Defence spending: A waste of money?
The Reframer | No. 03.2024
Given that ministers have recently stated that the United Kingdom (UK) is in a ‘pre-war world’, the issue of defence spending continues to grip strategists, officials and legislators. For more than a decade, British investment in defence has slipped from 2.6% of Gross Domestic Product (GDP) in 2003 to just 2.3% today, despite the worsening of the international environment and the rise of geopolitical competition. With the end of the Cold War, the discourse of peace crystalised, which sees defence spending as a wasteful endeavour. In this ‘reframer’, we attempt to challenge such outmoded thinking and reposition appropriate defence spending as a national benefit.
Defence spending reduces economic growth
Does it? That’s clearly not true if you consider the static impact of defence spending. As the global consultancy Bain & Co. showed in March 2024, every £1 billion spent by the Ministry of Defence generates £2.2 billion of GDP, and supports 15,000 jobs. The debate begins when we get to the dynamics: does spending an extra £1 billion give you a positive growth impact or not? One reason economists have focused on this question is that defence, being discretionary and apt to change suddenly, is an excellent case study for the more general question of whether fiscal stimulus actually works. The literature differs over whether the multiplier effects of defence spending are more or less than one-for-one, but the impact of defence spending is positive across all models.
Maybe, but defence spending draws innovators away from the civilian economy
Not really. A better argument would be that a hike in defence spending generates less growth than if the money were spent in the civilian economy. A study of American defence spending at state level, by Van Gemert et al., supports this conclusion. The reasons are: 1. There are limited positive spillovers from defence firms to others; 2. Defence spending hikes tend to make households nervous that they're about to be taxed more, reining in consumption; and 3. Spending with a defence firm does not stimulate as much consumption as, for example, a boost to public services or automobile manufacturing. So yes, there’s a danger that if the state spends more money on defence, it crowds the innovators into a sector where they will create less value.
On the other hand, if a country is in a technological arms race, as the UK is with Russia and the People’s Republic of China (PRC), it also has to price-in the cost of losing it – which could be felt through energy and food security, or handing Vladimir Putin, President of Russia, the ability to hike inflation and therefore borrowing costs at will.
But it is also true that, in the medium term, defence innovation tends to create economy-wide technological change, which is not captured in impact studies like the van Gemert paper. The wider problem is that Britain is having an essentially wartime debate with peacetime economic assumptions: in all defence economics the cost of catastrophic defeat must be factored in – as Duff Cooper did in his arguments against His Majesty’s (HM) Treasury defence ‘rationing’ in the run up to Munich in 1938.
Sure, but money spent on defence would be better spent on schools and hospitals
Wow. Tell that to the schools and hospitals currently being obliterated by the Kremlin’s Kinzhals. No politician, especially from the Labour tradition, comes into politics to think about prioritising warships and tanks over MRI scanners. But given that defence spending is necessary, and that it has to rise because of the threat, the point is to achieve the maximum in terms of growth multipliers.
The new government says it wants to spread wealth and high quality jobs across the UK – a glance at the 2024 JedHUB figures for defence employment shows there is plenty of scope for that. Two regions – the South West and North West England – account for 48% of the defence hours worked, while North East England accounts for less than 1%. With defence production jobs being among the best paid in manufacturing, one can imagine the positive impact of spreading the workload more evenly as the sector expands in response to global demand.
The unanswered question for HM Government is how it is going to pay for stuff – whether that is schools and hospitals or frigates and drones. Defence is the one area where, even for governments committed to fiscal rigour, one can make the case for borrowing in times of acute threat. That is what HM Treasury had to accept after 1935: there is no way to fund substantial rearmament from increased taxation.
Okay, but it would be more impactful to invest in other instruments of national power
Not today. If you take the ‘DIME’ categories of national power – diplomacy, information, military and economic – one could argue that the ‘securonomics’ methodology being adopted across Whitehall will boost Britain’s strategic advantage systemically.
HM Government’s primary mission is to grow the economy. Spending more on defence would certainly help do that – if executed right. Its second mission is to decarbonise the electricity supply by 2030 – which again would enhance national power by achieving increased energy security.
In defence, it looks like the government will demand more capabilities be built in the UK, and put a greater emphasis on defence exports.
Given the current status of the threats Britain faces, and the acknowledged hollowness of British military capabilities, it makes both strategic and economic sense to spend more on defence – though on exactly what depends on the outcome of the Strategic Defence Review.
Paul Mason is the Aneurin Bevan Associate Fellow in Defence and Resilience at the Council on Geostrategy and a journalist, author and political researcher.
To stay up to date with Britain’s World, please subscribe or pledge your support!
What do you think about this Reframer? Why not leave a comment below?
 | A guest post by
|