Can defence spending boost growth and productivity in the UK?

The UK is raising defence spending to bolster national security. But unless this shift supports defence-related research, without sacrificing public funds for innovation in health, science and education, the result could be slower productivity growth, not faster.

Defence spending can contribute to long-term growth, especially when it supports research and innovation. In fact, studies suggest that military R&D can generate up to twice its value in additional GDP over time (Antolin-Diaz and Surico, 2025).

But health, science and education R&D typically yield even higher returns. If defence investment rises while other research budgets fall, the overall effect on productivity may be weaker, not stronger.

What type of public spending drives productivity growth?

From the Apollo Project to the fight against Covid-19, history shows that it is not public spending on defence, healthcare or even space travel that singlehandedly transforms a country. The biggest gains in productivity – the creation of entirely new industries, and lasting improvements in people’s lives – happen when public spending is directed toward innovation.

The postwar American innovation ecosystem offers a useful example of this. The United States entered the space race with the Apollo Project, launched in 1961 under President John F Kennedy. It didn’t just land a man on the moon, it triggered a wave of new technologies that we now take for granted, including solar panels, composite materials, GPS and micro-cameras. Solar panels, for example, found one of their first major applications in space. They became standard on satellites and spacecraft, and today the same technology is widely used on rooftops and off-grid systems to generate electricity. These innovations quickly spread into everyday life, transforming entire industries.

Similarly, during World War 2 the need for secure communications pushed British mathematician Alan Turing and his team to crack the Nazi Enigma code. This challenge gave rise to the first programmable computers and laid the foundations of modern computing. A short-term military objective became a technological leap with lasting effects on civil society.

A more recent example comes from the Covid-19 pandemic. In just a few months, public investment in countries like Germany helped accelerate mRNA research. Partnerships with private firms such as Pfizer supported the effort. The result was a life-saving vaccine. That same technology now holds promise for treating cancer, malaria and other diseases.

What these examples show is that public spending delivers the greatest benefits when it is linked to clear, ambitious goals. Urgency is also important, but alone doesn’t drive innovation. On the other hand, when governments fund mission-driven projects, the result can be breakthroughs with wide-ranging economic and social returns.

These cases show that governments can play a catalytic role in driving innovation and have shaped some of the most transformative technologies of the past century, as emphasised in work by economist Mariana Mazzucato.

The UK is preparing to allocate a significant share of future budgets to security. To support long-term growth, this spending must be linked to technological progress. Without it, higher military budgets will not close the UK’s productivity gap with other advanced economies.

Can military spending deliver growth on its own?

When a country faces external threats or rising geopolitical tensions, the most immediate response is often to increase defence spending. From a national security perspective, this can be a necessary step. But economically, not all defence spending is equal.

Figure 1. Defence expenditure and investments by EU member states, 2005-2024

Source: European Defence Agency

If additional funding is directed mainly toward recruitment or the purchase of conventional weapons, its impact on long-term growth tends to be limited. Studies show that defence spending typically increases GDP in the short-run by 60p to £1 for every additional pound spent (Ramey, 2019). Economists call this measure of the increase in GDP for each additional pound spent the ‘multiplier’.

Returns are modest because many military purchases have a short shelf life and quickly become obsolete in a fast-moving technological environment. Modern military production is also highly automated and generates few new jobs, like much of manufacturing. This kind of spending can boost immediate national security, but it does little to reshape the country’s productive structure or raise average job quality.

What is the role of innovation activity?

A very different picture emerges when public funds are directed toward research and development (R&D). A recent study illustrates this dynamic in the United States (Antolin-Diaz and Surico, 2025). It shows that defence spending that supports innovation tends to have a much greater and more lasting effect on growth and productivity. The study finds that defence spending has the strongest long-run effect on public R&D and that, in turn, public R&D delivers the largest and most sustained gains in output, productivity and innovation. This contrasts with spending on conventional weapons or military personnel.

When R&D is the focus, long-run multipliers of government spending can reach values between 1.2 and 2. That means every £1 invested in innovation-focused defence projects can generate up to £2 in additional GDP over time. For example, this includes defence R&D projects funded by programmes like DARPA in the United States, which support early-stage technologies with military applications. These returns reflect gains in productivity and technological spillovers across sectors.

The military spending multiplier the authors estimate rises over time. It starts at modest levels, but then exceeds £1 of GDP after six years, and doubles after 15. This pattern reflects the fact that gains in productivity and innovation take time to appear, often outlasting any single parliamentary term. But when they do, they have long-lasting economic effects, including sustained improvements in productivity, output and innovation., output and innovation.

Figure 2. The return on military spending in the United States

Source: Antolin-Diaz and Surico, 2025
Note: Variables in log-levels. Shaded bands represent percentile ranges: darker (16th–84th percentile) and lighter (5th–95th). The solid red line marks the median (50th percentile).

Other international studies confirm that a 10% increase in public defence R&D spending is associated, on average, with a 5% rise in private investment (Moretti et al., 2025). This creates a strong ‘crowding in’ effect that amplifies the initial stimulus. The main reason is that public commitment ensures broad and reliable demand for any new solution capable of addressing the government’s mission. This encourages the private sector’s creativity and efficiency. One example is early-stage research funded by DARPA, which supported advances in signal processing. This work enabled Qualcomm’s development of CDMA technology, a breakthrough that helped launch the mobile communications industry.

