UK Defence Economics

Recent Conservative governments were increasingly concerned with recognising that defence spending should contribute to UK prosperity. The Labour government, elected in July 2024, has firmly underlined this stance. In its consultation paper on national industrial strategy, the defence sector is identified as a key sector for growth.

In government policy, private sector defence spending aims to further multiple goals. Spending is traditionally associated with enabling UK forces to deter and frustrate aggressive adversaries, but even this is not a simple matter when a sustained conventional conflict occurs. Today, the risks of relying on foreign suppliers appear to be higher than a decade ago. Further, the outputs of the defence industry become a foreign policy tool when they are provided to others, such as Ukraine.

These considerations make the defence industry a cornerstone in generating UK security. But defence-focused installations, including military bases, do also provide employment and local spending for businesses and, formally since 2015, the Ministry of Defence (MoD) has been charged with using funds to support greater national prosperity. Thus, although defence spending serves multiple purposes, government policy does not precisely direct how different ends are to be weighted.

As Philip Dunne, a former procurement minister, found when he prepared his report on the value of the defence industry to the UK economy, there is an information problem due to the multiple sectors that are involved with defence: the MoD buys everything from office furniture to combat aircraft. This paper points to findings about which there can be considerable confidence while also noting where more research is needed.

Although the defence industry appears as a small element in the overall UK economy, it looms much larger once the most prosperous areas of the UK (London and the southeast) are removed from the picture. As the UK defence industry is predominantly located outside London, the importance of good salaries, a skilled workforce and above average productivity is enhanced when prosperity is the focus.

Although defence is making increasing use of electronics and software, major weapons and platforms must be engineered and physically manufactured. Consequently, many defence industrial sites are located in areas that were part of the Industrial Revolution. Shipbuilding and its support are concentrated in historical coastal sites in Scotland and the southwest. Submarine building has become the maritime focus at Barrow-in-Furness in the northwest since the early 20th century. And as UK coastal areas are poorer than the overall UK average region, these defence sites play a significant role in sustaining economic stability in those areas.

Aircraft became a national endeavour during the First and Second World Wars but their construction and design have since become concentrated around Blackburn and Preston in the northwest, although their engines and other subsystems are made elsewhere.

While basic economic principles assert that the labour and capital resources of failing businesses will normally be taken over by others with better prospects, UK and wider international experience is that areas dominated by long-standing industries such as textiles, coal, steel, pottery and mechanical engineering take much longer to recover when such industries fail.

Much of the defence industry in the UK should be recognised as a protection against impoverishment. There is wide recognition of the long-term social deprivation of a town where the workforce has been run down – for example, the shipyard’s workforce on the Trident programme in Barrow-in-Furness.

Defence businesses in the UK also positively contribute to the development of the national economy. With a longer-term prospect of orders, defence businesses train apprentices and graduates, some of whom become available to the commercial economy. They push forward areas of technology, including digital engineering, which is starting to dominate most manufacturing sectors. Firms in defence supply chains must use MoD standards for the protection of their IT systems, which promotes cybersecurity both nationally and in firms that work on both military and commercial contracts. This includes large firms such as Leonardo, Rolls Royce and Airbus, as well as thousands of smaller firms. Additionally, the limited exposure of defence to commercial economic cycles supports both those firms and wider resilience when the wider economy is suffering.

The UK government has committed to factoring in the prosperity-generating aspect of defence to its defence equipment decisions. This can play a key role where economic infrastructure is otherwise degraded. However, the lack of concrete methods to measure prosperity-related impact often leaves this factor undervalued when deciding between international and domestic bids. This paper addresses this gap by offering a more nuanced perspective.

Introduction

The significance and value of defence industry businesses have often been contested. This attitude can be traced back to post-First World War writing countering private sector involvement in supplying defence, President Dwight D Eisenhower’s warning about the power of a military–industrial complex, and debates about the impact of defence spending on economic growth. The 2020s have seen the rise of Environmental, Social and Governance standards that sometimes classify investing in defence as “unethical”. While this line of argument has been weakened by the acknowledgement of the defence industry’s importance in supporting Ukraine, it has re-emerged through controversies surrounding the Israel–Hamas war in Gaza.

Spending on defence could be seen as a necessary evil. In an ideal world where armed forces were no longer needed, dismantling the defence industry would be a welcome challenge. Some felt this was the situation in the early 1990s: as demand for defence products declined, many defence companies sought business in the commercial world, which proved more difficult than expected. The leading UK example of failure concerned the General Electric Company (GEC), the large UK engineering and defence business, which sold its defence interests to BAE Systems in 1999 and moved into telecommunications a few years later. In the 2020s, changes in Russian foreign policy, an increasingly unstable Middle East and northern Africa, and China’s more assertive posture have generated a significant security agenda for Western countries. Equipping their armed forces adequately is back on the European political agenda. The UK government seeks independence in its use of and access to assured capabilities and materiel, pointing to the necessity of critical British industrial capabilities that can provide it. At the same time, political leaders are calling for defence choices to contribute to spreading prosperity.

▲ Figure 1: Multiple Objectives and Defence Spending Decisions with the Private Sector. Sources: HM Government, Defence and Security Industrial Strategy: A Strategic Approach to the UK’s Defence and Security Industrial Sector, CP 410 (London: Her Majesty’s Stationery Office, 2021); HM Government, National Security Strategy and Strategic Defence and Security Review 2015: A Secure and Prosperous United Kingdom, Cm 9161 (London: His Majesty’s Stationary Office, 2015); MoD, Defence in a Competitive Age, CP 411 (London: Her Majesty’s Stationery Office, 2021), pp. 58–59; HM Government, Safeguarding the Union, CP 1021 (London: His Majesty’s Stationery Office, 2024); Department for Business & Trade (DBT), “Invest 2035: the UK’s Modern Industrial Strategy”, 24 November 2024.

Figure 1 shows the multiple objectives and decisions to be served by defence spending with the private sector. Some are inter-related: for instance, operational independence is closely linked to, and even based on, industrial capability. While acknowledging all these areas, this paper focuses on prosperity and considers how the UK defence industry relates to UK economic prosperity.

This paper has four chapters. Chapter I focuses on the key factors shaping the UK defence economy and considers the context of government policy towards the defence industry in the UK. This chapter also discusses the question of how much money is involved and considers the range of goods and services bought by the UK defence industry, and how much suppliers are focused on the defence market. Chapter II recognises that the defence industry is a relatively small part of the economy but with a disproportionate impact. Reasons for this include high pay levels, advanced technologies and the interactions between military and commercial work. The industry’s regional presence also plays a vital role, often supporting areas that are otherwise economically struggling. The chapter also considers the probable fate of defence sector-dependent areas should that business disappear. Chapter III outlines the areas in the UK in which it is likely that a significant defence industry will have a positive impact on the wider manufacturing base, where the development of skills and knowledge in defence include additive manufacturing technologies, communication technologies and digital engineering.

