UK Defence Industry Faces Financial Hurdles and Strategic Uncertainty, Parliament Hears
A significant proportion of British defence companies are reportedly encountering difficulties securing basic financial services, including overdrafts and working capital, according to testimony presented to the UK Parliament’s Treasury Committee. Andrew Kinniburgh, Director-General of Make UK Defence, an organisation representing nearly 1,000 defence firms, informed MPs on 3 June 2026 that the number of his members reporting such issues had risen from 11 percent to 17 percent over the past year.
Kinniburgh highlighted various financial challenges, stating, “For instance being de-banked, not being able to get an overdraft, not being able to get the working capital they need through various means, whether that’s venture capital or private equity, or through traditional kind of retail banking and business banking.” He acknowledged that the reasons for this trend were complex, suggesting a “mudding of the water” between banks’ reactions to businesses with “shaky balance sheets” and a potential broader move by financial institutions to disinvest from the defence sector. He argued that the absence of a clear government Defence Investment Plan (DIP) and insufficient defence spending exacerbate these financial difficulties for companies.
The session also featured insights from Lucia Retter, Assistant Director for Defence and Security at RAND Europe, and Max Warner, a Senior Research Economist at the Institute for Fiscal Studies. The committee chair opened the proceedings by acknowledging the recent deaths of three Royal Navy aircrew in a helicopter crash in Devon.
A central theme of the evidence was the disparity between the United Kingdom’s stated defence ambitions and the financial resources allocated to achieve them. Kinniburgh contended that the current defence spending of 2.6 percent of GDP is “wholly unacceptable” and inadequate to maintain a “credible defence deterrent.” He advocated for a clear governmental commitment to increase defence spending to 3 percent, then 3.5 percent of GDP, alongside an additional 1.5 percent dedicated to defence infrastructure. He illustrated the substantial infrastructure demands by noting that constructing a single new submarine necessitates building three sets of infrastructure to account for basing and maintenance. Kinniburgh also expressed concern about a potential “financial black hole” from previous years, which could undermine future spending commitments.
Lucia Retter elaborated on the capability gaps identified in the Strategic Defence Review, which included deficiencies in readiness, stockpiles, digital and technological integration, the deployment of autonomous systems at scale, and persistent delays in equipment delivery. These gaps, she warned, render the UK’s “deterrence posture more brittle than we would like it to be” and diminish the effectiveness of its messaging to both allies and adversaries.
Max Warner of the Institute for Fiscal Studies questioned the affordability of the Strategic Defence Review’s recommendations. He noted that the review’s own terms of reference initially required it to be affordable within lower spending projections than the government now intends to reach, yet ministers accepted all its recommendations. Warner observed that there is now a widespread consensus that the plan is “not affordable.” He cautioned against an overemphasis on defence spending as a share of GDP, stressing that “what matters really is what we’re getting for that money.” Warner also highlighted the risk of rising prices across the defence supply chain as numerous countries simultaneously increase their defence budgets.
Warner provided a stark assessment of the financial implications for the public if defence spending were to reach 3.5 percent of GDP. He estimated that moving from 2.6 percent to 3.5 percent would require an additional £30 billion to £40 billion annually. This sum, he explained, equates to approximately £500 per person or around £2,000 for a family of four each year. To put this in context, he stated it would be comparable to adding the entire Department for Transport’s budget to the Ministry of Defence, or necessitate an increase of three to four pence on all rates of income tax, or a similar rise in VAT. He concluded that such an increase is too substantial to be achieved through efficiency savings alone, framing it as a fundamental choice: “Either we accept the state is going to become bigger and we’re going to raise taxes quite substantially to pay for that, or we don’t want the state to expand and we’re going to have to cut something quite chunky elsewhere.”
The committee repeatedly returned to the consequences of the delayed Defence Investment Plan, which Kinniburgh expressed hope might be published the following week. He stated that the absence of this plan is discouraging even the largest contractors from investing in the UK. Companies considering investments in Britain, Germany, Poland, the Baltics, or the United States are currently in a “state of paralysis,” holding off on decisions without a clear strategic roadmap from the UK government.
Addressing workforce issues, Kinniburgh warned of acute skills shortages, particularly citing the high cost of nuclear-rated welders, who can command six-figure salaries that defence firms struggle to match. He referenced a team of 300 welders recruited by Babcock from the Philippines, arguing that the UK should instead be training its own apprentices. However, he noted that firms are hesitant to commit to apprenticeships without a clear demand signal from the government. Kinniburgh also raised concerns about a looming 50 percent tariff on certain steel imports, set to take effect on 1 July, which he warned would increase procurement costs. He criticised the Ministry of Defence, specifically the Defence Infrastructure Organisation, for spot-buying standard steel from China that could be sourced domestically.
