A step-change in military spending is rippling through Britain's factories. After NATO leaders agreed at the June 2025 Hague summit to lift alliance defence spending towards 5% of GDP by 2035, the UK has committed to a rising budget path that is already reshaping order books, Investment plans and hiring across the Manufacturing base. The government spent an estimated £62 billion on defence in 2025/26 and expects outlays to climb steadily over the next decade. For UK manufacturers — from primes such as BAE Systems and Rolls-Royce down to precision engineering SMEs and a new wave of start-ups — that trajectory represents one of the largest sustained Demand signals in a generation. The opportunity is real, but so are the constraints.

The money behind the boom

The headline figures are substantial. The UK spent roughly 2.3% of GDP on defence in 2025 (on NATO's measure) and is expected to reach about 2.6% in 2026. Ministers have pledged to raise core defence spending to 2.5% of GDP by 2027 — or 2.6% once broader security and intelligence spending is counted — with an ambition to reach 3% in the next Parliament and 3.5% by 2035.

That 3.5% target is the "core defence" half of NATO's new benchmark. The Hague agreement splits the 5% goal into 3.5% of GDP on hard military capability plus a further 1.5% on wider security and resilience, such as critical infrastructure and cyber. In cash terms, the government's Defence Investment Plan projects spending rising towards roughly £79 billion by 2029/30.

For industry, the significance is less the single-year percentage than the direction and duration. A credible, decade-long upward path allows manufacturers to justify the capital investment, tooling and recruitment that short-term budgets never could.

Primes at the centre — but not alone

The largest beneficiaries are the established primes. BAE Systems, Babcock and Rolls-Royce anchor programmes spanning submarines, warships, combat aircraft and munitions, and each sits atop a Supply chain of thousands of smaller firms. Rolls-Royce has continued to hit milestones on next-generation combat-jet propulsion, while naval and munitions work underpins long-duration order backlogs.

The strategic emphasis has shifted, too. Industry body ADS Group frames the 2026 outlook around three structural changes: resilience as a requirement, with a premium on domestic industrial capacity and secure supply chains; alliances as a framework, with deeper integration alongside NATO partners; and speed as a differentiator, as procurement tries to move faster than traditional cycles allow. Each of those shifts points work towards a broader spread of UK suppliers rather than a handful of incumbents.

That is where the opportunity widens. Sovereign munitions production, drone and counter-drone systems and rapid-reaction manufacturing all demand a deeper domestic industrial base — precisely the kind of capacity that has thinned in recent decades.

The start-ups reshaping the base

The clearest sign of change is the arrival of well-funded newcomers. Isembard, founded in late 2024 by Alexander Fitzgerald, has opened a 160,000 sq ft factory in Southwark — billed as one of central London's largest manufacturing sites in decades — producing precision components for aerospace, defence and robotics. The company employs around 35 people at the site, targets 200 by the end of 2027, and counts Babcock, Anduril and Tekever among its customers. It has grown rapidly from a handful of facilities to more than a dozen across the UK, Europe and the US.

Propulsion is another hotspot. Greenjets, a British aerospace-technology firm developing low-cost engines for drones and interceptors, raised €35 million in July 2026 in a round backed by the NATO Innovation Fund and the National Security Strategic Investment Fund. It has been selected under the Ministry of Defence's Low-Cost Air Defence Effectors programme and plans to expand from around 160 to more than 250 staff. University spin-outs building affordable turbojets for uncrewed systems reflect how quickly the drone era is pulling engineering talent into defence.

These firms matter beyond their own headcount. They signal that private capital now sees UK defence manufacturing as an attractive growth market — a Reversal of the sector's long reputation as slow and capital-starved.

Skills, steel and industrial strategy

The upswing connects directly to wider industrial policy. Rebuilding sovereign capacity in munitions, aerospace components and shipbuilding requires materials, and that ties the defence boom to the fate of domestic steelmaking — including the aerospace-grade alloys the government has just moved to protect by taking Speciality Steel UK into public ownership. A defence build-up that relied wholly on imported specialist metals would undercut the resilience it is meant to deliver.

It also requires people. Welders, machinists, systems engineers and metrologists are in short supply, and the pace of hiring at firms such as Isembard and Greenjets underscores the competition for skilled labour. Apprenticeships, retraining and regional clusters in Sheffield, Barrow, Filton and Glasgow will determine how much of the spending converts into durable UK jobs rather than overseas procurement.

The risks manufacturers must weigh

The opportunity is not guaranteed, and the risks are material. Defence procurement is notoriously slow: budget commitments can take years to translate into signed contracts, leaving suppliers to fund capacity ahead of firm orders. Capacity itself is a constraint — expanding munitions or engine output means new lines, long-lead machine tools and trained staff that cannot be conjured quickly.

Dependence on government budgets cuts both ways. A demand signal set by fiscal choices can weaken if economic conditions tighten or political priorities shift, and firms that over-invest against optimistic forecasts could be exposed. Higher borrowing costs — the Bank of England's Bank Rate stands at 3.75% ahead of its 17 September decision — raise the price of the capital expansion many suppliers need. Export controls, competition from larger allied industrial bases and the risk that spending flows to foreign primes all temper the domestic upside.

A generational opening, with caveats

For UK manufacturers, the defence boom offers something rare: a large, sustained and politically backed source of demand at a time when the government is actively championing reindustrialisation. Firms that can move quickly, secure skilled workers and plug into prime supply chains could potentially capture years of growth. But the gains will accrue to those who manage the lags, the capacity risk and the budget dependence — not to everyone who hopes the spending will simply arrive.