Shares in some of Britain’s largest defence companies have risen after Prime Minister Andy Burnham appointed former defence secretary John Healey as chancellor of the Exchequer.

Investors interpreted the appointment as a signal that military spending could increase more quickly than previously planned. Healey resigned as defence secretary in June following a dispute with Sir Keir Starmer’s government over the level and timing of defence investment.

Babcock International’s shares rose by 6.7% on Tuesday, while QinetiQ gained 3.3% and BAE Systems increased by 3.1%. The wider European aerospace and defence index rose by a more modest 1.15%, suggesting that the movement was driven primarily by expectations surrounding British policy rather than a general sector-wide rally.

The market reaction does not mean that additional contracts have already been awarded. However, Healey’s record, combined with the continuing conflicts in Ukraine and the Middle East and NATO’s higher spending commitments, has strengthened expectations that defence could become one of the principal beneficiaries of the new government.

Why Healey’s appointment matters to defence companies

John Healey was appointed chancellor on 20 July, having previously served as defence secretary from July 2024 until his resignation on 11 June 2026. His move to the Treasury gives a former defence minister direct influence over the government’s taxation, borrowing and spending decisions.

Healey resigned after arguing that the previous government’s Defence Investment Plan did not provide sufficient resources to meet the growing security threat. He called for the UK to establish a firm target of spending 3% of gross domestic product on defence by 2030, rather than allowing the increase to depend upon economic conditions or postponing most of the additional spending until later in the decade.

The former defence secretary said the previous settlement would have taken spending to only around 2.68% of GDP by 2030. His appointment as chancellor has therefore encouraged investors to believe he may now use the Treasury to deliver the faster increase he previously demanded from it.

Andrew Wishart, senior UK economist at Berenberg, told Reuters that Healey’s resignation over inadequate funding suggested he would seek to increase military expenditure, although the method used to raise the necessary money remained uncertain.

Babcock leads the market rally

Babcock recorded the largest increase among the main London-listed defence companies.

The group designs, maintains and supports complex defence assets, including Royal Navy warships, submarines, military equipment and nuclear infrastructure. It is particularly exposed to spending on naval readiness, fleet maintenance and the defence nuclear programme.

This makes Babcock one of the companies most directly positioned to benefit if the government accelerates investment in ship availability, submarine construction, military bases and nuclear capabilities.

The previous government’s Defence Investment Plan allocated more than £63 billion over four years to the nuclear deterrent, Dreadnought and SSN-AUKUS submarines, the development of a replacement warhead and other nuclear work. It also included £26 billion over a decade for upgrades to naval bases at Faslane, Portsmouth and Devonport.

Babcock describes itself as the UK’s largest sovereign provider of civil and defence nuclear services. Its long-term relationship with the Ministry of Defence means that a larger defence budget could support both new programmes and the maintenance of existing assets.

However, increased spending would not translate immediately into profit. Defence contracts are often negotiated over long periods, require extensive security and technical approvals and can expose contractors to cost overruns if inflation, labour expenses or programme requirements change.

BAE Systems stands to benefit across several programmes

BAE Systems is the largest UK-listed defence contractor and has exposure across combat aircraft, submarines, warships, electronic systems, munitions, cyber technology and international defence markets.

The company is involved in many of the programmes identified for investment under the existing Defence Investment Plan. These include the Global Combat Air Programme, the Dreadnought and SSN-AUKUS submarine programmes, Type 26 frigates, missile systems and the expansion of munitions production.

The government has committed more than £8 billion over four years to the Global Combat Air Programme, which is developing a sixth-generation combat aircraft with Italy and Japan. More than £5 billion has been allocated to drones and autonomous systems, while £11 billion is intended to rebuild weapons and ammunition stocks and create at least six new energetics factories by 2030.

BAE Systems chief executive Charles Woodburn said Healey had championed British business during his time as defence secretary and recognised the sector’s contribution to both economic growth and national security.

BAE is also planning to recruit more than 1,100 apprentices and around 1,200 graduates and undergraduates in the UK during 2026. These recruits are expected to work on projects including GCAP, submarines, frigates, cyber capabilities, space technology and drones.

An increase in defence spending could therefore affect employment and investment across Lancashire, Cumbria, Glasgow and other areas where BAE maintains major operations.

QinetiQ offers exposure to technology and testing

QinetiQ’s shares also rose as investors considered the likely emphasis on technology, artificial intelligence, drones and military testing.