Methodology: The Residual Data Problem

This paper does not directly address the difficult question of how value in defence should be defined. It is a multifaceted concept that is subjective and dynamic.

The paper uses a range of existing datasets in its descriptive analysis, including government statistics, commercial studies and academic research. It also makes reference to studies from independent consultancies sponsored by individual large firms to assess their contributions to the economy. However, despite all this quantitative information, the complexity and scale of the defence industrial sector mean that much is still unknown. Former procurement minister Philip Dunne highlighted this in his 2018 report on defence in the economy. In response, during the same year, the Joint Economic Data Hub (JEDHub) was established within the Ministry of Defence’s (MoD) Defence Solutions Centre to enhance data collection and reporting on this area. The JEDHub has since published three annual reports, the latest in April 2024, which this paper uses for its analysis and on which it builds. For much of its information, the JEDHub relies significantly on the willingness of 22 companies to collect and send information.

A key issue with these statistics is the definition of “defence business”. As outlined in Chapter I, the range of products and services supplied to defence is broad. This paper focuses on the specialised defence business, as this sector is mostly not driven by traditional market dynamics. The complexity, the required expertise to develop and produce defence technology and the value of major defence products, such as platforms, mean that there is often only one or very few suppliers. At the same time, these suppliers have only one primary customer – the MoD. This makes the relationship between supply and demand special and requires policy to govern that relationship. One effect is that the MoD potentially has greater agency in shaping the market than it would in a market where it is one of many customers. This paper is concerned therefore with a key driver of that policy – the economic impact of UK defence businesses.

A key definitional problem remains: even businesses that specialise in defence technology may also have a substantive commercial business. Thus, there is a need to differentiate between their activities for defence and for the commercial market. This can be hard to describe statistically because of the lack of a distinct definition of what constitutes “defence business”. For instance, dual-use items may be primarily developed and produced both for defence and for the commercial sector. This has an impact on the effect that defence spending has on jobs associated with that business and is also difficult to measure. There is no easy way to establish the necessary share of a firm’s work being devoted to a defence product for it to qualify as a “defence business”.

Statistical datasets struggle with accurately pinning down the regional impact of the defence industry. This is because regional data is often compiled from the address to which money is paid, but not necessarily from where the cost has been incurred. Also problematic is the challenge of discerning what contributes a “British defence business” when the headquarters is located overseas. At the turn of the millennium, the Blair government concluded that a range of factors impacted “Britishness”, including where technology was created, where skills and intellectual property resided, where jobs were, and where investment is made. Clearly these are related but separate elements, although the link between jobs and investment is normally close. A significant part of this framework was that the location of ownership and overall control was considered not relevant.

Consequently, the UK activities of firms such as Airbus, Leonardo, Thales, Raytheon and General Dynamics are all treated as “British” businesses, even though they are all foreign owned. They add significant value to UK jobs and the UK economy, are permitted to be members of the UK industrial body Aerospace, Defence & Security (ADS), and several were part of the former UK Defence Suppliers Forum. It should be stressed that there are many more foreign-owned businesses in the UK carrying out defence work.

As a result of decades of privatisation, almost all businesses supplying the MoD are in the private sector. Those whose shares are available on the London Stock Exchange can be bought by funds from around the world, although the government does keep an eye on foreign purchases that would give a controlling interest to foreign businesses. Additionally, over the last two decades, important second-tier UK-owned firms have been bought either by foreign primes (for example, Lucas Aerospace is now part of GE Aerospace), or by capital funds looking to generate more value through restructuring (while generating an option of selling off part, or the whole of, the business). GKN, bought by UK-based Melrose, Cobham, bought by Advent International and Ultra Electronics, bought by the now US-based Cobham share this experience. In early 2025, the latest target of a US investor has reportedly been the defensive aid business Chemring.

With all this in mind, this paper uses the best information currently available, noting that the most common limitation in the JEDHub work is the omission of defence data rather than overstatement of defence claims.

I. Government Policy on the Defence Industry

This paper was primarily prepared in the context of previous Conservative government policy, which encouraged the MoD to use its resources to deliver on multiple objectives beyond securing military advantages for the UK’s armed forces. The 2021 Defence and Security Industrial Strategy referred to “critical industrial capabilities” as “a vital strategic asset in their own right”. Defence choices should provide the UK government with operational independence regarding the use of its armed forces, contribute to UK economic prosperity and levelling-up agendas, and strengthen the UK. The current Labour government’s January 2024 paper on safeguarding the UK made particular reference to the role of the defence industry in Northern Ireland. Since coming into office in July, the government has also underlined its expectation that the defence sector should benefit the UK economy. Its Green Paper on UK industrial policy identified the defence sector as a key sector to driving growth.

This paper directly addresses how to build, strengthen and sustain UK prosperity, with limited attention paid to the link between domestic industrial capability and the government’s desire for operational independence in its forces, which would be compromised if domestic defence firms fall short. However, the importance of operational independence should not be overlooked, especially as the UK aspires to use its forces for purposes other than the defence of national and allied territory. This paper also does not consider the economic impact of spending on governmental defence establishments in detail. However, it recognises that some military bases are of great local significance in terms of direct civil employment, as are those who deliver infrastructure projects.

In principle, the current government could abandon all these policy stances, but its previous positions on defence suggest that this is unlikely. In fact, the government would like to generate further positive economic benefits from defence spending, and has identified defence as a key sector for economic advances in its first paper on national industrial strategy.

How Much Money is Spent?

MoD data for 2023/24 separates payments to the US government for Foreign Military Sales (FMS) items – which the US Department of Defense (DoD) then buys for the UK from US industry – from direct transactions with UK and overseas industry. The MoD knows that some FMS work is carried out in the UK, particularly with the F-35 fighter aircraft, and reports its value. The MoD also reports on spending directly with industry worldwide and the proportion that is spent in the UK. Thus, it is possible to discern how much money has been spent in the UK and how much has been spent overseas.

The total amount spent by the MoD globally with UK and foreign-owned organisations was £38.2 billion in 2023/4, of which £600 million was on FMS deals with the US. Of this, the total spent with UK firms was £28.8 billion. Excluding mine-protected vehicles for Afghanistan and Iraq, such as Mastiff and Ridgeback, the list of platforms bought from the US in the last 15 years includes C-17 transport aircraft, F-35s, Predator remotely piloted aircraft systems (RPAs), Reaper RPAs, Apache A-64E attack helicopters, Rivet Joint electronic intelligence aircraft, Chinook helicopters, Wedgetail airborne command and control aircraft and P-8 Poseidon maritime patrol aircraft. The latest data from the US State Department (published in 2019) showed that the UK imported three times more defence equipment from the US than Germany did, and seven times more than France.

