What does the 2026 Budget mean for defence and international affairs? Alyson Kierans, Dods Political Consultant for Defence, Foreign Affairs, International Trade & Development, breaks down the decisions, missed opportunities and wider implications for the sectors.
What are the key takeaways for your sector?
Alyson Kierans: This Budget, which was billed as providing the solution to the £4.7bn funding gap in the Defence Investment Plan, has offered reprioritisation of capital budgets as its answer.
The Budget announced that this gap will be funded by a reprioritisation of 1 percent of Whitehall’s capital budgets. This is set to deliver £3bn, with the remaining £1.7bn to be funded from unallocated contingencies in the Treasury’s capital Reserve.
The main takeaways from the Budget are drone regulation reform, winter funding for Ukraine, and a new defence focus for the National Wealth Fund and British Business Bank. Particularly, the commitment on the National Wealth Fund has added weight, due to the extra £20.4bn the Chancellor announced for the fund.
Since the publication of the Strategic Defence Review, the Government has pursued advancing public-private partnerships to increase defence spending, and this Budget’s contents aim to continue that trend.
What has the Government not sufficiently addressed in the Budget for your sector?
Alyson Kierans: The most significant outstanding question is how the Government intends to meet its target of spending 3 percent of GDP on defence by 2030, and the broader NATO target of spending 5 percent by 2035.
While the Government has indicated that a pathway to 3 percent will be outlined at the 2027 Spending Review, the absence of a detailed funding trajectory continues to create uncertainty for long-term defence planning, given most large projects run across multiple decades.
This Budget’s reiteration of the promise to meet the targets, but the absence of the detailed plan, continues this trend.
This choice could affect the UK’s diplomatic relations with the United States. US President Donald Trump has strongly advocated that NATO members increase defence spending. Continued uncertainty over the UK’s willingness and ability to reach 3.5 percent on core defence spending and 1.5 percent on “defence and security related spending” could hinder the UK’s relationship with the US.
A credible funding pathway is therefore important for business, effective deterrence, and UK foreign policy.
Have the Government’s priorities changed in your sector? Why?
Alyson Kierans: The Government’s overarching commitment to increasing defence spending and strengthening the UK’s military capability has remained unchanged.
However, the Budget showed the Government’s intention to use, at least in the short term, internal defence spending reprioritisation to fill the current spending gap.
Rather seeking new funding to address the gap, this Budget has retroactively cut funded defence programmes, to reduce the £4.7bn in unfunded defence spending. The UK’s armed vehicle programme, in particular, has seen £2bn cut from its £7bn budget.
Under Prime Minister Keir Starmer, considerable emphasis was placed on improving Armed Forces personnel retention through increased spending on wellbeing. This included investment in military housing, strengthening the Armed Forces Covenant and supporting veterans’ transition into civilian employment.
Under Prime Minister Andy Burnham, the emphasis appears to have shifted toward delivering warfighting capabilities, accelerating procurement, and prioritising investments that can deliver more immediate operational benefits.
This suggests that capability development and readiness are taking greater prominence in an increasingly insecure geopolitical environment.
Any additional reflections?
Alyson Kierans: A significant portion of John Healey’s legitimacy as Chancellor may rest on credible funding of the Defence Investment Plan (DIP), given he previously resigned over under-funding of the plan.
By fully funding the Defence Investment Plan, Healey demonstrated he retained his strong commitment to increasing defence spending, despite the challenging fiscal environment. However, the lack of detail on what that ‘reprioritisation’ entails is unlikely to reassure the defence sector, or investors seeking strong reassurances from the Government in the form of hard numbers.
Additionally, the decision not to redirect funding from welfare to defence aligns with commitments Defence Secretary Wes Streeting made at this year’s Labour Party Conference.
He argued that spending on welfare and defence should not be treated as competing priorities. However, while Healey has stuck with the commitment thus far, welfare spending reform is not expected until the 2027 Spending Review and after the publication of the Milburn and Timms Review. This leaves continued ambiguity over whether there could be cuts to welfare to fund defence, despite rhetoric claiming there is no ‘either/or’ between defence and welfare spending.
Overall, this Budget has offered the defence sector a level of clarity, while broadly continuing the direction of travel set out at the Strategic Defence Reviews publication.