrup also contended that he had seen analysis that suggested NATO members would need to spend over 3% to combat the threats the alliance now faces. He argued that increasing expenditure to 3% would represent a return to earlier spending levels in real terms:

Investment in defence needs to be above 3% of GDP, not the 2.5% that the government say that they aspire to but for which they have not so far set out a firm plan. It is worth saying that 3% of GDP for the UK, allowing for all the accounting changes that have taken place in recent years, would not be much more than we were spending in 2010, when Europe was not facing a severe threat from Russia.[16]

As a means of comparison, analysis from the House of Commons Library indicates that annual real terms expenditure on defence stood at £57bn in real terms in 2009/10 compared with £56.3bn in 2022/23.[17] Expenditure dipped during the intervening period in real terms, however, reaching a low of £44.5bn in 2016/17.

Malcolm Chalmers, a defence analyst and deputy director general of the Royal United Services Institute (RUSI), has also argued that various decisions on defence spending may not be able to wait for the outcome of the strategic defence review. The review has begun by commissioning written submissions that will be followed by a period of ‘review and challenge’, after which the reviewers are due to submit their final report to the prime minister in the first half of 2025. Chalmers argues that issues which likely to need to be addressed before then include gaps in funding identified by the National Audit Office, for example in the equipment plan as noted above,[18] and to fund commitments to pay increases:

The MOD faces a large funding gap in the current (2024/25) financial year, and in 2025/26. In December 2023, the National Audit Office identified a deficit in the equipment plan of £3.0 billion for 2024/25 and a further deficit of £3.9 billion in 2025/26. The MoD will also need to find an extra £1 billion each year to fund the above-budget costs of the 2023 and 2024 pay settlements for the armed forces.[19]

For Chalmers, the effect of these and similar measures could be that more spending is deferred than would normally be the case. This could risk increasing lifetime project costs (through spreading work over a longer period), delaying the introduction of new capability and forcing the armed forces to extend the lifetime of “older, less effective kit”. He argues that the forthcoming October budget will be crucial in revealing how the government intends to meet these challenges and increase spending to 2.5%. However, he also highlights the forthcoming spending review due in spring 2025, arguing that this may reveal the true scale of the level of investment needed to deliver 2.5%:

If the [2025] spending review confirms that the UK is on track to be spending 2.5% on defence by 2029/2030, this would entail significantly more funding than would be needed to keep spending at 2.32% of GDP—some £6bn per year by 2029/30 according to the author’s own calculations. But not all of this will be available for additional investment in conventional forces. Nuclear and submarine spending, which now accounts for almost 40% of planned equipment spending, is due to rise further in the coming years, squeezing the resource available for other areas.[20]

As the National Audit Office (NAO) recently reported, any increase in defence resources is likely to be deployed differently to the past:

A shift is already under way: the 2023 defence command paper, ‘Defence’s response to a more contested and volatile world’, set out some lessons from the war in Ukraine, including the need to move away from basing acquisition primarily on large, multi-year physical equipment ‘platforms’. Instead, investment should be prioritised in software as much as hardware, including cutting-edge technologies (e.g. autonomous vehicles and direct energy weapons) and research (e.g. Artificial Intelligence), as well as in the new domains of cyber and space capabilities. It also set out the need to increase munitions stockpiling to build resilience.[21]

In addition, the NAO also notes that the need to invest in updating the UK’s nuclear deterrent is likely to make up an increasing proportion of total defence spending. The NAO observes that the government has also indicated areas where it will seek to reduce waste in defence spending, particularly through procurement reform.

5. Read more


Cover image by Don Jackson-Wyatt on Unsplash.

References

  1. NATO, ‘Defence expenditures and NATO’s 2% guideline’, 18 June 2024. Return to text
  2. As above. Return to text
  3. As above. Return to text
  4. HM Treasury, ‘Spring budget 2024’, 6 March 2024. Return to text
  5. HM Government, ‘Defending Britain’, 23 April 2024; and House of Commons Library, ‘UK defence spending’, 3 May 2024. Return to text
  6. House of Commons Library, ‘UK defence spending’, 3 May 2024. Return to text
  7. Labour Party, ‘Labour Party manifesto 2024’, June 2024, p 15. Return to text
  8. HM Government, ‘PM announces ‘turning point’ in European security as UK set to increase defence spending to 2.5% by 2030’, 24 April 2024. Return to text
  9. BBC News, ‘PM says defence spending commitment ‘cast iron’’, 10 July 2024. Return to text
  10. Ministry of Defence, ‘Strategic defence review 2024–2025: Terms of reference’, 17 July 2024. Return to text
  11. As above. Return to text
  12. BBC News, ‘Minister warns of ‘tough choices’ on defence spending’, 3 September 2024. Return to text
  13. As above. Return to text
  14. HL Hansard, 9 October 2024, col 262GC. Return to text
  15. Olivia O’Sullivan, ‘UK election manifestos make promises on security and foreign policy—but tough choices await a new government’, Chatham House, 20 June 2024. Return to text
  16. HL Hansard, 9 October 2024, 225GC. Return to text
  17. House of Commons Library, ‘UK defence spending’, 3 May 2024. Return to text
  18. National Audit Office, ‘The equipment plan 2023 to 2033’, 4 December 2023. Return to text
  19. Malcolm Chalmers, ‘UK defence spending decisions can’t wait for the strategic defence review’, Royal United Services Institute (RUSI), 9 September 2024. Return to text
  20. As above. Return to text
  21. National Audit Office, ‘An overview of the Ministry of Defence for the new parliament 2023–24’, October 2024. Return to text