28 October 2026
If you are covering the Chancellor's commitment to reach 3% of GDP for defence spending by 2030 (see note 5.29), please find below a comment from Matt Dorset, defence equity analyst at Quilter Cheviot:
"The outlook for UK defence spending has been a rollercoaster, as disappointment with the Starmer Government's plans transitioned to initial optimism on the appointment of John Healey as Chancellor in July, before this started to fade as fiscal concerns came to the fore. However, at today's Budget John Healey announced that not only is the Government committed to the 3.5% of GDP NATO target by 2035, but also to 3% of GDP by 2030 as a staging post for the 2035 target. This was the key issue that Healey resigned over as Defence Secretary in June, and provides more confidence that the 3.5% target will be met while also increasing spending in the interim.
"This is clearly an incremental positive for defence players with UK exposure, including BAE (~28% of sales in the UK), Babcock (60-65%), and Qinetiq (60-65%), and we would expect a high proportion of increased spend to go on defence equipment to improve UK defence readiness. Indeed, the share prices of these firms all rallied on the Chancellor's speech, indicating that 3% was not as set in stone as some would have liked, although gains have since moderated. Today's announcement will mean the industry can hold the government's feet to the fire to ensure these targets are met.
"That said, it is not yet clear how the Government will fund this commitment given high borrowing and competing spending pressures, which does therefore leave some uncertainty, with Healey set to answer these questions by laying out detailed plans in the Spending review next year. The fiscal position of the country is not expected to materially improve, so difficult decisions will have to be made. For a Chancellor who staked his reputation in the last government on increased defence spending, he has to hope it is something he can deliver."
