Keir Starmer urged to use defence spending boost to revive UK manufacturing

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Sir Keir Starmer must use a promised rise in UK defence spending to boost British manufacturing and expand domestic supply chains for the armaments industry, the head of the UK’s main manufacturing lobby group has said.

Stephen Phipson, the chief executive of Make UK, said the prime minister’s pledge to increase defence spending to 2.5 per cent of GDP was an opportunity to cement the UK’s position as a global leader in arms manufacturing.

“We must start to capitalise on our research and innovation capabilities to make sure that the defence sector is leading the way globally for years to come,” he said at the group’s national conference on Tuesday.

“A different approach to defence procurement” was also needed to ensure small businesses benefited from the spending pledge, Phipson added. The increase is being funded by cuts to the overseas development budget.

The government announced on Monday plans to launch a hub providing small and medium enterprises (SMEs) with better access to defence supply chains, alongside SME spending targets for the Ministry of Defence by June.

At a defence careers fair hosted by Downing Street, Starmer said: “We’ve got a ‘strategic defence review’ coming up, an industrial strategy, which will set out how we plan to spend this uplift on British defence.”

The plans involved overhauling procurement processes, supporting new technologies, and “working with partnerships with some of our key national suppliers like BAE Systems and Airbus”, he said.

Nearly 70 per cent of UK defence spending goes to businesses outside London, according to government figures, but only a 4 per cent share of this went to the 12,000 SMEs that serve the sector. The MoD spent a total of £28.8bn with UK industry in 2023-24.

Kevin Craven, chief executive of ADS, the aerospace industry trade group which represents 1,300 SMEs, welcomed the government’s announcement, adding the group was “acutely aware” of the defence procurement hurdles facing small businesses.

The UK and EU are under pressure from Washington to increase defence spending in order to underwrite the cost of European security and a potential peace deal to end the war in Ukraine.

The share prices of the European defence sector surged on Monday as investors predicted that countries will have to shoulder a bigger burden of their security costs.

Defence is one of eight “high-growth” sectors set to benefit from temporary catalytic government support in the UK’s industrial strategy, to be published in spring.

In a signal of the government’s rapid reordering of priorities, Reeves announced on Sunday that the £27.8bn National Wealth Fund will be available for investment in the defence industry.

The NWF, formerly called the UK Infrastructure Bank, was originally set up to focus on broader investment in infrastructure with an emphasis on decarbonising heavy industries such as steel.

One Whitehall insider said that new money flowing into defence would be deployed to boost a sector that was already being targeted under the existing industrial strategy.

“The ODA [Official Development Assistance] spend that was going to be outside the country is now going to be inside. That was money that wasn’t going to be flowing directly into the economy, but now will be,” they added.

Citing the balkanised nature of defence procurement in Europe — which has 173 weapons systems compared with 33 in the US — Phipson said the UK’s globally competitive arms industry meant it was “best placed” to help drive European consolidation.

However, Phipson warned that UK manufacturers were disadvantaged by energy prices that were 50 per cent more expensive than in Europe and double that of the US, and the impact of higher taxes on employers’ announced in the last Budget.

A Make UK survey found that 48 per cent of companies were freezing recruitment as a result of the increases in employers’ national insurance contributions due to take effect in April.

“[The] government must now build a business environment to encourage growth, provide incentives for investment and scaling innovation in this country and work together to now reduce the costs of doing business,” he added.

Additional reporting by Sylvia Pfeifer