The UK Ministry of Defence (MoD) has been ordered to allocate 10% of its equipment budget to “innovative technologies” moving forward, as part of a new £400m defence innovation fund announced during the Spring Statement. The announcement, made by Chancellor Rachel Reeves on 26 March, has raised questions and sparked debate across the defence community.
While the full definition of “innovative technologies” remains unclear, many expect this funding to encourage greater involvement from small and medium-sized enterprises (SMEs), an area where the MoD has long been criticised for falling short. These smaller companies could play a key role in bolstering military capabilities, an area the MoD is aiming to improve.
In her statement, Reeves revealed that the MoD would receive an additional £2.2bn ($2.8bn) in the 2025/26 financial year. However, despite this increase, the target of spending 2.5% of GDP on defence by April 2027 remains unchanged, and there was no commitment to raise this target during the current Parliament. The £2.2bn boost appears to be a front-loaded effort rather than a comprehensive increase in defence spending.
Additionally, the £400m innovation fund has been established to speed up the integration of new technologies into military service. The government aims to harness the rapid development of SMEs in the UK to bring cutting-edge tech to the front line. However, there has been little clarification on what types of technologies will be prioritised for funding.
Reeves also highlighted the “regeneration” of Portsmouth Naval Base and detailed a £1.6bn extension to Babcock’s contract for British Army maintenance, an initiative that the UK government is calling an “investment.”
James Marques, a defence analyst at GlobalData, has warned that the £400m fund should not be considered “DARPA-level funding,” referencing the US defence and technology agency. “We have to wait and see what happens, but in the current circumstances, it will be important to observe whether these programmes provide quick, simple boosts to frontline equipment, like buying a batch of COTS drones, or whether they are spent on broader ‘long term’ projects, like infrastructure, AI, computing, and manufacturing, that don’t have such a direct impact on hard power,” Marques said.
COTS, or consumer-off-the-shelf technology, refers to commercially available systems that can be adapted for military use, as seen on the battlefield in Ukraine.
Matthew Hodgson, CEO of the encrypted messaging platform Element, raised concerns that the government had overlooked a critical area of defence investment, secure communications and data privacy. “The announced £2.2bn boost to defence spending is a step in the right direction, but it must be carefully allocated to modernise secure communications and strengthen the UK’s overall defence capabilities,” he stated.
Hodgson emphasised the need for urgent investment in cyber defence and secure data management, saying, “If the UK is to remain a leader in global security and intelligence, the government must recognise that cybersecurity and secure communications is defence.”
It is important to note that the £3.2bn Project Morpheus, intended to replace the British Army’s Bowman communications system, has faced years of delays and is currently stalled.
£1.6bn “Investment” in British Army Maintenance Announced Just Before Spring Statement
Hours before the Spring Statement, the UK government issued a press release highlighting a £1.6bn “investment” aimed at supporting the maintenance of the British Army’s Challenger 2 tanks, 105mm artillery guns, Trojan armoured vehicles, and other military platforms.
However, this funding is not new but rather an extension of a previous contract with Babcock, which would have otherwise resulted in a disinvestment in essential maintenance. The UK government stated that the extension would “boost the readiness” of British Army combat vehicles and support 1,600 jobs across the defence supply chain.
Babcock, the UK defence prime contractor, clarified that the five-year contract extension would generate £1bn in revenue, which would be added to the company’s contract backlog, and £600m would be delivered as agent fees, not recognised as revenue.
This “agent” arrangement refers to a practice where an entity manages funding on behalf of the government for a specific project, rather than directly receiving and managing the finances themselves.
