Britain will need to identify around £4.7 billion of additional funding in this year’s Budget to fully finance planned increases in defence spending, despite recently announced reallocations, according to a research note from Barclays.
The bank said measures announced by outgoing Prime Minister Keir Starmer and Chancellor Rachel Reeves would fund much of the government’s planned rise in defence expenditure through reductions in capital budgets across government departments. However, those reallocations account for only about £11.3 billion of the planned £15 billion increase over the next four fiscal years.
That leaves a funding shortfall of approximately £4.7 billion, which Barclays said will need to be addressed through policy decisions in the 2026 Budget.
The analysis comes as Andy Burnham, widely regarded as the leading contender to succeed Starmer as prime minister, has begun outlining his policy priorities while reaffirming his commitment to Britain’s fiscal rules.
According to Barclays, Burnham’s focus on devolving greater powers to regional authorities and his reluctance to impose significant tax increases on businesses could limit the government’s options for financing additional spending commitments.
The bank noted that advisers close to Burnham have resisted proposals from some trade unions to increase taxes on banks and businesses to fund new initiatives, highlighting the political constraints facing the incoming administration.
While Barclays believes the increase in defence spending remains manageable under the government’s fiscal framework, it warned that higher gilt yields since the Office for Budget Responsibility’s March forecasts have already eroded fiscal headroom by around £3 billion.
The bank added that updated population projections could place further pressure on the public finances, although it currently estimates the government retains fiscal headroom of between £15 billion and £20 billion based on prevailing market conditions.
Barclays also examined the economic implications of redirecting investment from sectors such as transport, energy, housing and education towards defence.
It argued that the shift is unlikely to have a significant short-term impact on economic growth, as both defence and infrastructure spending tend to generate similar near-term fiscal multipliers. Over the longer term, however, the bank said infrastructure investment is generally associated with stronger productivity gains than defence expenditure.
On monetary policy, Barclays said recent remarks by Bank of England Governor Andrew Bailey reinforced its expectation that interest rates will remain unchanged this year, despite moderating inflationary pressures.
According to the bank, Bailey reiterated that inflation is expected to peak at around 3.2% later this year and indicated that interest rate cuts remain off the table for now, while signalling that the Bank will continue actively selling gilts as part of its quantitative tightening programme.
