FTI Consulting Public Affairs Snapshot: The 3% Club: How much is enough to spend on defence?
Every defence review is trailed as being singular and generational, more vital than the last. But this time around circumstances really do play into that narrative. The Strategic Defence Review, “Making Britain Safer“, published on 2 June has been pitched as the UK’s necessary response to an increasingly dangerous world.
War has returned to mainland Europe in the shape of Russian aggression in Ukraine, while the United States once again contemplates strategic withdrawal from the continent amid claims that allies have long exploited American benevolence. The fundamentals that have underpinned the transatlantic alliance since 1945 have been violently shaken. The Strategic Defence Review is the UK’s response. Paying to deliver it is not optional.
This is the context in which political focus has turned to how much the UK spends on national security, and what it spends it on. In the run-up to the general election last year, Labour sought to prove its credentials by matching the Conservatives’ long-standing pledge to raise annual defence spending to the equivalent of 2.5% of Gross Domestic Product (GDP) as soon as fiscal conditions allowed. Of course, cynics dismissed this as rhetoric over reality – the type of throwaway pledge soon abandoned by new governments when stress-tested against economic reality.
Yet, by February, it was no longer mere ambition. 2.5% GDP on defence was to be programmed into departmental spending plans and achieved as soon as 2027 – something that the Comprehensive Spending Review, due on 11 June, is set to confirm in detail.
The conclusion Labour ministers wanted voters to draw was that, with the armed forces found alarmingly wanting in the face of a deteriorating international environment, they had acted more quickly on their promise than even they themselves had expected. Amid cross-party consensus that defence is now indispensable, the only push back from opposition MPs was that this was all “too little, too late”.
Of course, the very nature of a spending target linked to GDP is an absurdity in isolation. With finite resources, budgets should be established based on need, prioritised across departments and allocated accordingly. But in a multilateral alliance, with organisations such as NATO, it provides necessary peer-to-peer validation. The irony, of course, is that for too long UK defence has seemingly needed more rather than less. As a result, the target became an effective ceiling, not a floor.
The Strategic Defence Review is the latest attempt to define, within a budgetary window, how the armed forces can fulfil all their missions, renew depleted and outmoded capabilities, invest in future technologies and maintain the nuclear deterrent – all with British kit built by a British workforce. It is ambitious, and that is the problem.
Even by the government’s own admission, the numbers do not yet add up. Hence even as 2.5% is confirmed in Ministry of Defence’s (MoD) budget – a new stretch target has been established as a show of intent; a yet-to-be-funded ambition to reach 3% GDP spending by the end of the next Parliament in 2034. The Prime Minister has stated his 100% confidence in it. The Defence Secretary has dismissed any doubt that it can be met. Of course, Treasury bookkeepers have been rather more qualified and reticent. But no matter. The new Defence Investment Plan – due in the Autumn, replacing the 10-year Equipment Plan – is certain to lean heavily into expectations of fulfilment.
It is this ambition that the Prime Minister will need sell to his peers at the summit of NATO leaders in the Netherlands later this month. But the context is not as ideal as when the current 2% NATO spending target was declared mandatory in 2014. Back then pretty much only the US and the UK were hitting it – a boast that rang out loudly across the Atlantic. Yet, in 2025, the UK sits in an altogether middling 9th position in the spend-to-GDP league table. Other nations have long since overtaken the UK, led by Poland, driven by necessity for those over whom Russia looms all too large. It is a downward trend that is unlikely to stop, even with the UK budget baselined at 2.5%.
At the summit, spending targets will be top of the agenda amid widespread anticipation of a US-led push for a meaningful increase. Some have speculating on figure as high as 5%. That is probably fantasy. But the Prime Minister will be out to convince others that 3% by 2034 is not only right for the UK, but enough for NATO, even as others clamber for more. Acquiescence on anything beyond will surely demand a hasty rethink from a country now openly dedicated to a “NATO first” defence policy.