How can military technologies spill over into everyday life?

The wide-reaching effects of defence innovation often come from the nature of the technologies themselves: they tend to be dual-use, with both military and civilian applications.

GPS began as a military navigation system. Today it is essential to logistics, precision farming and transport. Similarly, the internet was originally developed by DARPA, the US defence research agency. It is now the backbone of the global economy. Drones were first used in combat settings, but are now used for everything from parcel delivery, to agriculture, to emergency response. Nuclear fission started with the Manhattan Project during World War 2, leading to the creation of the atomic bomb and the destruction of Hiroshima and Nagasaki. Today nuclear energy is a major source of electricity around the world for civilian uses.

These technologies have had profound effects well beyond their original purpose. But it’s important not to turn the desirable goal of dual-use technology into an obsession: as the American experience shows, most defence innovations only entered everyday life after achieving their initial military goals.

Is military spending special?

Defence spending can seem uniquely valuable in times of crisis. But the economic impact of such spending depends less on the sector itself and more on the urgency of the moment and the way public funds are used.

When national security is the emergency, defence spending becomes productive. During the space race, for example, investment in aerospace and manufacturing played that role. During a pandemic, to take another example, it is health and biomedical research that becomes the most valuable use of resources.

The common factor in all these cases is not the sector. It is the presence of public R&D, focused on solving a clear problem. Mission-driven innovation is what turns spending into long-term growth. Defence R&D can be part of that story, if not central, but only when it follows the same principles.

Is the UK investing in the wrong kind of innovation?

The UK government’s 2025 Spending Review marked a sharp change in public investment priorities. In response to geopolitical risk, defence spending is set to increase to 2.6% of GDP by 2027. The Ministry of Defence will see the largest capital budget increase of any department, with average annual growth of 7.3% in real terms (rising from £23.2 billion in 2025/26 to £33.2 billion by 2029/30). Around 7% of this will be allocated to R&D, increasing from £1.7 billion to £2.4 billion over the same period (HM Treasury, 2025).

Meanwhile, R&D budgets for science, health and education are flat or falling in real terms. R&D spending on science, innovation and technology is budgeted to grow 10% in nominal terms from 2025/26 to 2029/30, implying minimal growth after inflation is considered. R&D within health and social care will remain flat in nominal terms at around £2 billion per year during this period, representing a significant decline in real terms. Education capital allocations show no significant uplift, meaning growth in R&D in this sector, if any, is likely to be minimal.

This trade-off is concerning, not because defence innovation does not contribute to growth, but because other forms of public R&D tend to deliver even greater long-run economic returns. A recent study estimates that while government-funded innovation expenditure delivers GDP returns of 8-14 times the original investment, these returns vary sharply by sector (Frontier Economics, 2024). Defence R&D delivers positive effects, but the gains from health, science and education public R&D are even greater, channelled primarily through universities, research institutes and start-ups (Gazzani et al., 2025).

Figure 3. The effects of innovation by federal agencies and industries

Source: Gazzani et al. (2025)
Note: The figure displays the dynamic effects of innovation shocks in each category of patents (public-private, private-private, public-public; by column) on log real per-capita GDP and log utilisation-adjusted total factor productivity (by row) by agency-sectoral breakdown.

So, defence innovation can support long-run growth. But if it is funded by diverting public resources away from more productive sectors, the net effect on productivity growth may actually be negative. This means that a reallocation of R&D spending away from healthcare, science and education towards defence may harm the UK’s long-term economic prospects.

Conclusion

The supposed trade-off between national security and economic prosperity is a false dilemma in reality. The two goals are not inherently opposed. Investing in defence does not have to come at the expense of growth so long as the spending is directed toward innovation projects capable of producing broad-based benefits.

But there is a caveat. If increases in defence R&D come at the cost of more effective forms of publicly supported innovation, the outcome may be lower growth, not higher. To close the UK’s productivity gap, investment needs to expand the innovation frontier not only in defence, but also (and perhaps more importantly) in sectors that deliver the greatest long-term returns.

Used wisely, defence R&D can be part of a national growth strategy. But without a broader vision for public innovation, it risks becoming a missed opportunity.

Where can I find out more?

The economic impact of higher defence spending: European Commission summary on the returns to defence spending.
Guns and Growth: The Macroeconomic Effects of Military Spending: Ethan Ilzetzki summarises the academic literature on the fiscal and economic effects of military spending.
How big is the economic dividend from defence spending?: Financial Times discussion on the topic.
The intellectual spoils of war: How government spending on defence research benefits the private sector: VoxEU column on the private spillovers from government-funded R&D.
The Public Origins of American Innovation: research paper studying the macroeconomic impact of government funded innovation.
The Long-Run Effects of Government Spending: research paper on the effects of different categories of defence spending (personnel, equipment, R&D) on aggregate productivity and GDP.
UK defence spending: composition, commitments and challenges: Institute for Fiscal Studies report on trends in UK defence spending and the economic and fiscal implications of recent policy commitments.