Good afternoon from New Economy Brief.
Defence, homes or heat pumps? Ministers are selling rearmament as an engine for growth, whilst it is being reported that the Chancellor may cut funding for the Warm Homes Plan to fund higher spending on defence.
But new research finds that, pound for pound, defence creates fewer jobs than investing in affordable housing or the energy transition, and funding it with cuts to either would cost jobs. This week’s New Economy Brief looks into the economics of Britain’s rearmament.
The fiscal politics of defence spending.
Last year's Strategic Defence Review called defence “central to both our national security and our economic growth”, and the defence industrial strategy was subtitled “making defence an engine for growth”. With John Healey's first Budget as Chancellor due on 28 October, and a spending review next year setting out departmental spending allocations for the remainder of the Parliament, that claim deserves testing.
Britain's defence target keeps moving. In February 2025 Keir Starmer brought the goal of 2.5% of GDP forward to 2027, paid for by cutting aid from 0.5% to 0.3% of national income. He billed it as £13.4bn more a year, although much of that increase had already been accounted for by the previous government. In June 2025, NATO allies agreed at The Hague to spend 5% of GDP by 2035: 3.5% on core defence and up to 1.5% on wider security.
Paying for this, however, has proved politically problematic. In June this year John Healey resigned as defence secretary, telling Starmer that the Treasury had been “unwilling to commit the resources that the nation needs” and that Britain must aim for 3% by 2030. Weeks later the Defence Investment Plan received an extra £15bn over four years.
How the money is found for additional defence spending matters. According to the government's explainer detailing how the Defence Investment Plan has been funded so far, every department gives up 1p in every £1 of its capital budget (£4bn over four years), the energy department finds an additional £2bn of savings and the transport department £0.8bn. Another £4.7bn is left "to be funded at Budget 2026". Starmer has since left office, and Healey, now Andy Burnham's Chancellor, inherits the bill.
What does a pound of defence spending buy?
A new report from Alexander Guschanski, Rob Calvert Jump and Özlem Onaran, commissioned by the Invest in Britain campaign, puts the government’s economic claim to the test. A 105-industry input–output model, built on the 2022 ONS tables, follows each pound through supply chains and into the spending of the workers it employs, net of imports.
Not all of a pound added to the MOD budget reaches British firms: 52.5p is spent with UK industry, 11.9p goes overseas and 26.9p pays personnel. The other 8.6p is budgeted spending that does not show up in the MOD's recorded payments to industry. The equipment that most new money buys is import-heavy: 18.5% of MOD spending on equipment goes to overseas suppliers, against 7% for the energy transition and 3.4% for affordable housing.
Spending on housing and the energy transition is better value for money. The result is that each £1m of extra MOD budget supports about 13.1 full-time-equivalent jobs, once supply chains and household spending are counted. However, the same £1m supports 14.5 jobs in renewables, energy efficiency and public transport, and 16.1 jobs in affordable housing. In a forthcoming companion paper, the authors find that spending on education, childcare, health and social care does better still: about 22 jobs per £1m. Defence also gives women the smallest share of new jobs. On value added – their contribution to GDP – the three are effectively level: £1.06 per pound for defence, £1.08 for energy transition and £1.13 for housing. Small changes to the assumptions can reorder them. For instance, the authors’ defence assumptions are generous: before household spending they find 8.6 jobs per £1m of MOD spending, while the MOD itself estimates 8.3 jobs.
The trade-off
The research shows that defence spending does boost the economy, like most public spending. However, if it rises at the expense of other investments, the relevant question is not whether its economic effects are positive. It is whether the benefits flowing from defence spending are greater or less than the benefits flowing from alternative uses of the same money.
Take £13bn a year, roughly the scale of Starmer's pledge. Spent on defence, it creates about 169,900 new jobs. Spent on the energy transition it supports 188,200, and on affordable housing 209,100. Move £13bn from housing to defence and the economy loses about 39,200 potential jobs, 14,700 of them held by women. Move it from the energy transition and about 18,300 jobs go.
These swaps are already happening, and reports this month suggest the Warm Homes Plan could be cut to fill the remaining gaps. Nesta’s Madeleine Gabriel recently warned that this could ”effectively wipe out” the heat pump industry in England and Wales.
The fiscal rules push us towards trading off defence against other areas of investment, but also to channelling investment through financial vehicles. Since the 2024 Budget, the government has targeted public sector net financial liabilities (PSNFL). This measure nets off financial assets against the government debt that is issued to purchase them. So, if the government sells gilts to fund loans to private housebuilders, PSNFL does not increase. On the other hand, if the government issues gilts to fund the construction of publicly owned housing, PSNFL does increase. This creates an obvious bias towards public investment in financial assets, rather than physical assets, even if (as the OBR notes) “this is not the best value for money mechanism” (see also Calvert Jump and Michell, 2026).
What Next? The Budget and the spending review
Healey's Budget is expected to find the missing £4.7bn in the Defence Investment Plan, £1.8bn of it this year. He will also come under pressure to set out how the UK plans to make progress towards the 3.5% NATO spending target by 2030.
The research findings recommend not cutting housing, energy or care to fund defence. The jobs lost would outnumber those created, and GDP would be no higher. Cuts could be avoided if the UK instead followed much of the rest of Europe in exempting investment by public corporations from the fiscal rules, enabling more investment in physical assets that earn a return – like social housing and energy generation.
None of this settles how much Britain should spend on defence. That is primarily a geopolitical question, not an economic one. But whatever the case for rearmament, there is no good reason to reduce the investment that builds homes, cleans up the grid or funds education, childcare, health and social care.
Stat of the week: 39,200 – the number of potential full-time jobs lost if £13bn is spent on defence rather than affordable housing.
What does ‘public control’ actually mean? Economists Mariana Mazzucato and Anna Hope Emerson define public control as “the capacity of the state to steer the strategic direction of economic activity through the public-purpose orientation of its policy tools”. They argue that control is broader than ownership, as other policy tools such as regulation and licensing, procurement, public finance conditionality and equity stakes can also be used.
Privatisation was a failed experiment. Common Wealth’s Chris Hayes comments on recent developments in the history of UK’s privatised energy storage, grid and transmission network, arguing that “we remain a continental anomaly” as “Britain’s experiment in unbundling and privatisation went further than any other country and many of those that followed our example have started turning back.”
South East and South West Water companies sound alarm over reservoirs drying up. The government is running two emergency Cobra meetings a week to discuss the “reasonable worst-case scenario” that several reservoirs in Southern England could run out of water within weeks, potentially affecting hundreds of thousands of homes.
What’s stopping wealth tax reform? New research from Tax Justice UK explores the political barriers to reforming wealth taxes, and ways to overcome them. Researchers from the Fraser of Allender Institute interviewed Westminster, Holyrood and Senned MPs from all major political parties who listed economic fears, research gaps, negative media narratives and billionaire-owned media spaces, party political machinations, and lobbying by powerful interests as the key obstacles, as well as deeply held ideological beliefs around extreme wealth and the role of tax.
Debt cancellation at the G20? Ed Miliband has emphasised the need to take multilateral action to cancel developing countries’ debts ahead of the UK taking over the G20 presidency next year.