The company specialises in defence science and engineering, testing, evaluation, training and mission-critical technology. It employs more than 8,000 people internationally and works principally in defence and national-security markets.

QinetiQ has already secured a £1.7 billion extension to the Long Term Partnering Agreement under which it operates and modernises important UK defence testing facilities. The extension runs until 2033 and supports the testing of equipment required for future warfare.

The Defence Investment Plan places substantial emphasis on artificial intelligence, autonomous systems, digital targeting and rapidly deployable technology. It includes almost £2 billion for a Digital Targeting Web, £100 million for a Rapid AI Delivery Taskforce and additional spending on counter-drone systems, sensors and directed-energy weapons.

These priorities may favour specialist science and technology companies as well as traditional manufacturers of aircraft, ships and armoured vehicles.

Rolls-Royce also gains from defence expectations

Rolls-Royce shares rose by approximately 1.9% as the market assessed the implications for the company’s defence operations. The group supplies engines and power systems for military aircraft and provides the nuclear propulsion technology used by the Royal Navy’s submarine fleet.

Rolls-Royce chief executive Tufan Erginbilgic said Healey understood the company, its objectives and its contribution to the British economy.

Although Rolls-Royce remains strongly influenced by civil aviation, its defence and submarine activities give it exposure to the government’s planned nuclear and aerospace investment.

A sustained increase in spending could support long-term revenue, although the company’s overall performance would continue to depend on commercial aviation, engine servicing and the delivery of major projects.

The existing plan already represents a major increase

The market rally occurred even though the previous government had announced a substantial increase in defence funding only three weeks earlier.

The Defence Investment Plan provided for £298 billion of spending over four years, including an additional £15 billion above the amount agreed in the previous Spending Review. Annual defence funding was expected to rise from £54 billion under the previous Conservative government to almost £80 billion by 2029.

The plan was expected to increase defence spending to approximately 2.7% of GDP and support nearly 60,000 additional direct and indirect jobs by the end of the decade. The government estimated that more than half a million jobs could ultimately be supported by defence-related expenditure.

It also created a £50 billion defence export facility through UK Export Finance to help British companies secure overseas orders. This could be particularly important because the commercial return from higher defence spending depends partly on whether equipment is designed, manufactured and maintained in Britain rather than purchased entirely from foreign suppliers.

Investors are now considering whether Healey will retain this plan, accelerate it or replace parts of it with a more ambitious commitment.

Moving to 3% could require another £10 billion a year

Increasing defence expenditure from the previous trajectory of around 2.7% of GDP to 3% by 2030 could require approximately £10 billion of additional annual spending, depending on the size of the economy and which expenditure qualifies under NATO definitions.

Finding this money will be one of Healey’s first major challenges as chancellor.

The government could increase taxation, borrow more, reduce spending in other departments or attempt to use a combination of these options. Faster economic growth would help by increasing government revenues and enlarging the economy against which defence spending is measured, but it would not remove the immediate funding requirement.

Special defence bonds have previously been discussed as one possible financing mechanism. However, the Burnham government has indicated that it is not currently considering issuing war bonds, leaving the conventional choices of taxation, general borrowing and spending reallocation.

Borrowing specifically labelled for defence would not remove the cost from the public finances. Investors would still expect interest and repayment, while the debt would remain an obligation of the government.

NATO commitments will continue to drive spending

The pressure to spend more does not arise solely from domestic politics.

NATO members agreed in 2025 to commit 5% of GDP annually to defence and wider security-related investment by 2035. At least 3.5% is intended for core military requirements, with up to 1.5% covering areas such as critical infrastructure, civil resilience, networks and the defence industrial base.

The target is considerably higher than Britain’s present level of core defence spending. NATO expects members to submit annual plans showing a credible path towards meeting the commitment.

This creates a long-term source of potential demand for defence companies across Europe, even if individual governments change or annual budgets fluctuate.

The commercial opportunity is not limited to contracts awarded by the UK Ministry of Defence. British companies may also benefit from larger budgets in Germany, Poland, the Nordic countries and other NATO members seeking to rebuild equipment stocks and military capacity.

Farnborough strengthens the focus on British defence

The share-price increases coincided with the Farnborough International Airshow, where defence companies accounted for approximately half of a record 1,600 exhibitors.

Canada joined the Global Combat Air Programme as an observer during the event, becoming the first country outside Britain, Italy and Japan to establish a formal relationship with the programme. Observer status does not carry an immediate financial commitment, but it creates the possibility of Canada joining more fully, contributing to development costs and eventually purchasing aircraft.

