British Chancellor John Healey has announced that the government will reveal a "clear pathway" for increasing defence spending during next spring's spending review. In an interview at the G20 summit in North Carolina, Healey stated: "For the first time, we will set out in this spending review exactly how we plan to meet our NATO commitment of raising defence spending to 3.5% of GDP by 2035." He further noted that this roadmap will also pinpoint the specific date when the interim target of 3% will be achieved, with defence set to play a "core role" in next year's fiscal planning.

Having served as Defence Secretary in the previous administration, Healey resigned from that post earlier this year after failing to secure funding to reach the 3% of GDP target by 2030. He had argued at the time that given the current "dangerous era," Britain "must set" this objective. Now back in office since July, Healey is preparing to deliver his first Budget on October 28, having already committed to adhering to the borrowing rules inherited from his predecessor Rachel Reeves.

The timeline for meeting NATO's fiscal targets remains a point of intense speculation. According to a ranking comparing defence spending increases among NATO allies from 2014 to 2025, the UK ranks in the bottom three, faring better only than France and Iceland, which maintains no standing army. In practical terms, this places Britain second-to-last. Since the spending goals were established, UK military expenditure has grown by less than 35%, while most other NATO members have more than doubled their outlays. As a share of GDP, British defence spending has barely moved, inching up from 2.17% to 2.35%.

Data from the Office for Budget Responsibility indicates that lifting defence spending to 3% of GDP by 2030 would impose an additional burden of £17.3 billion on public finances. Furthermore, Healey will need to bridge a £4.7 billion funding shortfall to satisfy the existing Defence Investment Plan. Unveiled on June 30, that plan outlined Labour's roadmap for strengthening national security and marked a new era for British military development. Over the next four years, the UK intends to add £15 billion to the defence budget, pushing total spending close to £300 billion and raising the GDP share to 2.68% by 2030.

The plan signals a significant shift in priorities, with traditional assets like ground forces and manned tanks making way for unmanned systems that have proven their effectiveness on the battlefields of Ukraine. The navy is set to transform into a "hybrid force," with similar reforms planned for the Royal Air Force and the Army. Investment of £500 million will be directed toward developing land, sea, and air unmanned systems, with AI poised to dominate future combat operations. The hybrid fleet envisions Type 91 unmanned missile ships and Type 93 unmanned submarines, while £230 million will be allocated to "autonomous" seabed warfare capabilities.

However, the £15 billion in additional spending over four years is partly offset by cuts elsewhere, and a third of the funding remains unidentified. The plan has also drawn criticism from opposition politicians and former senior military figures for failing to specify when defence spending would hit 3% of GDP, a key milestone on the path to the 2035 target of 3.5%.

The government's pledge to outline a "clear pathway" in next spring's spending review could help allay these concerns and potentially serve as a catalyst for European defence stocks. For instance, the UK has committed to building up to 12 next-generation SSN-A nuclear-powered attack submarines, with BAE Systems handling construction and Rolls-Royce supplying the nuclear reactors. Nevertheless, some investors remain wary of the gap between NATO governments' spending promises and the actual flow of contracts, which could pose headwinds for European defence equities if expectations fail to translate into tangible orders.