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Investing.com -- Britain’s prime minister Keir Starmer announced plans to hike defense spending to 3% of GDP in the next parliament, set to begin in 2029, with part of the funding coming from cuts to the aid budget.
He committed to reach 2.5% of GDP in defense spending by 2027, citing growing security concerns in Europe.
UK-based defense stocks jumped Tuesday, with BAE Systems (LON:BAES) jumping more than 4% by 14:45 GMT, and Babcock International (LON:BAB) climbing 1.9%. Moreover, shares in Qinetiq Group PLC (LON:QQ) also added 1.9% and Rolls-Royce (OTC:RYCEY) Holdings PLC (LON:RR) rose 2%.
The UK currently allocates 2.3% of GDP to defense, and while the previous government had set a 2.5% target, no timeline had been specified.
Starmer told lawmakers that the planned increase would add £13.4 billion ($17 billion) annually to defense spending. To help cover the cost, he confirmed that overseas development aid would be reduced from 0.5% to 0.3% of national income.
Starmer called the move the “biggest sustained increase in defense spending since the end of the Cold War,” arguing that it is necessary because “tyrants like (Russian President Vladimir) Putin only respond to strength.”
Citi analysts see two main potential implications of this move. First, the UK defense spending could rise by 4% in the long term, increasing from 2.5% to 2.6% of GDP. "We’d broadly suggest this increases the value of UK defense sales by the same," analysts said.
Second, in the medium term, by 2027, they anticipate an 8% increase. "This may boost medium-term UK sales by a similar amount, but we’d focus on the long-term fundamental value," they added.
Stramer’s announcement comes as European nations rush to strengthen their defenses amid uncertainty over US foreign policy under President Donald Trump, who has previously questioned NATO’s value and criticized European countries for not contributing enough to their own security.
The UK prime minister, who is set to meet Trump at the White House on Thursday, has proposed deploying British troops to Ukraine to help maintain a ceasefire but emphasized that an American “backstop” would be crucial to ensuring lasting stability.
“We must stand by Ukraine, because if we do not achieve a lasting peace, then the economic instability and threats to our security, they will only grow,” Starmer said.
“And so as the nature of that conflict changes, as it has in recent weeks, it brings our response into sharper focus, a new era that we must meet as we have so often in the past, together, and with strength.”