Economic pressures and mounting spending priorities have created a UK capital fund investment gap which, despite government progress, will widen under new defence spending commitments, a new analysis by EY-Parthenon shows.
The group found that new defence spending plans will leave between £1.7 trillion and £1.96 trillion of UK capital projects unfunded, up from £1.6 trillion a year ago.
Despite the UK government having taken a number of positive steps to fund additional projects, the deficit would leave a shortfall of between £583 billion and £817 billion if defence spending rises to between 3%-5% of GDP.
A growing gap
The report follows an earlier edition published in September 2024 that assessed the UK’s pipeline of more than 1,000 capital projects scheduled to commence or complete by 2040, ranging from transport and health programmes to economic and energy infrastructure.
The 2024 analysis found that a combination of economic headwinds, including inflation, had driven up the cost of national infrastructure programmes and left £1.6 trillion of capital projects unfunded.
One year on, new EY-Parthenon analysis has found that the UK Government has made substantial progress in unlocking more capital investment by reforming fiscal rules, with several projects which were unfunded in 2024 now receiving funding or on a clear path towards it.
However, like other Western countries, the UK’s total pipeline of projects and programmes requiring capital investment between now and 2040 has also increased, driven primarily by plans to raise UK defence spending as a share of GDP to 3% and 5% by early 2030s and 2035 respectively.
EY-Parthenon analysis suggests that these commitments will expand the overall value of currently unfunded capital programmes and projects from the £1.6 trillion identified a year ago to £1.7 trillion under a 3% defence spending scenario and to £1.96 trillion under a 5% scenario.
By using historic patterns of government spending on existing versus new projects, EY-Parthenon estimates that only around £1.1 trillion could be covered by government investment by 2040. This would leave a funding shortfall of £583 billion if UK defence spending rises to the 3% target and £817 billion for the 5% target. This compares to a funding shortfall of £670 billion identified in 2024’s report.
“The government has made significant progress in addressing the UK’s infrastructure funding shortfall over the last year, with a slew of new capital investment unlocked for key projects. However, the 15-year funding requirements to achieve simultaneous transitions across energy, infrastructure, health and defence are also rising,” said Mats Persson, EY-Parthenon UK Macro and Geostrategy Leader.
“New defence priorities in particular are reshaping the country’s capital agenda but should also create new opportunities to combine security and industrial objectives and, with the help of private finance, stimulate UK tech development, advanced manufacturing and national resilience.”
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