Defence firms and the government seek to use the domestic defence goods and services market as the basis for exports to foreign governments. The scale of exports is a matter of some contention since the data collected in the UK and published by the government typically addresses orders rather than the deliveries that often follow years later. The data shows that the five-year average of defence exports between 2018 and 2022 was around £10 billion a year, equivalent to 40–50% of what the UK MoD buys overall. The aerospace sector dominates defence exports and the Gulf states have emerged as major customers. However, the full picture is more complex. Rolls-Royce and Leonardo sell important subsystems, such as radars, to a wider range of customers. The Swedish Gripen, for instance, has a Leonardo radar from the UK, some Japanese ships have Rolls-Royce engines, the New Zealand navy has MBDA missiles, and BAE Systems has provided technical help for other national combat aircraft programmes, including in Sweden and Korea. There is no assurance that UK-developed and UK-built military equipment would succeed in export markets, but extensive reliance on imports certainly erodes the UK defence industry’s export potential.

What Does the Ministry of Defence Buy, and from Whom?

The goods and services used by the defence industry span a vast range of categories. At one end, governmental defence customers require generic commercial goods and services, such as office furniture, sports clothing for soldiers, fuel and catering services. There are many potential suppliers in these areas, and the MoD is just one of multiple customers, and could account for just a small part of such firms’ sales. Moreover, the entry barriers for firms trying to break into most of these areas are modest in terms of the required expertise, facilities and finance. New firms can come in while poorer performers disappear. Such commercial products have many characteristics of perfect markets on which much of conventional economics is based.

In the large middle are firms supplying goods and services on a commercial basis, but which involve little to major modification to make them suitable for defence use. Trucks, roll-on roll-off ferries, some helicopter types and some UAVs have these attributes. A useful delineator of such goods is whether they are defined in export control law and regulation as dual-use goods requiring export licences before they can be sold to a foreign customer. The UK list of dual-use goods is extensive, covering some 350 pages in the government’s Export Control List. The list also contains 36 pages for specialised defence areas, such as combat aircraft, artillery pieces, armoured vehicles and warships. Suppliers of major platforms and systems for defence tend to have very different problems, opportunities and natures from those in the commercial world. There is just one key initial customer for a UK specialised defence supplier – the MoD.

The Ministry of Defence and Armed Forces as Sole Buyers

Navies, air forces and, to an increasing extent, armies rely on platforms to move and indeed to operate. Platforms are thus important, with many remaining in service for decades. For example, there was a 20-year gap between one UK Army order for an armoured combat vehicle (Challenger 2 in 1994) and the next (Ajax in 2014). For firms required to develop, produce and sell such platforms, a viable business model can be difficult to specify because national orders can be rare.

When intervals have been long between domestic orders of a military product category, the unsuccessful firm in a bidding competition, or even the winning firm, often either closes or sells that part of its business. Other firms have behaved similarly when they believed that their overall defence order prospects were too limited. In 1989, General Electric, Plessey, Vickers Shipbuilding & Engineering, Devonport Management, Ferranti, Hunting, Racal, Thorn EMI, Vickers plc and Westland were among the 18 suppliers listed by the MoD as among its top suppliers paid more than £100 million in 1987–88. Today, none exist as a separate entity.

As a result, UK defence in 2025 is often marked by a monopsony buyer (one buyer among many sellers) facing an oligopoly or even a monopoly seller. This is not just a UK phenomenon, with oligopolies or even national champion companies facing the defence ministries of countries such as France, Germany and even the US. After 1993, as noted by Michael Brown, “America’s 50 main defense suppliers consolidated to five. Today, the top six suppliers to the U.S. Department of Defense receive two-thirds of all procurement dollars”.

Some companies survive in the sector through export orders and by generating required upgrades to older systems. However, it is never easy to sell a defence product internationally that has not been endorsed – that is, bought by the armed forces of that company’s national government. Moreover, a growing number of countries are seeking to develop their own defence industrial capabilities.

It is here that several policy directions meet. The UK government wants operational independence regarding the use of its forces, which means the UK should enjoy access to a capable industrial base. To survive commercially, a firm requires continuity in development, production and support work. For national and regional prosperity, a region needs defence businesses that provide secure and sustained opportunities. A firm might struggle to attract and train specialised young staff if they will only have a job in their locality for eight or nine years. The Appledore shipyard in Devon, for example, had minimal work once it had completed its blocks of the Queen Elizabeth-class carriers. Babcock closed the shipyard in 2019, and its yard in Rosyth, Scotland has no assured shipbuilding work once the five Type 31 fleet is completed. There is uncertainty about the Type 32 project.

Boards and personnel of major defence firms should not be drawn into complacency and must be aware that their position depends on their delivery record, creating a synergistic relationship between government and defence business. If firms perform well, they enjoy security and the government obtains operational independence and military capability. If companies fall short, they are likely to lose their business with the government, and the government will have to turn to foreign suppliers. The price of this, for government, is the loss of a credible claim to operational independence.

Some firms that have a significant defence portfolio can choose whether they will focus entirely on defence sector equipment or whether they want to also compete in the commercial sector. In a comparison of three UK firms in the Global Combat Air Programme (GCAP), BAE Systems is 96% dependent on revenue from defence sector products; Leonardo 75%; and Rolls-Royce 25%.

The deeper investigations go into supply chains, the more it is revealed that firms address both defence and commercial markets. Every firm has its own concept of how defence work fits into its overall strategy and business model. Specialised defence products contain components, and even subsystems, that are produced by firms serving both commercial and military markets, and it is likely that there are more than 10,000 firms in the UK that have some defence business. From a prosperity perspective, a crucial, yet unresearched, question concerns the extent to which a mixed commercial–military firm benefits from more defence work or suffers from its cancellation.

To contain external dependence while seeking the claimed benefits of competition and maintaining access to advanced systems, successive governments in the UK have allowed, or even encouraged, foreign defence firms to invest in the UK. Each firm has its own individual pattern of activity, which can address some or all R&D, manufacturing and support activities. Airbus, Leonardo, MBDA and Thales are the most prominent firms from Europe operating in the UK, while General Dynamics (about 1,500 employees), Lockheed Martin (about 1,700) and Raytheon (about 2,000) are the larger US firms operating in the UK.

