The centrality of investing in defence
The centrality of investing in defence
Open Briefing | No. SDR-10.2024
This is the final in a series of Open Briefings to the Strategic Defence Review (SDR) from the Council on Geostrategy. Our aim is to analyse ten key questions facing the Defence Review Team, from the vantage point of how the United Kingdom’s (UK) adversaries and strategic competitors see us (an approach known as Opposing Forces, or ‘OPFOR’). We will avoid euphemisms and address the challenges head-on. After holding an expert seminar, we will formally submit the briefings at the end of September. Our contributions are deliberately candid – and we invite comment and challenge from all quarters. This final Open Briefing looks at how Britain can boost investment in defence:
Britain’s unwillingness to invest in defence since the early 2010s has undermined its security and prosperity. Low defence investment makes generating additional ‘strategic advantage’ impossible, undermines the deterrent effect of the British Armed Forces, and harms the country’s long-term interests. Leaning further into alliances and partnerships to make up for capability shortfalls will reduce the country’s strategic autonomy and render it increasingly dependent on its allies and partners’ goodwill. And efforts to extract greater efficiency from military units – especially warships and auxiliary vessels – have already undermined morale and stressed well-worked equipment, often to breaking point.
If the UK is to remain a major military power as the international order comes under strain from large and determined authoritarian powers, it will need to invest a greater proportion of its national resources – Gross Domestic Product (GDP) – into defence. The proportion of GDP His Majesty’s (HM) Government allocates to defence reached a nadir in 2018 (at 1.9% of GDP) and it has not increased substantially since. In 2023, British defence spending stood at £60.4 billion – equivalent to 2.3% of GDP, or 5.2% of total government spending. To put this into perspective, British investment into defence as a percentage of GDP averaged at 2.5% for 2000s, 3.1% for the 1990s, and in excess of 6% of GDP for the duration of the Cold War (i.e., 1949-1989).
Even if increased to 2.5% of GDP, as pledged by the prime minister, defence spending would still be close to its post-Cold War lows – a status entirely at odds with HM Government’s appraisal of the scale of the threat. According to Lord Robertson, the Lead for the Strategic Defence Review (SDR), the UK is now ‘confronted by a “deadly quartet” of nations increasingly working together.’ These countries – including the People’s Republic of China (PRC), Russia, Iran and North Korea – intend to revise the prevailing international order, and degrade the power and authority of democratic nations, of which Britain is a leader. Russia’s aggression towards Ukraine and the PRC’s naval build-up in the South China Sea demonstrates their determination to achieve their goals and highlights the interconnectedness of Euro-Atlantic and Indo-Pacific regions.
The UK will face demotion to a second-tier regional military power within the next decade if it does not increase defence spending. This will have severe consequences for the nation’s ability to defend itself and protect its allies and partners. The change in Britain’s status will become qualitative, rather than quantitative. The UK will be less able to convene and align allies and partners – with knock-on effects for British influence – if it lacks the wherewithal to deter threats to their interests or shape the international order. It will also undermine Britain’s capacity for defence engagement, as well as degrade the country’s ability to project military power to all major geostrategic theatres. And it will degrade the British defence industrial and technological base, which remains cutting-edge, despite being starved of resources for over 15 years.
Though the SDR’s remit is to match military capabilities to geopolitical threats, Britain cannot do this in a fiscal vacuum. If HM Government’s target of spending 2.5% of GDP on defence were regarded as a hard limit by the SDR, there would be no prospect of matching capabilities to threats, achieving a rational integrated force design or of stabilising the Ministry of Defence’s budget.
However, set at a higher and more realistic level, a hard limit – of, for example, investing 3%, 4% or even 5% of GDP in defence – would allow British policymakers to manage the macro-economic impact of rearmament rationally and situate it within HM Government’s economy-wide growth strategy.
The Labour government’s mission-led growth strategy is premised on the argument that, by creating long-term regulatory certainty, the state can stimulate private investment alongside public, triggering increased growth and productivity and – ultimately – reduce the ratio of debt to GDP.
