Defence Spending and SMEs: Can the UK Turn a Budget Hike into a “Defence Dividend”?

A New Economic Role for Defence Spending

The UK’s decision to lift defence spending to roughly 2.5% of GDP by 2027 is being framed as both a national security necessity and an economic strategy. Ministers increasingly describe this uplift as a potential “defence dividend,” one that could stimulate growth among small and medium-sized enterprises and channel investment into regions that rarely see the benefits of major government spending.

Shifting the Balance Away from Defence Giants

For decades, the defence sector has been shaped by major prime contractors with the scale and resources needed to win complex, long-term contracts. The government now wants to change this dynamic. Part of the new defence package directs a greater share of spending specifically toward SMEs. A new support hub has been created to help smaller firms navigate the supply chain, gain visibility, access finance, and connect with the big primes that dominate procurement.

Procurement Reform and the Push for Innovation

A core part of the government’s plan involves reforming the procurement process itself. Defence contracting is often slow, burdensome, and inaccessible for smaller businesses. Ministers have promised to accelerate procurement cycles and simplify bidding processes so that SMEs can bring forward innovative products in fast-moving fields such as drones, AI, cyber systems, data analytics, and autonomous technologies. The new approach positions innovation as vital to national security, not merely an economic bonus.

The Regional Growth Opportunity

The government also aims to use defence spending as a tool for regional economic development. Defence already supports hundreds of thousands of jobs across the UK, but the goal is to spread the benefits of the spending increase more widely. If more SMEs can access contracts, local economies could see new investment, expanded supply chains, and the emergence of high-tech clusters. The ambition is to build long-term industrial strength, not just award isolated contracts.

Challenges Facing Small Businesses

Despite the optimism, the path into defence remains challenging for many SMEs. Smaller firms often lack the capital, compliance capacity, and resilience required to take on big defence projects. Without meaningful structural support, the procurement reforms may fall short of expectations. The government will need to ensure that the support hub offers practical assistance, not just guidance, and that reforms address the real administrative barriers SMEs face.

The Importance of Long-Term Policy Stability

Another uncertainty lies in political and budget continuity. SME participation depends on predictable policy and steady investment. The targets for increased SME spending extend several years into the future, and any shift in priorities could undermine progress. For small firms that risk significant resources when entering the defence market, confidence in long-term government commitment is essential.

An Opening, If SMEs Can Seize It

This moment represents one of the most significant openings for SMEs in the defence sector in years. If procurement is genuinely streamlined and the new hub delivers substantive support, small businesses could play a far greater role in defence innovation. The vision is a more dynamic, diverse, and regionally rooted defence economy that strengthens national security while driving growth.

Conclusion

The UK’s rising defence budget offers both promise and uncertainty for SMEs. Whether the uplift becomes a true “defence dividend” depends on execution. If the reforms succeed, the defence sector could become more accessible, more innovative, and more widely beneficial to the UK economy. If they falter, it may remain dominated by the same few giants, with SMEs once again left on the margins.