UK Treasury Lacks Due Diligence on NATO Defense Spending Funding

The UK Treasury has revealed it has not conducted any due diligence or analysis on how to finance the nation's commitment to allocate 3.5% of its Gross Domestic Product (GDP) to NATO defense spending. Lucy Rigby, the Chief Secretary to the Treasury, informed Members of Parliament during a joint session of the Treasury and defence select committees on Wednesday that the funding of additional defense expenditure would be a matter for 'the next prime minister.'

This disclosure introduces significant uncertainty regarding the UK's path to fulfilling its pledge to raise defense spending to 3.5% of GDP by 2035. When pressed on whether the Treasury had performed any 'number-crunching' on the costs or potential trade-offs of this commitment, Rigby responded with a concise 'no.' Committee member Bobby Dean pointed out that this increase could amount to an additional £30-40 billion annually, equivalent to a 3p to 4p rise across all rates of income tax. Current Prime Minister Keir Starmer had pledged at last year's NATO summit in The Hague that the UK would meet the 3.5% target by 2035. However, the recent resignation of former Defence Secretary John Healey was partly attributed to concerns over the funding of the Defence Investment Plan (DIP).

The UK's defense spending stood at approximately 2.3% of GDP in 2024, with current plans projecting a rise to 2.7% between 2027 and 2029. This indicates a substantial fiscal gap to bridge to reach the 2035 target. While the government has an interim target of 3% for the next parliamentary term, the trajectory to achieve this goal also remains undefined. The Treasury's lack of analysis raises questions about the potential impact on public spending and fiscal discipline. Although increased defense spending can stimulate economic growth in the short term, factors such as the relatively small share of the UK's defense industry in the economy and import dependency could limit this effect.

This development comes at a time of escalating pressure among NATO allies to boost defense spending. Notably, US Republicans and former President Donald Trump have consistently urged allies, including the UK, to allocate a larger portion of their GDP to defense. According to updated NATO data, several allies, including Lithuania, Estonia, Latvia, Poland, and Greece, are projected to exceed 3.5% of their GDP on defense in 2026. This situation intensifies the pressure on the UK and could impact its international credibility.

Analysts and market observers warn that the Treasury's ambiguity on this matter could have long-term implications for the UK's fiscal outlook. The Institute for Fiscal Studies (IFS) estimates that meeting the 2035 target would require an additional annual cost of around £25 billion in today's terms. This suggests that the next prime minister will face difficult fiscal decisions, potentially involving cuts to other public services or tax increases. With the next spending review anticipated in mid-2027, debates surrounding the funding strategy are expected to intensify during this period.