Following the release of the UK Ministry of Defence’s (MoD) information on trade, industry and contracts for 2022;

Harry Boneham, Aerospace Analyst at GlobalData, a leading data and analytics company, offers his view:

“It’s clear that UK defense contractors are increasingly relying upon the MoD as a major source of revenue. Large firms such as Babcock and BAE Systems derived 55.5% and 20.4% of their annual revenue in 2021/2022, respectively, from the MoD.

“As recently as 2022, such a revenue structure represented a stable foundation for growth. The war in Ukraine has stimulated rises in defense spending across the board, and firms positioned as primary MoD contractors seemed likely to be buoyed by a tide rising all ships. However, it could now be argued that relying upon the MoD for large portions of revenue leaves firms exposed to fluctuations in defense budgets.

“In light of the economic turmoil following the mini-budget delivered in September by Chancellor Kwasi Kwarteng, this reliance could now represent a potential vulnerability for over-exposed firms. Initial markers of incoming austerity are starting to materialize in the UK. For instance, on September 28, it emerged that government departments will be asked to make spending cuts in an effort to balance the budget.

“Whilst it is too soon to speculate on what impact an austerity economy would have on future defence spending, it is unlikely that budgets will emerge unscathed, and Prime Minister Liz Truss’ campaign commitment to spend 3% of GDP on defence by 2030 now appears fanciful.

“Furthermore, UK firms are most vulnerable when it comes to defense spending cuts. QinetiQ, Babcock, BAE Systems, and Rolls-Royce are among the most reliant on MoD funding (61.1%, 55.5%, 20.4%, and 8.0%), whilst international firms such as Airbus, Thales, Boeing, and Leonardo are less exposed. These UK firms stand to lose large portions of their revenue in the event of budget cuts and will find it challenging to pivot to international customers to make up the difference. Ultimately, this could have a detrimental effect on the UK defense industrial base, with job losses and facility closures possible outcomes.”