That rationale is given added credibility by two recent papers from the Office for Budget Responsibility (OBR):
In ‘Public Investment and Potential Output’, the authors suggest that if public investment were to be increased permanently by 1% of GDP, then in addition to its short-term impact on demand, it should permanently raise the output potential of the economy by 0.5% within five years, and 2.5% in 50 years. Though such percentages sound small, their impact on fiscal sustainability would be large.
In ‘Fiscal Risks and Sustainability’ the authors predict that, despite the negative long-term impacts on the public finances arising from ill health, ageing and climate change, these could be entirely offset if the post-2008 decline in productivity were to be reversed. If the UK’s output potential were to rise by one percentage point of GDP, debt would remain below 100% of GDP beyond the mid-century.
Recommendations for the Defence Review Team:
The implications for the SDR are clear: a substantial increase in defence investment would both enhance Britain’s national security and its long-term growth potential, by:
Expanding its gross fixed capital formation, through the domestic production of weapons, machines, intellectual property, accommodation, energy and base infrastructure; and
Boosting productivity through more effective research and development, streamlined defence production, and higher skills.
The question remains: how would Britain finance rearmament? Using International Monetary Fund figures, raising defence spending to 2.5% of GDP by 2029 would cost £6.6 billion more per year at current prices, while 3% costs £23.1 billion more a year, 4% costs £56.1 billion more a year, and a notional 5% would see the defence budget rise by £89.1 billion per year, dwarfing current expenditure.
The UK’s history suggests that borrowing is the only rational and morally acceptable means of financing rearmament:
Between 1933 and 1938, the UK’s defence budget grew from 2.2% to 6.9% of GDP. The aim was to boost the capabilities of the armed forces – primarily the Royal Air Force – to a level where they could deter an attack by Nazi Germany;
During the Second World War defence spending then climbed above 50% of GDP;
During the Cold War (1949-1989), defence spending averaged out at above 6%; it was only reduced below 4% after the fall of the Berlin Wall.
As the Nazi German threat grew, HM Government scheduled a £400 million National Defence Loan in 1935 once the primary surplus was run down during the first two years of rearmament. Though it later attempted to impose a windfall tax on the profits of defence firms, this was never designed to raise more than 10% of the money needed, and was withdrawn. Increased taxation was never seriously considered an appropriate source for most funds needed to rearm.
High borrowing costs and illiquid markets posed challenges in raising debt, leading to ‘rationing’ defence spending. However, HM Government never considered not rearming due to fiscal constraints. Indeed, as Sir Anthony Duff Cooper, First Lord of the Admiralty, insisted after the Anschluss: fiscal penury might be ‘severe embarrassment’; defeat by Nazi Germany would mean ‘complete destruction.’
Today, with borrowing costs high, debt standing at 100% of GDP and HM Treasury pointing to a £22 billion in-year spending gap, any proposal to fund rearmament through borrowing would need to be structured to produce maximum economic benefits, in terms of growth, productivity and the creation of higher fixed capital.
Numerous principles outlined in the Ministry of Defence’s forthcoming ‘Defence Industrial Strategy’ would promote the long-term growth impact of rearmament, namely: ‘Build in Britain’, spreading defence investment to every region, creating certainty and stability for suppliers and their investors. In addition, the SDR should recommend:
For non-combat related investment, pursue wherever appropriate public-private partnerships;
Structure the rearmament programme to promote investment spending over current spending;
Structure the timing of investments to achieve their long-term growth effects as early as possible.
In sum, on the basis of new OBR calculations modelling the impact of public investment on future GDP, the Defence Review Team could confidently make the case that an investment-led rearmament programme is fiscally sustainable.
James Rogers is the Co-founder and Director of Research at the Council on Geostrategy.
Paul Mason is the Aneurin Bevan Associate Fellow in Defence and Resilience at the Council on Geostrategy and a journalist, author and political researcher.
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