Defence Stocks Rally as Starmer Vows to Accelerate Military Spending
Investors flocked to defence stocks on Monday following Prime Minister Keir Starmer's declaration that the United Kingdom must "go faster" on defence spending to address escalating threats from Russia. The bullish comments ignited a significant rally across the sector, with major defence contractors seeing substantial share price increases.
Market Reaction and Stock Performance
Speculation mounted that the government could accelerate its defence budget increase ahead of the current 2034 target, potentially moving it to 2029. Danni Hewson, head of financial analysis at AJ Bell, noted that this anticipation drove investor enthusiasm, resulting in notable gains for FTSE 100 defence stocks.
Shares in Melrose closed 3.9 percent higher, while Babcock gained 3.5 percent, and BAE Systems rose 3.0 percent. Rolls Royce shares also increased by 1.9 percent during the trading session, reflecting broad market optimism about enhanced government contracts and spending commitments.
Starmer's Defence Spending Pledge
Prime Minister Starmer emphasized the urgency of bolstering the UK's defence capabilities, stating, "We need to step up. That means on defence spending, we need to go faster." He highlighted that the commitment extends beyond mere financial allocation, suggesting a strategic overhaul to ensure national security.
While Downing Street sources later clarified that there are no "concrete plans" to accelerate defence spending, they did not deny ongoing discussions. This ambiguity has kept markets attentive, with analysts weighing the potential fiscal implications of such a move.
Fiscal Challenges and Economic Implications
James Smith, a developed markets economist at ING, estimated that accelerating defence spending could cost an additional £17 billion annually beyond existing budget plans. This increase poses a risk to the government's fiscal rules, particularly the requirement for public sector net financial liabilities (PSNFL) to decline within five years.
The Office for Budget Responsibility currently reports £24 billion in headroom against supplementary targets, but higher defence spending, especially if frontloaded, could significantly reduce or eliminate this buffer. Julian Jessop, an independent economist, warned that markets remain wary of increased government borrowing, noting, "More borrowing is still more borrowing, whatever the purpose, and the markets are already nervous about the outlook for UK debt."
Cross-Party Support and Budgetary Constraints
Henry Cook, Europe economist at MUFG, pointed out that while there is cross-party support for enhanced defence spending, finding fiscal space is challenging. He stated, "It would be hard to trim anything meaningful from unprotected departmental budgets," indicating limited room for manoeuvre without compromising other public services.
Cook added that the government's efforts to stabilise fiscal speculation through increased headroom in the last Budget have not fully alleviated concerns, leaving the economic outlook uncertain amidst these proposed spending hikes.
