(Bloomberg) -- Prime Minister Keir Starmer outlined plans for a dramatic increase in UK defense spending — rising to 3% of economic output over the next decade — as European governments seek to bolster their security amid doubts over US support under Donald Trump.
Starmer announced what he called “the biggest sustained increase in defense spending since the end of the Cold War” in the House of Commons on Tuesday as he prepares for a visit to Washington later in the week. The government will pay for the initial hikes by cutting overseas development spending and won’t raise taxes or borrow more, he said.
The Labour prime minister pledged to spend the equivalent of 2.5% of gross domestic product on defense by 2027, compared with 2.3% currently. He said it was then his “ambition” to expand funding to 3% during the next five-year parliamentary term, which is due to begin by 2029.
“A generational challenge requires a generational response,” Starmer told Parliament, where the plans were widely welcomed by opposition leaders. “What I wasn’t going to do is come to this house with a plan that was not credible and not costed because I think that would be far worse for this country.”
The announcement marked a seismic moment in British politics as Starmer, only elected premier last July, is forced to refocus his priorities by America’s shifting position on the Russia-Ukraine war, and the wider issue of European security.
The move is a last-ditch attempt by the UK to pull Trump back from the brink of tearing up a transatlantic alliance that’s lasted since World War II. Still, Starmer also signaled that Britain would have to turn back toward Europe five years on from Brexit, heralding the beginning of a “new alliance” with the continent.
Starmer’s remarks did little to move UK bonds, which held on to earlier gains. The yield on the 10-year gilt was down four basis points to 4.52%, outperforming most euro-area peers.
European defense stocks, which have risen markedly in recent days, also saw little impact. BAE Systems was already up 3.7% on the day while Rolls-Royce gained 1.3%, compared with a broader 0.5% increase in the FTSE 100.
Bloomberg reported last week that the military had told Starmer he needed to hit 2.5% as soon as possible before 2030, then ramp it up to 3% afterward. Military chiefs have said 2.5% is the bare minimum Britain needs to spend to defend itself and potentially contribute to a peacekeeping force in the event of a ceasefire between Russia and Ukraine.
What Bloomberg Economics Says...
“Raising defense spending (as defined by NATO) to 2.5% of GDP would only be a 0.2% of GDP increase. That’s not enough to transform Britain’s military capabilities. It will, however, redefine the aid offering, if that’s where the savings come from. That choice would at least spare other hard-pressed departments from even deeper austerity coming years. Taking military outlays to 3% of GDP in the 2030s will involve some very difficult decisions in the next parliament — that’s when age-related cost pressures are set to intensify.”
—Jamie Rush, chief European economist
The UK needs to lift current spending by around £5 billion ($6.3 billion) to reach 2.5% — a target that has long been touted in Westminster. Former Prime Minister Rishi Sunak, a Conservative, had promised ahead of the last election to reach 2.5% by 2030, but Labour was more equivocal as it planned to hike spending on other priorities, such as public services and large infrastructure projects.
Sunak’s successor, Kemi Badenoch, backed the accelerated plan on Tuesday, telling Starmer: “All of us on this side of the house welcome that.” Still, former Tory leader Iain Duncan Smith suggested the government would come under pressure to do more. “I think we’ll find we have to be raising defense spending further,” he said.
Lawmakers from the right-wing Reform UK party, led by Trump ally Nigel Farage, were not present in parliament when Starmer made his announcement. Several MPs from other parties mocked and criticized Reform’s absence.
Trump’s return to the White House has placed greater urgency on the need for European governments to lift defense expenditure. The US is seeking a quick cease-fire in Russia’s war in Ukraine and shocked the West on Monday by refusing to back a UN resolution that condemned the Kremlin’s full-scale invasion. Other countries voting against the resolution included Belarus and North Korea.
Starmer’s visit to the White House on Thursday follows a similar mission by French President Emmanuel Macron earlier this week. Trump has said he expects countries in the North Atlantic Treaty Organization to spend 5% of GDP on their armed forces, with US Defense Secretary Pete Hegseth describing the goal as “critical.”
Britain was already facing a tight fiscal squeeze before Trump took office and reiterated his demands. The country’s borrowing costs jumped during January’s global bond rout, amid particular concerns about the UK’s large debt pile and feeble levels of economic growth. Chancellor of the Exchequer Rachel Reeves is at risk of breaking her self-imposed fiscal rules despite lifting taxes by more than £40 billion, as Labour ramps up spending on an expanded public sector.
Starmer’s decision to fund defense by cutting the foreign aid budget mirrors Trump’s decision to freeze US programs that administer humanitarian assistance around the world. UK Foreign Secretary David Lammy had said earlier this month that it was a “big strategic mistake” when Britain previously slashed its aid budget.
“It’s a bold step given how tight the fiscal position is,” former UK national security adviser Peter Ricketts told Bloomberg. “I’m sad it has to come from the aid budget, but if the UK is to co-lead with Macron a much more ambitious European security policy, this increase was indispensable.”
--With assistance from Ellen Milligan, Ailbhe Rea, Joe Mayes, Aline Oyamada and Blaise Robinson.
