Prime minister Keir Starmer has launched Britain’s much-anticipated strategic defence review, as he declared the UK “cannot ignore the threat Russia poses”.
Speaking at BAE Systems’ shipyard in Glasgow on Monday (2 June), he said Britain needs to modernise and strengthen its armed forces in order to deter conflict and move to a “war-fighting readiness”.
This will include building 12 new attack submarines, six new munitions factories, blending drones into the Royal Navy, delivering better housing and equipment for members of the armed forces, and investing an extra £15 billion into nuclear weapons.
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The prime minister further justified the moves by arguing the new measures will create 30,000 new jobs.
The review, which lays out the plans for the UK’s defence spending for the next decade, was commissioned in the first weeks of the Labour government in 2024, and the strategic landscape for European defence has since changed drastically.
While the threat from Russia existed at the review’s inception, there has been a significant escalation in how Europe’s powers are positioning themselves in recent months after Donald Trump signalled that he wants the US to play a much smaller role in foreign affairs.
Will defence spending rise to 3% of GDP?
It’s unclear whether the government will increase defence spending to 3% of GDP after defence secretary John Healy backtracked on comments made about the commitment.
Healy previously said there was “no doubt” that the government would meet 3% spending by 2034 (the end of the next parliament), but on 1 June, he said such a spending increase was just an “ambition”.
Defence spending in the UK currently stands at 2.3% of GDP (£53.9 billion), but will be increased to 2.5% by 2027/28 as per an announcement in February 2025.
Bringing defence spending up to 3% of GDP would move the UK ahead of NATO’s current target of 2% and closer in line with some other big spenders in European defence like Lithuania and Poland.
The prime minister added fuel to the fire when he refused to give a specific date for when defence spending would increase to 3%, instead insisting he wouldn’t commit to the policy “until [he] can be sure precisely where the money is coming from”.
When further quizzed about the figure at the launch this week, Starmer said the government was “committed to spending what we need to deliver this review”.
The spending flip-flop has been roundly criticised by the government’s opponents with Liberal Democrats leader Ed Davey accusing the prime minister of “showing a concerning lack of urgency on reaching 3%”.
He added: "With Putin waging war, Trump undermining NATO and conflicts raging, we must deliver for our armed forces and Britain's security in an increasingly unstable world. Anything less would be a dereliction of duty.”
Davey urged the government to “convene cross-party talks to allow us to get to 3% as soon as possible, and faster than 2034”.
Shadow defence secretary James Cartlidge said Labour’s announcement amounted to a “total unravelling of their strategic defence review” because the government “do not have a plan to fund it”.
“An SDR without the funding is an empty wish list. The ships and submarines it talks of are a fantasy fleet,” he added.
Further pressures are now mounting after reports suggest the UK could be forced to sign up to a spending target of 3.5% as part of a NATO incentive to ramp up defence spending and appease Donald Trump, who has repeatedly accused NATO members of skimping out on their defence budgets.
Insiders told The Times that a prescribed spending increase is to be expected at the NATO summit at the end of June and that the UK would not have a choice because NATO’s secretary-general had already agreed to the new target with Trump.
Outlook for the sector – should you invest in defence stocks?
With more specific news of what an increased defence budget would be spent on, and the possibility of defence spending getting a further shot in the arm in the near future, many defence stocks have seen gains.
BAE Systems, the largest defence contractor in Britain, saw its stock price rise by around 3% from the start of trading on 2 June to the end of 3 June. Meanwhile, Rolls Royce, another key player in Britain's defence industry, rose by 3.6% in the same time period.
Susannah Streeter, head of money and markets, at Hargreaves Lansdown said: “London listed military contractors are on the front foot in early trade as the UK government pushes defence spending up the priority list.”
She pointed towards the gains seen by BAE and Rolls Royce as commitments for 12 new submarines were made, highlighting that both companies have played a key role in designing and building UK nuclear subs.
Another big winner on the LSE was Babcock international whose shares rose by around 9% since the announcement amid expectations that it will benefit given it currently maintains the UK's submarine fleet.
“The government wants the UK’s armed forces to be on war-fighting readiness to act as a deterrent, so it seems that higher defence spending is here to stay,” Streeter said.
An optimistic view of defence stocks following the strategic defence review is also shared by Tom Bailey, head of research at HANetf, who said the review showed “encouraging signs that the government is taking the long-term task of rebuilding defence capability seriously”.#
Bailey said it was understandable that defence spending of 3% of GDP was not yet formalised, considering the UK’s fiscal constraints.
Commenting on the outlook of defence stocks, Bailey said investors should capitalise on the “broad commitment to modernisation.”
“For investors, this underscores the growing need to look beyond only the traditional defence primes, and consider exposure to cyber and digital defence as well,” he added.
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