On 25th February the prime minister set out what was billed as the biggest increase in defence spending since the end of the Cold War. Under this plan the amount of defence spending will increase to 2.5% of GDP by April 2027. He added that the ambition was to achieve a level of 3% of GDP in the next parliament i. e. beyond 2029.
This announcement follows the speech by the defence secretary to the Institute of Government on 18th February, which heralded a new approach to defence reform. By implication the defence secretary was admitting that the MOD and the way the services operate are not fit for purpose, in the new Cold War setting.
These remarks chime with other comments from government sources that ‘the bureaucracy’ is getting in the way of delivery, as the government seeks economic growth. Not from any malevolent intention, other than pure bureaucratic inertia. Steve Hilton who worked for David Cameron used to speak of getting the barnacles off the boat – a more moderate approach than is being enacted now by Elon Musk in Washington.
The Defence conundrum
There is a lot of discussion about the forthcoming spring statement when the Chancellor will set out the government’s position on public spending. Commentary will focus on what this all means for Defence. How best to get more outputs from the resources the MOD and the services receive. In recent years it seems that the level of capability the defence budget buys has been diminishing. ‘Defence Inflation’ plays a part, something first identified by Norman Augustine – in the 1980s;
Law Number XVI: In the year 2054, the entire defense budget will purchase just one aircraft. This aircraft will have to be shared by the Air Force and Navy 3-1/2 days each per week except for leap year, when it will be made available to the Marines for the extra day.
The imperative now is to ensure that the UK has a credible deterrent capability, which means getting the right kit into the hands of the services as swiftly as possible. For their part, the services have got to be sure what they need now, what they might need in the future can wait a while. The speed of technological innovation means that the days of big exotic programmes must be questioned, a topic for a separate Commentary.
HMT
In his speech announcing the uplift of defence expenditure, the prime minister also noted:
“I equally want to be very clear that like any other investment we make we must seek value for money. And that’s why we’re putting in place a new Defence Reform and Efficiency Plan, jointly led by my Right Honourable Friends the Chancellor and the Defence Secretary.”
A former Treasury minister described the MOD and the NHS as having the same problem (from the Treasury’s point of view) – they are impenetrable. Within the Treasury organization there are two people who monitor MOD. These people report to the chief secretary, who oversees the spending teams.
As the MOD undergoes a period of reform, alongside the measures to be introduced in the forthcoming SDR, it must be hoped that MOD & HMT can usefully co-operate to ensure that the taxpayers’ funds are spent wisely. Having raided the ODA budget to fund the uplift in MOD spending, the prime minister will want to see that these resources are not wasted.
Fiscal Rules
The Chancellor may have a way out of her ‘fiscal rules’ dilemma, thanks to our European neighbours. Recognizing the seriousness of the revived threat from Russia, the EU and the German government are considering relaxing their debt rules to finance increased defence spending. This would be a significant step for Germany which has been allergic to government debt since the days of the Weimar republic. It would be a very significant step for the EU, as this would mean ‘federalizing’ the debt to be shared among all EU Member States. The European Commission has proposed a 150 billion euro defence bond. Having weathered the Covid pandemic, policy makers are again reaching for the fiscal lever.
The possibility of a Eurobond linked to defence spending would allow the Chancellor to use the political top cover from our European neighbours to announce a similar move by HMG. In effect this would ring fence defence spending for the foreseeable future.
Defence Bank
As governments contemplate how to generate the necessary resources for defence without increasing taxes or reducing other public services, the idea of a ‘Defence Bank’ has gained currency in the debate. The City of London is the obvious place for such a vehicle. It must be hoped that the City would get behind a UK government ‘defence bond’ and shame the ESG lobby who are damaging the ability of our defence industries ability to raise funds by doing so.
Poland has increased its defence budget to 4 % of GDP. The political pressure for the UK government to go further can only increase, if it doesn’t want to lose its place as the largest spender on defence in Europe.
Securonomics
A neologism – but this word encapsulates the government’s idea that increased defence spending will generate both economic growth at home, as well as security. In a note published on 27th February, Goldman Sachs estimated that increased defence spending by European states would increase GDP by 0.5%. Positive but limited. Just now the government must be hoping that this applies to the UK as well.
A recent report by William Freer and Paul Mason published by the Council on Geostrategy noted that the forthcoming Defence Industrial Strategy (DIS) will need to be a whole of government exercise. It will be necessary to engage the Department for Education and the wider industrial sector, to champion the skills that will be needed to achieve the growth the government hopes to secure. There is also a role for defence exports to generate sales, as well as reinforcing the UK’s wider defence diplomacy effort.
Roll on the SDR
The stage is now set for the SDR which is due in the near future. Government is making the right noises, but a degree of expectation management might be useful. The geopolitical landscape is shifting weekly, at the whim of Messrs Putin and Trump, not to say Mr Xi. This is not the time for another Whitehall smoke and mirrors exercise.
For now sits Expectation in the air
[Henry V: Act two]
NPW 20 03 25
Nick Watts
07714 246478