Lucia Retter suggested that the persistent problems in defence procurement are rooted more in culture than in organisational structures. She observed that numerous reforms since the 1960s, all aimed at making procurement faster and more efficient, have largely failed to achieve their goals. Retter argued that a fundamental shift in mindset, empowering officials to make decisions without excessive layers of approval, is the key enabler for improvement. She pointed to the speed and effectiveness demonstrated under urgent operational requirements, such as Operation Scorpius which supplied equipment to Ukraine, as evidence of what is achievable when external pressure and a higher tolerance for risk are present.
Max Warner explained how current fiscal rules influence defence spending, noting that the Ministry of Defence has shifted from allocating approximately a quarter of its budget to investment in the 2010s to a planned figure exceeding 40 percent. This shift, he stated, is partly due to investment spending being treated more favourably than day-to-day spending under current regulations. He also addressed the argument that defence spending could generate economic growth, acknowledging potential positive spillovers from defence research and development but cautioning that these benefits are unlikely to be substantial.
Retter added a note of caution regarding the government’s communication strategy for defence spending. She observed that the UK appears to be unique among European nations in primarily justifying increased defence expenditure on the grounds of economic growth. In contrast, countries like Germany, Poland, and the Nordic and Baltic states frame their arguments more directly around geopolitical threats and a changed security environment. While acknowledging the genuine regional economic benefits of defence, Retter stressed that economic growth should not be presented as the primary purpose of rearmament.
Kinniburgh concurred that economic growth should not be the main objective, but argued that defence can indeed be a powerful engine for it, citing towns like Barrow-in-Furness, Yeovil, Helensburgh, and Plymouth, whose economies are heavily dependent on defence work. He concluded his testimony with two proposals for the committee to present to the Treasury. His first suggestion was to reallocate approximately £1.8 billion of patent box tax relief, much of which currently benefits large pharmaceutical companies, towards the defence sector. His second proposal involved issuing “wartime-style” defence innovation bonds to fund early-stage research and development, drawing a parallel to the defence bonds that raised the equivalent of tens of billions of pounds during the Second World War.
The committee announced that its next session on defence spending, planned jointly with the Defence Select Committee, would aim to question the Chief Secretary to the Treasury and a defence minister directly, though a date for this session had not yet been confirmed.
Why This Matters
The challenges highlighted by the Treasury Committee’s session on UK defence spending carry significant implications for national security, economic stability, and industrial policy. The reported difficulties faced by British defence companies in securing financial services, coupled with the absence of a clear government Defence Investment Plan, signal a lack of confidence and predictability that could deter vital investment in the sector. This directly impacts the ability of the UK’s defence industrial base to innovate, grow, and meet the demands of a rapidly evolving global security landscape.
The debate over defence spending levels—currently at 2.6% of GDP but argued by some as insufficient for a credible deterrent—underscores a fundamental tension between national security ambitions and economic realities. Experts warn that current defence plans are unaffordable without substantial increases in public spending, potentially necessitating significant tax hikes or cuts to other public services. This raises critical questions about public priorities and the allocation of national resources, particularly given the cost-of-living challenges faced by many households.
Furthermore, the identified capability gaps—ranging from depleted stockpiles to delays in equipment delivery—suggest that the UK’s military readiness and deterrence posture may be more vulnerable than desired. This has ramifications not only for the UK’s ability to protect its own interests but also for its standing and influence among allies and adversaries. The cultural and structural issues within defence procurement, leading to inefficiencies and slow decision-making, exacerbate these capability concerns. Addressing these requires more than just increased funding; it demands a fundamental shift in approach and empowerment within government institutions.
The focus on defence spending’s economic benefits by the UK, in contrast to other European nations that emphasize geopolitical threats, also matters. While defence investment can undoubtedly create regional jobs and foster technological advancements, framing it primarily as an economic growth driver may obscure the core national security imperatives that traditionally underpin such expenditure. This distinction is crucial for maintaining public understanding and support for defence policies.
Ultimately, the issues discussed by the committee paint a picture of a defence ecosystem grappling with financial constraints, strategic ambiguity, and operational deficiencies. How the government responds to these challenges, particularly regarding the Defence Investment Plan, funding commitments, and procurement reforms, will determine the future strength and credibility of the UK’s armed forces and its defence industry on the global stage.