The UK’s defense expenditure recorded a CAGR of 2.33% during the review period. The major share of defense budget accounted for the revenue expenditure and this trend is anticipated to continue over the forecast period, due to significant cuts on government policy towards procurement of defense equipments. The revenue expenditure for the forecast period is expected to decline gradually due to the reduction in troop size and overhead expenses.
The UK is one of largest defense market in the world. Due to its high levels of military spending, a large number of opportunities are available to companies keen to supply the nation with defense equipment. However, the UK defense budget, which grew at a CAGR of 2.33% during the review period, is expected to record a CAGR of -3.21% over the forecast period, largely due to the financial constraints caused by the global financial crisis. With the nation aiming to reduce its fiscal deficit, military spending as a percentage of GDP is also expected to decline from an average of 2.4% during the review period to 1.8% over the forecast period.
The threat of terrorism is increasing and the UK must deliver a safe and secure Olympics in 2012, the threat of terrorist activity will be a primary driver of defense spending. Furthermore, the UK’s military spending will be driven by peace keeping operations and combating terrorism. During 2009–2010 the country spent GBP3.8 million (US$6.1 million) on peace keeping operations in Afghanistan alone and this trend is expected to continue over the forecast period.
The UK government has announced a reduction in defense expenditure over the next five years in order to control the country’s increasing fiscal deficit. Such reductions will lead to a decline in procurements and are expected to have a negative impact on domestic defense companies. The announcement of defense budget cuts followed the Strategic Defense and Security Review conducted in October 2010. The review is likely to lead to personnel reductions of 17,000 across all the three military services and staff reductions of 25,000 by 2013.
The Ministry of Defense (MoD) protects domestic defense companies by allowing only direct offsets to foreign exporters and by encouraging foreign bidders to use UK sub-contractors on a competitive basis. In addition, the UK government gives priority to domestic companies in meeting its Urgent Operational Requirements (UOR).
With 11 of the world’s top 100 defense companies based in the UK, and a further 20 having significant operations in the UK, international investment activity in the UK defense sector is high. Recent defense investments include Denmark’s Royal TenCate acquisition of AML UK and EADS Astrium’s acquisition of 85% of Surrey Satellite Technology.
Aerial refuelling is a key military capability that significantly increases the operational range and endurance of front line aircraft across a range of military roles and tasks. To enhance the existing air-to-air refuelling capability, the UK’s Ministry of Defense (MoD) has undertaken the US$18 billion FSTA program.
The demand for advanced communications including satellite-based communication systems has increased over the last five years with UK military operations spread over distant geographies and this trend is anticipated to continue over the forecast period.
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