BAE Systems, Boeing and Saab also agreed to advance a proposal for a new fast-jet training aircraft based on Boeing’s T-7 system. The aircraft could replace the RAF’s ageing Hawk training fleet if selected by the government.

These announcements demonstrate how government policy can create export and partnership opportunities alongside domestic procurement.

Defence spending could support regional growth

The economic case for increased military investment is increasingly being presented in terms of jobs, skills and industrial capacity as well as national security.

Defence manufacturing is distributed across many parts of Britain. Shipbuilding supports employment on the Clyde, at Rosyth and in Devonport. Submarine programmes are concentrated in Barrow-in-Furness and Derby, while combat-air work supports jobs in Lancashire and other parts of the aerospace supply chain.

Additional orders could also benefit smaller engineering, software, electronics, materials and component businesses that supply the major contractors.

This supports Burnham’s wider emphasis on reindustrialisation and regional economic development. Defence spending can create skilled employment and sustain manufacturing capacity in locations outside London and the South East.

However, the regional benefits will depend on procurement decisions. A larger budget does not automatically guarantee more British production if contracts are awarded overseas or if domestic companies import a large proportion of their components.

Skills and production capacity may limit expansion

Money is not the only constraint facing the defence industry.

Companies need engineers, welders, software specialists, nuclear-qualified workers and people with appropriate security clearance. Training these employees takes time, particularly in highly regulated areas such as submarines, missiles and nuclear systems.

Manufacturing facilities and supply chains must also be expanded before production can increase. Some smaller suppliers may struggle to finance machinery, recruit employees or carry the working capital required for larger contracts.

NATO has acknowledged that increasing budgets must be accompanied by greater industrial output. European allies and Canada have been increasing defence expenditure rapidly, but production capacity cannot expand at the same speed without investment in factories, skills and supply chains.

The government will therefore need to provide greater certainty over future orders. Businesses are more likely to invest in capacity when they can see a reliable pipeline extending beyond a single budget or political term.

Higher spending does not guarantee higher shareholder returns

The rise in defence shares reflects expectations rather than confirmed financial results.

A company can receive more orders but still experience weaker returns if contracts are poorly priced, costs rise or delivery problems lead to penalties. Fixed-price development programmes can be particularly risky when technology is complex and specifications change.

Defence procurement is also exposed to political delays. Governments may announce targets years before the funding, contracts or production schedules are finalised.

Shares in defence companies have already risen substantially as investors have responded to the war in Ukraine, Middle Eastern instability and higher NATO spending. Some of the expected growth may therefore already be reflected in valuations.

Investors will ultimately require evidence of firm orders, improving cash flow and profitable execution rather than political commitments alone.

The bond market remains cautious

The reaction in the government bond market was more restrained than the rise in defence shares.

Healey is regarded by many investors as an experienced and relatively cautious appointment, having previously served in junior Treasury roles. His selection helped calm some concerns that Burnham would appoint a chancellor more willing to borrow aggressively.

Nevertheless, ten-year gilt yields remained above 5%, while thirty-year yields reached approximately 5.77% as markets assessed the government’s wider spending plans.

Higher gilt yields increase the cost of government borrowing and can feed into mortgages and business finance. If additional defence spending is funded through debt without a credible long-term plan, the increase in interest costs could reduce the resources available for the armed forces and other public services.

Healey must therefore satisfy two audiences. Defence companies and military leaders want a clear commitment to higher spending, while bond investors want evidence that the overall public finances remain under control.

A positive signal, but funding remains decisive

The appointment of John Healey as chancellor is a potentially important development for the British defence industry.

His resignation from the previous government established his position as an advocate of faster military investment. His control of the Treasury now gives him the opportunity to influence the funding decisions that previously caused the dispute.

Babcock, BAE Systems, QinetiQ and Rolls-Royce could all benefit from a larger and more predictable programme of defence procurement. Smaller suppliers may also gain if the government succeeds in directing investment towards British factories, technology and skills.

However, the share-price rally has moved ahead of confirmed policy.

The existing Defence Investment Plan already requires almost £300 billion over four years. Increasing spending further will require difficult choices between taxation, borrowing and other public services.

The commercial outcome will also depend on whether the government can convert broad spending targets into signed contracts, expand industrial capacity and deliver equipment without excessive delay or cost.

Healey’s appointment has increased confidence that defence will receive greater priority. The next Budget and any revised timetable for reaching 3% of GDP will determine whether Tuesday’s market optimism is justified.