The UK is unwilling to be the "sick man of NATO"! It will announce a "clear path" for increasing defense spending next spring, which could serve as a new catalyst for European defense stocks.

UK Chancellor of the Exchequer John Healey stated that the UK government will outline a "clear path" to increase defense spending in the spending review next spring. In an interview at the G20 summit in North Carolina, Healey said, "For the first time in this spending review, we will clearly outline how we will fulfill the NATO commitment of raising defense spending to 3.5% of GDP by 2035." He added, "As part of establishing this path, we will also specify concrete dates for achieving the 3% target." He remarked that defense spending will "take center stage" in next year's spending review. Healey has been Chancellor since July of this year. Previously, he served as the Defense Secretary in the last government but resigned from that position after failing to secure funding to raise defense spending to 3% of GDP by 2030. He stated at the time that given the current "dangerous times," the UK "must set" this goal. Healey is set to present his first budget on October 28 and has pledged to adhere to the borrowing rules inherited from his predecessor, Rachel Reeves. Currently, there is speculation about when the UK can meet the NATO-set target. In a ranking comparing the military spending increases of NATO allies from 2014 to 2025, the UK came in third from the bottom, only outperformed by France and Iceland, which has no national military, effectively placing the UK in second to last. Since the target for military spending was introduced, the UK's defense expenditure has increased by less than 35%, while most NATO members have seen increases of over 100%. In terms of GDP percentage, the UK's defense spending has barely budged, rising from 2.17% to 2.35%. According to the UK Office for Budget Responsibility, raising defense spending to 3% of GDP by 2030 will impose an additional cost of 17.3 billion (approximately $23.4 billion) on the government. To meet the requirements of the existing Defense Investment Plan, Healey will also need to fill a funding gap of 4.7 billion. It is reported that the UK's Defense Investment Plan was officially unveiled on June 30, outlining the Labour Party's roadmap for strengthening national security, marking the beginning of a new era in military development for the UK. Over the next four years, the UK will increase defense spending by 15 billion, bringing total defense spending close to 300 billion. By 2030, the proportion of defense spending to GDP will reach 2.68%. Reports indicate that traditional defense equipment such as ground troops and manned tanks will give way to unmanned systems, which have demonstrated powerful capabilities on the battlefield in Ukraine. The navy will be transformed into a "mixed navy." The Royal Air Force and the Army will undergo similar reforms. The plan will allocate 5 billion for the development of land, sea, and air unmanned systems. Future military operations will be predominantly guided by artificial intelligence. The mixed naval fleet will include Type 91 unmanned missile vessels and Type 93 unmanned submarines. The plan will also invest 230 million in developing "autonomous" underwater combat systems. However, the 15 billion increase in defense spending over the next four years will partly rely on cuts to other areas, and it was subsequently disclosed that one-third of it still lacks funding sources. More importantly, the plan has faced criticism from opposition politicians and former military leaders, arguing that it does not clarify when defense spending will reach 3% of GDP, which is a crucial milestone for the UK to fulfill its commitment to achieving 3.5% of GDP in defense spending by 2035. Therefore, the UK government's announcement of a "clear path" to increase defense spending in next spring's spending review may help alleviate public concerns while potentially benefiting European defense stocks. For instance, the UK plans to build up to 12 next-generation SSN-A nuclear-powered attack submarines, constructed by BAE Systems, with Rolls-Royce providing the nuclear reactor. However, some investors are worried about the actual implementation of defense spending commitments made by NATO countries, including the UK. A significant gap between government defense spending commitments and actual contracts could hinder European defense stocks.