A strange title but, after we ‘leave’ the EU on January 31st and just eleven months later, when the transition period covered by the Brexit agreement comes to an end, with or without a trade deal with the EU, the UK will enter a period that will provide opportunities mixed with further uncertainty. For industry these will be challenging times but somehow, we must enter into this period with optimism that in the end we will come out of the next maybe three years in a better place than the one we entered. Whatever, securing a strong future relationship with the EU is in my view imperative.
I have always believed myself to be a positive thinker, a glass half full fellow rather than one of those that fits in the glass half empty category. Do I believe that the UK and EU will have secured a trade deal by the end of 2020? Yes, notwithstanding the rhetoric suggesting such is an impossible task, while the EU and UK may not have achieved that each seeks to have by the end of the year, the bulk of a trade deal will in my view be sorted.
Of course, there are other issues to consider – an economy that is to strongly biased toward service-based industries, one in which we are consuming far more than we produce. Our exports are far too low and our imports far too high. We need to redress the balance. The desire of the Scottish Nationalist Party to pursue the notion of holding another referendum on independence and the vexing issue of global warming and what more needs to be done will feature large in the national and international debates.
You may well ask why I take such a positive view in regard of our securing a trade deal with the EU particularly in light of the seemingly stubborn attitude of the EU itself in regard of the timetable and indeed, of some of the individual member states who would have us lie on the bed we have made for ourselves on our own.
Put simply, I take the view that the shock of Britain leaving the EU has yet to sink in in Brussels and that major member countries such as Germany, Italy and maybe also in Spain, the Netherlands, Sweden, Belgium plus newer Eastern European member states want it to happen. We will see and yes, I may well be wrong but the bottom line for me is that it is equally as important for the EU to secure a deal with the UK as it is for Prime Minister Boris Johnson to end the year saying that we have secured most if not all of what we and they need.
As to a trade deal with the US – there is little doubt that Mr. Johnson and Mr. Trump have formed a mutual respect and if China can secure a trade deal with the US – signing of an initial deal expected in two weeks – then establishing core principles of a UK deal with the US is not beyond the bounds of possibility.
Back at the Treasury, having fast tracked a Spending Review process covering the 2020/21 period one is left to anticipate the Chancellor of the Exchequer, Sajid Javid conducting a full comprehensive Spending Review process covering the 2021 to 2024 period during the summer of this year. From 2019-20 or the year to begin April 2020 we were told that departmental spending was expected to grow at 4.1% in real terms. Since 2010 government borrowing has been successfully reduced to 1.1% of GDP but given what the Government promised during the General Election campaign a margin for error would better be built in. UK national debt may have fallen in both actual and as a percentage of GDP (the figure at the end of March 2019 was £1,821.9 billion which is equivalent to 84.6% of GDP) but there is still a long way to go.
In terms of election promises and confirming what the Chancellor of the Exchequer had in effect previously announced back in August when the single year departmental spending commitment was announced, the NHS, police and schools will be the major beneficiaries of increased cash over the next few years. Defence will be the subject of an internal review process this year (SDSR 2020) and previously noted, reports circulated during mid-December the PM’s special advisor, Dominic Cummings appears likely to be very involved in the SDSR 2020 review process. In fact, preliminary work on SDSR 2020 has been going on for several months. Similarly, whilst perfectly correct, reports suggesting that the Service Chiefs have each been given a specified priority to fix before the MoD would be allowed to request additional funds dates from well before the General Election.
I am not about to pre-judge the eventual outcome of the defence review here and now. Clearly more savings have to be made and the Army, Royal Navy and Royal Air Force may all be told to bury some sacred cows. The one fact that we are aware of is that the Government has committed to keep defence spending above 2.1% of UK GDP albeit that there have long been differences of opinion as to how the 2.1% figure is calculated. With significant delays to ordering of some defence equipment, base closures, efficiencies, personnel numbers particularly in the Army having not been achieved etc) the oft talked about defence spending gap (the ten-year funding gap in available resources to cover the Equipment Plan 2018 to 2028 spending requirement had been suggested by the NAO to be £7bn and double that in a worst case scenario) but with sterling rising against the dollar and Euro and likely to continue doing so if Mr. Johnson succeeds in all he is setting out to achieve, I venture to suggest that the gap may well have narrowed. Indeed, by using one of the oldest tricks in the book, that of delaying ordering of equipment, the pushing back of certain elements of defence procurement will have saved significant cash albeit not resolved the underlying problem of defence being underfunded.
Critics of defence spending will clearly continue to harp on about the MOD being inefficient at equipment procurement. However, I would counter that while it is true that the MOD has and continues, particularly for such a complex area, to find itself short of sufficient numbers of high calibre civil servants across the whole of defence, there has been a considerable improvement in defence procurement as a whole but for all that, it remains clear that more needs to be done.
Against the background of defence underfunding consistency is the huge change that the UK is now about to go through by the decision to leave the EU. The need to ensure that NATO remains strong and fit for purpose and to redress the balance of financial and operational responsibility of NATO member states remains an unresolved issue. The US remains the largest financial contributor to NATO accounting for 70% of total spend whilst the UK remains the largest financial contributor amongst European member states. The UK also takes on a higher individual burden than any other European NATO member state.
Meanwhile, the UK aerospace industry, one of the most successful of our true engineering, technology and manufacturing industries, will be forced to continue living on tenterhooks until and of if Mr. Johnson secures a trade deal with the EU. A no-deal Brexit is a potential disaster for this industry just as it also is for those UK auto industry assemblers reliant on imported component parts and export markets for the cars they produce.
Uncertainty remains in the UK’s banking and financial industries too until the future appears to be more settled. Yes, opportunities abound for all UK service industries and we have a much stronger technology infrastructure than we did a few years ago. The future is bright but by the same token, it is unclear. Having a majority government, one that can with the right people make things happen, provide encouragement, motivation and, through fair policies of taxation, incentivise, provides a very sound basis to be far more positive as we go into 2020 than it was when we entered 2019.
Let us not only hope but work hard to create and make opportunities happen. Complacency will lead to failure but hard work over the next three years will create the opportunities we need. The ‘City’ and financial institutions must play their part too in thinking about the long term and playing less reliance on the short term.
Commentary will continue to provide a mix of defence, aerospace, industry, macro-economic, geo-political and other views as it has for the past twenty-six years on a three or four day per week basis except when I am away on business or the rare vacation. Your comments, retorts and criticisms are always welcome and while I cannot hope to please everyone all of the time rest assured that I will do my best to enlighten, enthuse and where necessary, criticise in a properly balanced way.
All that remains for me to do is to wish you all a Very Happy New Year and, slightly altering what the late author, broadcaster and for 21 years, director of the London Planetarium Mr. John Ebdon used to say at the end of his Radio 4 broadcasts, if you have done, thanks for reading.
CHW (London – 2nd January 2020)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785