A further feature of the market for many defence systems is that the purchase price is often just the beginning, with direct in-service costs exceeding the purchase within a decade. A US DoD memorandum observed 15 years ago that: “Sustainment costs have five to ten times more impact on total life cycle costs than do RDT&E [research, development, test and evaluation] costs”. Frontline defence equipment is still generally designed for high-level performance rather than the maintenance-free operating periods that form the basis for most commercial equipment. Military platforms and many of their subsystems are supplied and supported on the basis of mean time between failure rates that would be unacceptable in commercial markets. The US is more open about availability than the UK: in 2021, across the US Air Force, for every 10 aircraft in its possession, three were unavailable at any one point in time. As of 2022, all variants of the F-35 had lower availability rates than this. Other reports indicate that the situation has not much improved, if at all.

These factors mean that defence maintenance, repair and overhaul absorb significant costs, but also provide much work for the industry. Many in-service needs can only be supplied by the original equipment manufacturer (OEM), which may opt to offer a modest initial purchase price, knowing that it can charge handsomely for parts supply and related services over the following decades. Total in-service costs are much harder to calculate than “sticker prices” and are much less available in the public domain. However, particularly with combat aircraft, UK governments have pursued in-service support savings by contracting with the lead companies for availability and reliability rather than simply supplying parts.

An increasing challenge in the 2020s is that there is an opportunity, and in some cases a need, for regular upgrades to military equipment as opposed to just maintenance and repair, given the increased electronic content and software of many systems. In defence (as in the commercial world), firms are usually reluctant to transfer full intellectual property (IP) rights to a user, which would be needed for the government to make its own arrangements for the modification and even repair of equipment. Understandably, some governments are seeking to weaken the power of OEMs, but this is not easy given legitimate concerns about safety, fair trade and the commercial importance of IP for the firm involved. The bottom line is that in defence, the governmental customer can feel itself to be subject to vendor lock-in.

Defence industrial capabilities and behaviours are also central to governmental efforts to protect the country and the government’s perception of the national interest. Happily, for the most part, defence activities are focused on deterrence and capability preparation, but actual military operations often place special demands on the industrial sector. Experience of protracted conflicts, including the Second World War, the Korean War and the ongoing war in Ukraine, have demonstrated the value of access to a strong and agile supply base. Maria Eagle, the UK Minister for Defence Procurement, observed at RUSI in March 2025:

Amidst the uncertainty surrounding European security … one thing … is certain and that’s a fighting force is only as strong as the industrial base that stands behind it. So transforming European defence industrial capabilities and boosting capacity are going to be integral to this defining mission of our time.

Even the more recent British military operational activities, despite being less intense on an order of magnitude, placed urgent demands on the supply base. All these considerations result in the choice of this paper to focus on defence in the economy rather than “defence economics”, as well as why the government, like others, has accepted that the defence industrial base should be viewed as a strategic asset. However, as noted earlier in the Methodology section on data issues, there is no clear specification of which defence suppliers qualify as sufficiently British to be a strategic asset. What is most likely to interest the MoD, from an industrial capability perspective, is a firm’s capacity in R&D, integration and production, as well as support and upgrades. From a wealth-creation perspective, the scale of employment and salary levels should also loom large. Each of these considerations should inform the MoD’s approach to choosing firms, which will in turn inform the government’s strategy.

II. Key Economic Contributions of Defence Firms

This chapter addresses the economic consequences of defence spending with the private sector rather than the consequences of defence spending overall. There is an argument that suitable defence spending boosts investor confidence, because defence spending assures potential investors that a country is unlikely to be attacked (and is thus a safe investment), but this is not addressed in this paper.

Defence Can Appear Economically Insignificant

National economic statistics signal that defence should be a minor factor in the UK economy. Defence’s share of the economy, at a little over 2.3% of GDP, has reduced from its Cold War percentage share (4.1%) and considerably reduced from what its share of GDP was 50 years ago (5.1%).

Defence has become a small part of the national R&D effort. The Office of National Statistics reported governmental R&D spending in 2022 as £2.1 billion on defence, with £13.4 billion focused on commercial purposes. For the economy as a whole, a parliamentary study notes:

The Office for National Statistics (ONS) shows that, in 2020, total public and private expenditure on R&D in the UK was £61.8 billion.

However, along with government funding from UK Research and Innovation, defence may be ready to support projects with a more distant return than that of some commercial firms.

Regarding employment, MoD data for 2022/23 shows that defence accounted for a total of 434,000 UK jobs, which constitutes one in 60 UK jobs. Of these, 239,000 were in the private sector, and the MoD employed 58,000 civilians and 142,000 service personnel in the UK. (The private sector numbers exclude those involved in the promotion and delivery of defence exports.)

The employment significance of exports is almost impossible to decipher since the levels of exports and the numbers of people involved varies from year to year. Thus, the significance of exports must include their potential to provide a continuity of work once UK needs have been met, which in turn sustains the industrial capabilities needed for the development and production of future systems. For some years, Thales in Belfast sustained a workforce and capability in anti-tank and short-range air defence missiles through exports. The RAF took delivery of its last Typhoon in 2019 and production has been sustained by sales to Austria, Kuwait, Oman, Qatar and Saudi Arabia, as well as additional deliveries to collaborative partner countries. At the 2024 Berlin airshow, Germany announced that it would be buying an additional 20 aircraft to cover the period until approximately 2040 (when the Franco-German SCAF aircraft should come into service).

In terms of ships, although the sales of the Type 26 frigate to Australia and Canada mainly involve the design (the vessels will be built in the customer states), there are some subsystems involved that will be made in the UK. The same is true of the three Type 31 ships being bought by Poland. There are hopes of further sales of both vessels. Under Patrick Sanders as Chief of the General Staff, the Army focused on equipment modernisation and relationships with industry. In a keynote speech in 2023, Sanders said,

Like many other nations and Defence industries, we have studied the war carefully, identifying and learning valuable lessons which are shaping our decisions for the future.

At RUSI, I trailed our initial response to these lessons and we have forged a credible plan for the British Army’s renewal. Renewal to make sure we can fight the war we must. A renewal founded in hard-won lessons of the past, orientated to the future to ensure that we emerge more lethal, agile, expeditionary and resilient, all underpinned by our digital framework.

This renewal is delivering now and gathering momentum.

He also underlined the need and opportunities for more exports.

Despite its modest size, the defence industry has features that give it greater importance than numbers without context would imply.

High Productivity, Pay and Levels of Knowledge and Skills

Defence firms feature high productivity rates, offer high salaries and are adept at generating knowledge and skills. JEDHub data shows that value added per employee is high in defence, with gross value added estimated in 2022 at £112,000, compared with the national average in manufacturing as a whole of £81,062.

