LBS research provides a key focus in the Chancellor’s Spring Statement

In the UK chancellor’s Spring Statement of 26 March 2025, Rachel Reeves told MPs that she was having to take account of “a world that is changing before our eyes”.

This was no more evident in the chancellor’s commitment that defence spending would increase to 2.5 per cent of GDP.

“We can act quickly and decisively in a more uncertain world,” Reeves said, as she referred to “increasing global uncertainty”. A big package of defence spending was badged as an investment in making Britain a “defence industrial superpower”.

In the Treasury press release that accompanied Reeves’ announcement, key elements of research by London Business School’s Professor Paolo Surico - The Long-Run Effects of Government Spending (American Economic Review, with Juan Antolin-Diaz) – were included:

“This government is determined to transform the defence sector into an engine for growth by focusing this investment on where it boosts the productive capacity of the economy such as investment in innovation and novel technologies. As a result of the increase in defence spending to 2.5%, the government estimates this could lead to around 0.3% higher GDP in the long run, equivalent to around £11 billion of GDP in today’s money."

Following the chancellor’s statement Professor Surico’s work was later mentioned in the debate that followed in the House of Commons.

Speaking about the announcement, Professor Surico said that military spending has sizable effects on long-run growth whenever it shifts the composition of public spending towards R&D. “This boosts innovation and private investment in the medium-term and increases productivity and output at longer horizons.”

To read Professor Surico’s research, click here

A new LBS video can be viewed here: How does the defence budget fuel technological advancement and productivity?