But what do these targets mean in real money? Moving from spending 2.5% to 3% GDP might easily be dismissed as a rounding error. That would be a mistake. Of course, projecting absolute numbers is a fool’s errand. GDP is only known in retrospect, while budgets are by necessity forward-planned. Hence why you rarely see spending totals attached to these targets – they are too variable to hang a fiscal guarantee on. Moreover, if the government is to realise its foremost aim of growing the economy in a meaningful way, any spending target linked to GDP inevitably grows with it as the price of success.
But let’s try and extrapolate some numbers anyway, if only to provide context as to the scale of the challenge. The Office for National Statistics currently calculates the UK’s entire GDP to have been £2,851 billion in 2024. Simple arithmetic tells us that a 2.5% spending target would thus have equated to £71.27 billion, while a 3% target would mean a defence budget of £85.53 billion.
So, what did the UK spend on defence in 2024? That depends on who you are asking. The MoD’s Departmental Expenditure Limit for FY2024/25 was set by the Treasury at £56.9 billion – a whisker shy of 2% GDP according to 2024 figures. But NATO defines defence spending more generously, including such things as pensions for retired service personnel. Thus, the number grows. Usefully for our purposes, the Institute for Government has calculated UK defence spending in 2024, according to NATO definitions, to have been £64.5 billion – or the equivalent of 2.26% GDP.
Taking the NATO-aligned expenditure for 2024 as our baseline, to hit 2.5% GDP, defence spending would need to grow annually by 10.5%. And to hit 3% GDP, it would need it to grow by 32.6%. And those figures assume a stagnant economy, which in every other political scenario spells doom for the current government.
To put this in perspective, a 32.6% uplift would equate to just over £21 billion in additional resourcing for defence every year based on 2024 expenditure. On its own, that is more than the entire annual Home Office budget. It is more than the block grant afforded to any of the devolved nations. That is all to say, it’s not pocket change. And it needs to be found if ambition is to become reality.
As we know, the Chancellor is iron-willed when it comes to her fiscal rules – her reputation rests upon it, if not her seat at the cabinet table. Borrowing to fund increased spending is out of the question. Tax rises, too, are problematic, with manifesto commitments not to raise any of the principal revenue generating levies. While those commitments don’t necessarily carry over to the next Parliament – certainly so if another party finds itself in No 10 – it is difficult to envisage any electable party standing on a platform of “tax and spend” or “borrow and spend”. So, if 3% for defence is to be achieved, it will need to be paid for from within.
Of course, the means to achieve the uplift to the MoD budget by 2027 has already been established – at least according to the government narrative – by extending the once-temporary ceiling on international aid and development spending. This no doubt helps the Treasury to balance the books in a politically expedient way, but there is an irony here. Given that expenditure on humanitarian missions counts within the NATO definition of defence expenditure, for the purposes of meeting the NATO target, there is a danger of robbing Peter to pay Paul.
Neither is the aid budget a forever-replenishing source. The Comprehensive Spending Review is already set to be a ruthless exercise in budgetary parsimony right across Whitehall for all but the ringfenced few. Many a permanent secretary will be looking on in envy at the comparative largesse that is already being afforded to the MoD. Will a second bite to fund defence prove politically palatable? While all spending decisions require political choices, it is difficult to foresee this being easily accommodated through deeper and more unpalatable cuts to public services elsewhere.
The answer, almost inevitably, can only be found in economic growth. A bigger economy means more public money for the Treasury to spread around. Fail on that front and Labour’s commitments beyond the current Parliament are likely to prove academic anyway. But even in a world where radiant economic conditions prevail, will defence justify being the number one benefactor? Perhaps, in a dangerous world. But plenty of Labour MPs may be tempted to conclude that electoral advantage lies in feeding more tangible voter appetites for investment in health, education and filling potholes.
The next defence review – in 2030 if the five-year cycle sticks – will also be generational. They always are. Ambition to get to 3% won’t wait any longer. Politicians will be hoping that there’s a peace dividend to bank by then. But, in uncertain times, who’d bet on that?
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