At the national level, the JEDHub (as well as company-sponsored studies) finds that salaries in the defence sector are higher than the UK average, and that salaries in the defence sector are higher than UK average pay in the manufacturing sector specifically. While this could make some government officials complain that the MoD is paying more than it should for its private sector labour, defence firms are under clear pressure to pay what is required to recruit and retain their expert staff, whose training they have often significantly funded. Moreover, firms serving both military and commercial markets, such as Rolls-Royce and Leonardo, who move their staff around, do not pay their employees in the commercial sector less than they do those in the military domain.

▲ Figure 2: MoD Expenditure Per Capita with UK Industry by Region 2023/24. Source: MoD, “MOD Regional Expenditure with Industry 2023/24”, 21 November 2024.

Of course, it could be argued that higher wages come at the expense of creating more, albeit lower-paying, jobs through government spending in other areas. However, higher salaries mean higher disposable incomes and a more significant multiplier effect in terms of supporting a wide range of businesses. For example, a 2024 study by Oxford Economics of Leonardo’s economic impact in the UK showed average wages at Leonardo Yeovil of £51,000 compared with the overall local average of £32,000, and that every Leonardo and Leonardo-supported job in its supply chain generated about a third of a job through employees’ spending in the wider economy. Oxford Economics also researched similar salaries and multiplier effect ratios for Leonardo’s Edinburgh electronics firm and other smaller UK sites.

Higher salaries also mean that the government gets more than a third of its defence industrial spending in the UK directly back in the form of national insurance payments, income tax, corporation tax and VAT.

It is likely that the eventual net cost to government revenues will be small when a foreign bid has succeeded, provided that an unsuccessful UK bidder has other projects to work on. But defence is a de facto UK government monopsony, meaning that a similar opportunity is often unavailable. As noted, British defence firms have been subject to multiple takeovers and plant closures over decades. This issue is discussed later in this paper in the section The Consequences of Defence Cuts.

A further consideration is that while defence firms employ a high number of people from science, technology, engineering and mathematics (STEM) backgrounds, they also train a large number of apprentices who become everything from skilled tradespeople to chartered engineers. For example, more than 10% of Leonardo’s employees in Luton and Edinburgh are graduate trainees, apprentices or placement students. In 2022, BAE Systems said it had invested approximately “£100m in education, skills and early careers activities in the UK annually”. In 2025, it will have a record 6,500 people in training, around 15% of its UK workforce. Such qualified young people become an important part of the UK’s overall stock of knowledgeable and skilled personnel.

The view that defence firms do not spend their own money on R&D also needs to be qualified. Much of defence is R&D intensive and, while most defence funding comes from government, the 2024 JEDHub report found that up to 30% of defence R&D funding comes from the private sector. In relation to the wider economy, Dunne’s report observes that: “Historically, there has been a strong correlation between defence research and technological advances across society”.

UK governments usually make sure an announcement of a contract with a UK firm mentions how many jobs will be sustained and/or created, to allay any doubt regarding the positive economic consequences of defence spending. Also, perhaps as an effort to win favour from the first Trump administration, a British defence official based in Washington stressed in 2018 that British defence spending was increasing to America’s benefit:

That’s not only good for strengthening our defense capabilities; it’s excellent news for the U.S. We’re focusing on American priorities, like counterterrorism, while bolstering the U.S. economy. This year, European allies are buying more than $35 billion of American products, such as F-35 Joint Strike Fighters, Poseidon P-8A Maritime Patrol Aircraft, Reaper drones, and billions of dollars in Patriot missile defense. UK’s defense spending alone is helping to employ more than 160,000 Americans.

A month later, then-secretary of state Gavin Williamson repeated this number (of defence-supported jobs) to a Washington DC audience. If the MoD recognises that UK spending in the US benefits the US economy, it must also recognise that defence spending at home helps with the UK economy. Similarly, if it is accepted that technology and manufacturing are important foundations even for a service-based economy, it is significant that defence appears to be in excess of 10% of total British manufacturing.

The Value of Defence Business in a Commercial–Defence Firm

It is difficult to generalise about the extent that businesses which work with defence find such work to be helpful in sustaining and developing their commercial work. Even at the top level, firms vary in their strategies and market focuses. While BAE Systems and QinetiQ are dominated by defence, Rolls-Royce receives only about 30% of its revenue from defence. In terms of the commercial–defence links, much of the technical workforce in Rolls-Royce has the ability to work in either side. Babcock received 68% of its 2023 revenue from the defence sector and presents itself as serving defence, security and commercial markets.

While defence spending is most visible in terms of the large primes that dominate major projects, and while governments for some years have sought to bring more (innovative) small and medium-sized enterprises (SMEs) into defence, it is easy to overlook the fact that major firms already outsource much of their activity and have hundreds of identified firms in their supply chains. Oxford Economics and individual companies’ reports provide evidence of this.

• Babcock International 2022: “£1bn spent with more than 5,700 UK suppliers, including £230m spent with 1,070 suppliers in deprived local authority areas, and £337m spent with 2,200 SMEs”.

• Leonardo 2020: “Two thirds of Leonardo’s 2,100 UK suppliers were small and medium-sized enterprises (SMEs), and more than a quarter (28%) of all Leonardo supply chain spending was spent directly with these SMEs”.

• BAE Systems 2018: “More than 3,000 contractors [are] employed by BAE Systems as part of its procurement spending”.

• Rolls-Royce (with its larger civil business) spends £2.3 billion a year with more than 2,300 companies.

The degree of corporate dependence on defence reduces further down supply chains. Certainly, many members of ADS, MAKE UK Defence and Tech UK (the industrial bodies that support access to the defence market), have members serving the commercial world as well. The perceived benefit of having some defence business is reflected in the growing number of companies joining these bodies. As mentioned earlier, another consideration is that supplying defence requires all firms to have high cybersecurity standards, which should enhance their overall resilience.

None of this constitutes hard evidence of the benefits of defence work, but it does signal that many firms see access to both sectors as beneficial. Spirit AeroSystems in Northern Ireland explicitly pursued the defence market as a strategy because, having experienced the collapse of commercial air transport during the Covid-19 pandemic, it recognised defence as a valuable counter-cyclical element.

An issue worth detailed research concerns the wider impact of defence work on dual-use suppliers. For example, can longer-term defence contracts justify capital investments that a predominance of short-term commercial contracts would make more risky? And can gaps between work be a difficulty for dual-use firms?

All these considerations suggest that, as a generalisation, defence business appears to have a higher impact on the UK economy than a superficial look would suggest. This message is reinforced when regional and local needs are considered.

