Commitments to increase defence spending have widened the UK infrastructure funding shortfall and could leave between £1.7tn and £1.96tn worth of the UK’s capital project pipeline through to 2040 unfunded, according to a new EY-Parthenon report.
The report, Mind the (Investment) Gap 2025, 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 £1.6tn 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 suggest that these commitments will expand the overall value of currently unfunded capital programmes and projects from the £1.6tn identified a year ago to £1.7tn under a 3% defence spending scenario and to £1.96tn under a 5% scenario.
By using historic patterns of government spending on existing versus new projects, EY-Parthenon estimates that only around £1.1tn could be covered by government investment by 2040. This would leave a funding shortfall of £583bn if UK defence spending rises to the 3% target and £817bn for the 5% target. This compares to a funding shortfall of £670bn identified in 2024’s report.
Mats Persson, EY-Parthenon UK Macro and Geostrategy Leader, said: “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.
“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.”
Andrea Powell, EY UK&I Infrastructure Leader, said: “Greater adoption of technology, particularly in AI, digital simulation and predictive analytics, is already driving transformative results for UK infrastructure, cutting costs and building projects better, safer and faster. Scaling this technology across the capital project pipeline needs to be a central part of closing the UK’s infrastructure funding gap, accelerating delivery and persuading investors that these projects offer a viable, timely return.”
Defence commitments add to capital envelope
The report assesses the UK’s existing and forecast capital spending commitments identified by the National Infrastructure and Service Transformation Authority, the Department for Health and Social Care, and the Ministry of Defence. This includes a wide range of projects, from new road and rail projects to decarbonising public buildings and funding social infrastructure like hospitals and schools.
EY-Parthenon analysis suggests that commitments to increase defence spending have been the single largest driver of change to the UK’s public capital outlook and have substantially expanded the envelope of programmes that currently have no allocated funding.
The 2024 analysis found that defence programmes made up 16% of unfunded projects last year, which has now risen to 41%. These include major programmes across nuclear, naval and autonomous systems, as well as areas like digitalisation and strategic infrastructure.
Closing the infrastructure funding gap
The report identifies three key measures that, if deployed at a project level in the UK, have the potential to close a large share of the UK’s projected investment shortfall by 2040.
These include leveraging a range of alternative investment models to mobilise tens of billions of pounds in non-government capital, reducing fiscal pressure while accelerating delivery of critical national infrastructure. The report outlines venture and private-capital options, as well as modernised public private partnership and regulated asset-based models that could prove attractive to worldwide pension funds.
The report also recommends that infrastructure projects incorporate a series of efficiency improvements, with particular focus on opportunities to enhance productivity during the design phase. Evidence from large-scale infrastructure and industrial programmes have found that design-led coordination can reduce the average cost of a capital project by 20-25% and cut delivery times by 10-15%.
Finally, the report highlights the benefits of deploying AI and other technology to produce accurate cost analysis and highlight savings opportunities. Digital simulation and predictive analytics are highlighted as examples of technology already in use that could be scaled across the infrastructure sector to deliver consistent efficiency design, construction and operations improvements and bring down project costs.
