But he’s got his work cut out. In a speech at the London School of Economics, chief secretary to the Treasury, Liz Truss, reiterated that government finances remain constrained after eight years of austerity. No surprises there, but a widely reported intervention in the spending debate by former head of the armed forces General Lord Houghton made clear the UK stands at a “strategic crossroads”. In an interview on BBC’s Radio 4 Today programme, the former defence chief gave indirect support to claims by The National Audit Office that the MoD could be faced with a funding gap of up to £21bn over the next decade (that’s roughly the annual increase given to the NHS to mark its 70th anniversary).
Lord Houghton said that either the UK provides sufficient funds to meet the £178bn spending commitments under the 2015 Strategic Defence and Security Review or “diminish ourselves in terms of our status as a military power”.
It’s always a slightly odd debate around defence spending, as many politicians are unconvinced of – or simply refuse to acknowledge – its wider macroeconomic benefits. Admittedly, the academic evidence isn’t entirely convincing. A study published by the Mercatus Centre at Virginia’s George Mason University found that a dollar increase in US federal defence spending results in a less-than-a-dollar rise in GDP when the spending increase is deficit-financed.
That’s consistent with other studies that suggest every dollar saved due to US defence retrenchment leads to a positive multiplier effect, allowing for a positive shift of resources to the private economy (however, critics of these findings believe that the historically low interest rate environment during which they’ve been conducted has distorted outcomes). And there were marked discrepancies in the findings depending on where the studies were conducted – most research in this area has been undertaken in the US – as states with higher concentrations of military contractors (as a proportion of their industrial base) benefited disproportionately from spending increases.
This last point is also significant for the economies of nation states such as Israel and the Czech Republic – and to a lesser extent Britain – where defence spending constitutes a relatively high proportion of gross domestic product (GDP), supported by a large-scale domestic arms industry. The UK has the fifth-largest defence budget in the world and the third-highest spend per capita (£538) amongst the North Atlantic Treaty Organisation (Nato) allies. With four out of the top 30 aerospace/defence contractors in the world, the UK punches above its weight in export markets, but any contraction in MoD budgets usually has a marked impact on companies with heightened exposure to the domestic market – the likes of QinetiQ (QQ.) and Ultra Electronics (ULE), together with the lengthy homegrown supply chain.
Lord Houghton is obviously highlighting a strategic issue, but, unfortunately, many politicians view cuts in defence spending as a straightforward economic gain. Many readers will recall all the talk of the “peace dividend” once the Cold War came to an end. The idea here is that expenditure can be redirected to other parts of the economy with more productive outcomes, based on the premise that defence budgets serve no other purpose than to match the spending patterns of potential belligerents.