The Local and Regional Economic Impact of Defence

Defence industrial and wider economic considerations loom larger once London is excluded from the picture. MoD data shows that London only gets around £2 billion in defence spending – around 7% of the total. London accounts for 13% of the UK population but 23% of GDP. In brief, although London has some very poor areas, it is much richer than the rest of the UK, while not receiving much from the defence budget. GDP per head in London was £69,000 in 2023. GDP per head in the southeast made it the next highest income region at £41,319. This high level in the southeast might be surprising, but the delineation of naval facilities in and around Portsmouth, plus army facilities in the southeast, contribute to this.

None of the MoD’s top 10 suppliers has major defence manufacturing installations in the southeast, but BAE Systems employs around 650 staff at Frimley, who carry out IT and ship support work. Airbus is now the owner of Surrey Satellites, based in Guildford.

Comparing defence spending per capita in different areas with GDP per capita suggests the positive impact of defence (except in the southeast). Defence spending per capita is high in the northwest, the southwest and Scotland. These regions, despite having either extensive coastal boundaries or significantly de-industrialised communities, have slightly higher GDP per capita than any other UK region (except London and the southeast). For the southwest, there is little defence activity in Cornwall compared with other counties in the region. It is possibly not a coincidence that it has higher unemployment and lower pay than the overall southwest region.

Recognition that defence spending in a local area can be of significance is reflected in the focused interest that MPs from Scotland, Wales and Northern Ireland show in whether their regions are getting their share of defence, however “defence” is defined. The Scottish Affairs Committee has completed a series of inquiries, with those members who oppose Scottish independence looking for evidence of the benefits of being in the UK. The Scottish National Party finds it awkward to oppose shipbuilding links with the rest of the UK that bring so many benefits to Scotland. The Welsh Affairs Committee can see how little defence work has come to their area, and the Northern Ireland Affairs Committee is in a similar place. Both the Northern Ireland and Wales inquiries established by these committees were terminated due to the June 2024 general election.

Government Revenues and the Balance of Trade

The UK government has a significant budget deficit problem, and the country has a long-standing balance of trade deficit. It is therefore of some significance to assess the impact of the defence industry on these matters. In terms of the trade deficit, a foreign defence product clearly constitutes an import, which presents a challenge for a country that imports more than it exports over a sustained period.

It is incontestable that, when the MoD spends government money in the private sector, some of that becomes revenue to the Treasury in the form of tax. At first glance, free-market economics would argue that, if well-paid defence jobs were not available, those affected would quickly find other well-paid sources of employment (which would mean they paid similar amounts of tax). For some this will indeed be the case, while others will opt for early retirement, albeit on a reduced pension income. Some will take time to find new work and weigh on government spending rather than contribute financially to the Treasury. Here it could be said that the burden of proof lies with those who argue against the assertions in a 2012 RUSI Briefing Paper which demonstrated that, on a contract involving no foreign elements, the government would get back as much as 36% directly in the form of income tax, national insurance and other direct payments to government, without any multiplier effects included in the calculation.

Exports present a slightly different situation. A UK or collaborative product may or may not generate foreign exchange revenues from exports, depending on its commercial terms. But it is quite clear that a product bought from a foreign supplier, such as Apache E or Predator, can only be an import. This is not an argument for rejecting foreign products when the frontline military case is strong and/or there is no capable supplier in the UK. But security of supply in the support phase, and operational independence, are other factors that affect import decisions – as is clearly considered when the US buys an overseas defence product.

The Consequences of Defence Cuts

The argument so far is that defence work has wider benefits than might be assumed, but there is a further issue. What can be observed about the impact of reduced defence spending and a lack of defence orders? In mid-2024 there was uncertainty about the affordability of the defence programme, so such reductions cannot be ruled out.

Historically, adjustment to defence closures has been easiest in regions with a diversified, already prospering economy. Here, those affected by a defence firm closure may be able to quickly find other ways of contributing to the economy, and any abandoned infrastructure would get reused. The closures of BAE Systems factories at Kingston, Hatfield and Enfield have not affected long-term local prosperity – at Hatfield, for instance, the site of the Flight Test Hangar “is currently a David Lloyd Leisure Centre and hotel”. In diversified, prosperous areas, other activities can usually replace closed defence entities.

But it is also clear that, in many areas of the UK, the loss of major industries has had major negative repercussions for decades. Many of the towns and areas that were at the forefront of the Industrial Revolution have seen the decline of their traditional industries (especially textiles, coal, steel and heavy engineering) in the face of foreign competition from countries with less expensive labour and/or more efficient working practices. Many of these places, not least the north and some parts of the West Midlands, did not experience the speedy replacement of a failed firm with well-paid jobs, and their populations have instead suffered sustained periods of unemployment, low pay and social deprivation. The employment and value added by an Amazon warehouse near a motorway exit differ from the benefits of a thriving factory. Social deprivation is a multidimensional concept with a range of metrics, several of which are inter-related: low wages, unemployment, poor levels of educational performance, poor health and crime. Once in place, it is difficult to improve social deprivation.

A further consideration is that coastal areas in the UK are poorer, have poorer health and more crime than their inland neighbours. By definition, they are peripheral rather than “core” UK locations, and many have not experienced a replacement for UK tourists moving to international destinations or for the decline of the fishing industry. In the defence domain, a report in March 2024 covered the current revitalisation of Chatham, albeit 40 years after the closure of its naval dockyard. Industrial sites by the coast thus have a special economic and social significance.

The town of Barrow-in-Furness, for example, had a highly negative experience when there was no design work for a new submarine for almost 20 years between the Vanguard and Astute projects, and Astute manufacturing did not start until three years after the completion of the last Vanguard. Indeed, as the shipyard’s number of employees dropped from 14,000 to 3,000, the town went into a major decline, although some were able to find work at the neighbouring Sellafield nuclear installation. This resulted in more people living on social security payments and increased drug use. Male unemployment in the constituency was 7.3% in 1998. In 2001, data showed that there were almost half as many economically inactive males in Barrow-in-Furness as those measured as economically active. Poor educational standards became a feature, with almost 50% of the adult population having no formal qualifications and another 20% with only Level 1 qualifications. Almost 2,000 people had never worked or were long-term unemployed. A significant question that merits future research (but may prove tricky in terms of data access) is to what degree running down the shipyard contributed to the region becoming less a contributor to government tax revenues and instead a greater burden on social security spending.

In terms of industrial capability, defence suffered as the restoration of submarine building proved a protracted, difficult and expensive process. According to John Schank and others, “submarine design and build skills atrophied in the United Kingdom, resulting in a costlier and lengthier Astute procurement effort”.

