UK boost to defence could pay dividends

Britain is aiming to increase defence spending to over 3% of GDP by the next parliament, and to 3.5% by 2035 (up from 2.3% in 2024). That’s a huge boon for the defence industry, but what will such a rapid increase mean for the economy as a whole?

A new study by the IMF provides some clues. Published before its spring meetings this week, its annual economic outlook analyses 215 examples of defence spending booms since 1945, across 164 countries. A “boom” is defined as a period in which the two-year moving average of defence spending rises by at least one percentage point of GDP and doesn’t fall again. Most were in emerging economies; only 11% were in European countries, where on average they l asted three and a half years and added defence spending equivalent to 4.5 percentage points of GDP.

Overall, the IMF finds a “defence dividend” of sorts. Booms in defence spending tend to be correlated with faster GDP growth than at other times. They also lead to higher inflation, but only modestly and temporarily. The boost to GDP tends to be much greater when the spending boom happens in peace time rather than war time.

An upside for Britain is that long-term economic benefits are higher the more the extra spending goes to investment in domestic defence production, rather than imports or current consumption (such as recruiting more soldiers). The downside: economic growth tends to be strongest when extra defence spending is funded by increased government borrowing – not something the UK’s finances currently allow. Instead, Britain faces what the IMF calls the “standard guns versus butter trade-off”: boosting spending on defence at the expense of other priorities.

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