The maturing of Astute production and the start of Dreadnought-class building has contributed highly to the restoration of employment in and around Barrow-in-Furness: BAE Systems reported in 2024 that its “submarines business already employs approximately 13,500 people, mainly in the North West of England, with that figure set to grow to around 17,000 in the coming years”. This has required, and been accompanied by, improvements in education and cultural opportunities. Given the labour demands of the Astute and Dreadnought programmes, and plans for the Astute successor, BAE Systems felt it necessary to establish its own education and training centre (Academy for Skills and Knowledge) and its website proclaims:

Barrow-in-Furness is a hub for learning and innovation. We’re not just building the next generation of nuclear submarines here. We’re developing the next generation of engineering talent.

In short, cutting defence work often quickly leads to levelling down when no comparable new opportunities arrive, and bringing about recovery using defence money is a protracted process. There has been progress in Barrow-in-Furness, but there is still a way to go. The government’s March 2024 nuclear white paper detailed the multi-year efforts being made to rejuvenate the town with a major waterfront housing development, improved education provision and a decade-long, £20-million-a-year Barrow Transformation Fund, all aimed at encouraging “more people to come to live and work in the area”.

In the context of sustained economic difficulties in areas that led the first Industrial Revolution, the survival of defence aerospace and missile firms in the northwest takes on added significance. BAE Systems, with core factories near Preston and Blackburn, contributes significantly to local prosperity. BAE Systems also uses multiple subcontractors in a regional cluster. Also in the northwest, MBDA has a modernised missile factory in Bolton, which employed “670 highly skilled design, engineering and manufacturing employees” when it opened in 2018. As of January 2024, the company employs more than 1,000 people and has plans to triple its workforce in future years.

When considering that defence cuts would likely mean levelling down an area for a sustained period, naval work conducted entirely in coastal locations merits particular attention. UK warship building is focused on the Govan and Scotstoun yards near Glasgow and the Babcock site at Rosyth, also in Scotland. These sites are currently busy building Type 26 and Type 31 ships, but what will come next (if current work is successfully completed) has not been confirmed. There is also extensive ship support work in Portsmouth, Devonport (Plymouth) and Faslane. Because of the overall reduced size of the Royal Navy, there is now much less of this type of work. Gosport, adjacent to Portsmouth, is now recognised as one of the more deprived areas of the UK.

Yeovil, the home of Leonardo helicopters, is unusual. Its rural location was important to a new firm called Westland Aircraft during the First World War, when the aircraft industry came to life. The company survived the downturn in defence spending after the end of that conflict and after the Second World War the company focused on helicopter technology. In 2024, Leonardo was directly employing around 3,000 people in a town of just over 40,000 inhabitants.

Today, Westland Aircraft is owned by Italian firm Leonardo, and the Italian side of its helicopter business is larger than the British element of the business. However, the latter still works on development, production and support for both military and commercial helicopters. A factory with such a long history and significance is inevitably a key presence in its community. To ensure it has suitably qualified and motivated young people to come into its workforce, it actively supports local education. Nonetheless, Yeovil’s future is uncertain. In recent years the MoD has turned increasingly to US helicopter suppliers, opting for the Apache E helicopter (with no role for Leonardo), and buying more Chinook helicopters. With the Wildcat helicopter production completed, and despite Leonardo having a strategic partnership agreement with the MoD, the (MoD) initial decision was to use a formal competition for the next military helicopter (the New Medium Helicopter, NMH) – with Airbus and Lockheed-Martin chosen alongside Leonardo as viable bidders. In April 2024, the MoD bought six Airbus H145 helicopters as Puma replacements for deployment in Cyprus and Brunei. Later in 2024, Airbus and Lockheed-Martin withdrew from the NMH competition, and as of April 2025 there was no firm MoD commitment to the project.

Leonardo does, however, have a £50-million, four-year MoD contract agreed in 2022 to generate Proteus, a flying demonstrator of an uncrewed naval helicopter that, when developed, could carry out surveillance, supply and casualty missions. Proteus could also substitute, to a degree, for the EH-101 Merlin helicopter. The project has been pursued on an incremental basis and is intended to provide employment for about 100 development engineers in Yeovil until 2026. If Leonardo closed in Yeovil, the town would likely become another (seasonal) tourist centre, although the southwest region has a wide range of defence industrial capabilities which in 2025 its companies came together to publicise and attract further work.

A feature of domestic defence industrial capabilities is that they can provide a variety of benefits. When successful, they can serve as a conspicuous symbol of national technological and management capability, support both the reality and the image of a government with meaningful sovereign freedoms and enable an armed force to secure access to equipment with its preferred characteristics. They can provide stable and well-paid employment, deliver tax revenues and reduce a government’s foreign exchange needs. In this situation, it is not surprising that ever more countries are seeking to enhance their domestic defence industrial capacity, with many having formal offset regulations to stimulate advances.

III. The Potential of the Defence Industry

This chapter outlines the key areas in which defence could make contributions to the wider manufacturing base in the UK. Their impact has been of particular interest to the current government, which pledged to harness it further through defence investments, stating: “Defence and strategic capability play a unique role in our economy, providing both high-skilled jobs and spillover innovation, as well as supporting Britain’s position on the world stage”.

Integrating defence spending more closely with economic benefit would imply maintaining the previous government’s focus on developing UK products for which there was also an export market. The GCAP and Type 31 projects are both instances of the UK aiming to generate a core product (with a minimum deployable capability) that would be affordable in export markets and modifiable to meet the specific needs of a customer. Currently, Australia and Canada are working to modify the Type 26 to meet local needs, while both Poland and Indonesia are interested in buying their own versions of the Type 31.

A government seeking to improve the wider economic benefit from defence would consider the wider potential of the technologies in a defence project. Some focused technologies, such as those involved with gas turbines, have applications in both military and commercial products. Others can be understood as almost general purpose technologies, with applications in multiple domains: for example, the electric motor. At least four areas in the defence industry stand out as having many commercial applications:

1. Aerospace has been defined in dual-use terms since its inception. The RAF was supplied until 1964 by the Air Ministry, which had responsibility for both the military and commercial worlds. On the commercial side was the Society of British Aerospace Companies, which transformed into ADS in 2009. The lead professional body is the Royal Aeronautical Society, founded in 1866, and it also has both commercial and military agendas.

2. In (outer) space, challenges and opportunities for sensors and communication abound. This can be subdivided into ground installations, launchers and satellites. UK industrial progress was long neglected by the MoD on the grounds of expense and a readiness to rely on US capabilities, but the small-satellite achievements of Surrey Satellites, plus falling launch costs and participation in some European programmes, have resulted in some changes in attitude. A National Space Strategy was announced in 2021 as a joint effort of the MoD and the (then) Department of Business, Energy & Industrial Strategy.

3. Digital engineering is destined to become the central driver behind manufacturing advances. Of great interest to defence, but also of huge commercial potential, is the integration of a range of focused digital technologies into a digital engineering whole. GCAP is a demanding product for digital engineering, but it could generate a large, informed workforce and multiple lessons to be learned through integrated digitisation. These lessons learned could be curated and mechanisms put in place to make them available across the whole UK manufacturing sector.

4. Computing, AI, machine learning and data science are key enablers of digital engineering but also have huge implications for many decision-making activities, including modelling, empirical analysis of data from multiple sources, recommendations for risk assessments, and commitment to an action. In the defence sector, AI is not a new phenomenon: defence has been using advanced data processing and analysis for decades. But AI is advancing quickly and will have many commercial uses.

In addition to these four fields, there are more specific areas on the defence agenda, including advanced materials with weight, strength and radar absorption attributes. Additionally, power generation, storage and distribution technologies have the potential to provide mobile capabilities and reduce the use of fossil fuels. Such fields also have commercial applications and potential.

For defence to lead on technologies with wider applications, defence systems must work in a much more hostile environment than most commercial products. Organised crime and governments pursuing deniable attacks on civilians are blurring this distinction, but it still carries core validity. For example, how long would “self-driving” cars work once those who wished to subvert them resort to using the electromagnetic spectrum to interfere with their connectivity. The reverse argument also can be offered: if a technology has been demonstrated to work in a military context, it will almost always also work in a commercial one.

To generate enhanced macroeconomic benefit from military progress, it will not be enough to entrust defence work to firms with a dual-use output. Some firms choose strategically to focus on defence because of the background knowledge this requires about defence challenges, organisational structures and procurement procedures. Also, those who invest in defence firms bring a risk perspective over a portfolio of activities: sometimes they do not embrace diversification in those firms but rather see defence investments as generating modest, but low-risk, returns because of the long-term nature of contracts and the assured financial survival of the customer. This does not make commercial spin-offs within defence companies impossible, but it involves choices that should be seen as strategic rather than opportunistic.

The government needs to think hard about how it will make the nature of dual-use but defence-origin technology advances available to the wider UK economy. This will include specifying the security classifications of a technology to allow dissemination but prevent undesirable releases to non-UK firms and governments. There could be pressure on the MoD to continue to support defence companies in defence-dependent areas, even if the outputs of those companies have lost much of their security relevance. This consideration would be less important if regions that are currently defence-dependent had a more diversified economy. Supporting firms that could use the skills and knowledge found in the defence sector and improving infrastructure in neglected areas of the UK would also help. But a broader point is that government, military and industrial leaders need to be thinking ahead to innovative products and new routes to military capabilities. All this implies that, while the defence sector already can be seen to provide benefits to the wider economy as well as imposing costs, careful allocation of defence funding and effort mean that it has the potential to do more.

Conclusion

The defence industry’s role in the UK’s economy extends beyond pure macroeconomic metrics. This paper has attempted to provide a more granular perspective on the value of defence to the UK economy. Defence can contribute significantly to social stability and regional cohesion by providing meaningful employment and vocational training in areas where they are not always provided by commercial industry. This socioeconomic impact aligns with broader established government objectives, such as narrowing the gaps between the wealthiest and poorest areas, and efforts to strengthen the UK by ensuring that all regions benefit equitably from defence spending.

Of course, UK forces must have the equipment that enables them to deter adversaries, and to prevail in conflicts, if necessary. But, to sustain the quality of their products, defence firms need continuity of work (as is well understood by other countries, including in the US, France and Germany). For projects of particularly high cost and risk, collaborative approaches with allied states are often available. For the immediate future, the MoD will be pressing for more funding, an option that it seems to believe is more likely to win public support if it can be seen to contribute to national prosperity.

Defence industrial spending is a major component of the UK’s economic landscape, particularly in terms of local and regional prosperity and industrial capability. It helps prevent the levelling down associated with de-industrialisation in traditional areas and supports higher-than-average wages and productivity. As the UK navigates its future defence and economic strategies, it must balance immediate fiscal prudence with the long-term benefits of a robust, strategically managed defence industrial base. This balance is crucial not only for national security but also for sustaining regional economies and, by extension, the socioeconomic fabric of the country.

UK defence spending currently benefits the economy and society through several of its attributes, from providing a national supply base, which brings well-paid jobs wherever it is located, to training many young people, especially in STEM-related areas. This is not the case across the wider economy. Defence spending is especially beneficial in coastal areas that are less prosperous than the country overall, but it is also beneficial in regions, such as the north of England, which have already experienced long-term damage from de-industrialisation. Large defence firms spread MoD revenues across extensive supply chains, including to many small firms. As defence-relevant technology increasingly interacts with rapid growth commercial technologies, defence spending can provide stimulus for dual-use innovations and a counter-cyclical source of revenue. Several countries are working to develop their own defence industries, and globally there is widespread appreciation for defence industrial employment.

The UK government does not, and should not, spend defence money in the UK just to prop up disadvantaged regions. Nonetheless, the reality of 2025 is that assured defence capabilities look especially valuable. Russia has re-emerged as a hostile entity, and it seems the US can no longer be seen as a reliable ally to the UK. Moreover, there is little reason to think that defence spending at levels significantly higher than today would damage the economy.

In the last 20 years of the Cold War, the UK government spent on average just under 5% of GDP per year on defence. Economic growth fluctuated significantly during this period, but the average was over 2% per year. In the last 20 years, defence has been just over 2% of GDP per year. Although growth rates during the same period fluctuated, the average annual growth has been just over 1.4%. If there has been a peace dividend, it has allowed governments to spend more on social welfare, health and education, which dominate government spending, but there is no obvious evidence that this helped economic growth. Overall, it appears that increasing defence spending in the UK would not necessarily be harmful.

The arguments in this paper are broadly compatible with the policy stances of both the current government and its predecessors, dating from around 2015. However, policy implementation is usually more challenging than policy formulation. Defence industrial policy can only be implemented through acquisition choices, and these choices can be shaped by a range of stakeholders with different, more focused priorities than supporting the UK economy. While the next iteration of the UK Defence Industrial Strategy should be closely studied, much will rest on how it is put into practice.

Trevor Taylor is Director of RUSI’s Defence, Industries & Society Programme and Professorial Fellow in Defence management at RUSI, where he has worked since 2009. He also works regularly on a consultancy basis for the Institute of Security Governance, based at the Naval Postgraduate School in Monterey, CA.

Linus Terhorst is a Research Analyst in RUSI’s Defence, Industries & Society Programme, where he works on defence procurement and industrial strategy questions and innovation management in defence.