Not A Penny More Not A Penny Less - Thoughts on UK Defence Spending

There has been a significant level of political and policy upheaval in  the UK recently following the change of Prime Minister from Boris Johnson MP to Liz Truss MP. Through a range of ministerial changes, policy shifts and new positions on previous policy goals, it now appears likely that the UK MOD may face the potential for reductions in defence expenditure.  The challenge facing the government as a whole is to reduce spending and the burden on the taxpaying population, while still delivering critical services and outputs. This is, to put it mildly, a delicate tightrope to walk along.

The last Prime Minister had committed to a rise in defence spending to 2.5% of GDP by 2030, while the Prime Minister has made clear her commitment to ensuring that in the medium term defence spending in the UK rises from 2% of GDP to 3%, although no specific timeframes have been set for this. Such a move would, in theory, generate tens of billions of extra spending for the MOD, which could be used to enhance wages, living conditions, infrastructure, stockpiles of munitions and spares, and potentially additional equipment too.

Image by Ministry of Defence; © Crown copyright 2023.

The significant change in the national economic circumstances, meaning a challenging combination of high inflation, an extremely weak pound and a need to reduce spending means that it may prove harder than expected both to raise this spending total, and also be certain of what the actual planning figure is going to be. Only a fool would try to place long term spending plans on bets about the size of the British economy in 2030, yet paradoxically this is what the MOD is going to have to do, when it assumes how much money is likely to be available, and how it can be spent.

What then is going to happen next? In the short order the Prime Minister has committed the MOD to carry out an additional study in the National Security Strategy that was published last year. This paper, likely to be similar in concept to the 2002 SDR ‘new chapter’ paper, will set out how changes in the international environment may impact on wider British defence and security planning. For example, the threat from Russia, the rise of economic sabotage, the growing aggressiveness of China and the threat it poses to the UK and so on. This paper will also likely consider what, if anything, needs to be done by the MOD to address the threat as part of its contribution to wider UK national security objectives.

So far so straightforward. However the challenges emerge when trying to work out how much is available to be spent, and how much less spending power in real times the budget actually has. For example, if the budget for the next 2 years remains flat or very small growth (e.g. 1% rise), then in real terms the defence budget will be smaller – inflation will have reduced its purchasing power, meaning it cannot afford all the things it planned on previously. This ranges from the impact on growth in big ticket projects, such as the affordability of the replacement nuclear deterrent submarines through to the ability to pay electricity bills as energy bills soar. At the same time, the collapse in the pounds value over the last 8 months means that many defence projects are, in the short term, going to be 10-20% more expensive – in the medium term this is less of an issue, but if your major project is buying from the US right now in dollars, and you’d banked on a fixed exchange rate of £1 - $1.25 and the new rate is £1- $1.10 (for example) that means a $125m purchase that would have cost £100m is now going to cost closer to £120m – add this up across defence and suddenly that is a big shortfall to be found somewhere.

The next challenge is factoring in what gives if the cost growth is less than ideal – the way that the MOD works, it delivers outputs to meet clearly stated UK national security policies. Everything bought owned and operated by MOD is done so to meet clearly stated government requirements. The MOD cannot stop doing things unless the Government agrees that it can do so – which in turn requires a change to agreed national security goals. The challenge for planners is to carry out an incredibly delicate balancing act, trying to ensure that they put together financial outcomes that ensure the MOD meets Government goals, while making the books balance. Without a significant injection of extra cash just to stand still, it is hard to see how this can be done without reducing defence outputs.  There is likely to be some suggestion of ‘efficiencies’ but it may be difficult to realise them. The MOD has committed to a great deal of such efficiency savings in previous spending rounds, yet the NAO has always found that it has failed to deliver on them.

Image by Ministry of Defence; © Crown copyright 2023.

To make things even more complex, switching tasks or activity off is really easy – just look at the way Nimrod stopped almost at no notice to save short term money in the 2010 budget. Switching the Maritime Patrol capability back on has taken the best part of 10 years and cost a lot of additional cash to do. For the MOD, faced with the prospect of potentially short term cash cuts, but a long term commitment to cash growth, this presents a challenge – do you switch a capability off now to meet more stringent budget totals in the short term, yet knowing that you’ll need to switch it back on again later to fill the capability gap – and does this cost more long term than it saves short term, and at what impact? There will need to be a lot of work done to work out how to balance off short and long term goals here.

Other challenges MOD will need to consider are the balance of investment in major projects, what to focus on and what to sacrifice. For example, should (hypothetically) the MOD reduce its investment in autonomous systems now in order to protect cash to fund nearer term high priority issues (for example enhancing the Army to reflect Ukraine lessons identified) if doing so in the medium term does real harm to our industrial position, ability to become world leaders in this space and the ability of British industry to take a lead on their competitors?

Alternatively what balance is struck between investment in new equipment like ships, which may need long term ordering done to ensure they are delivered in years to come, versus shorter term investment in stockpiles of munitions and spare parts? While the money may come from separate budgets, when the MOD is faced corporately with decisions on where to focus spending, choosing to cut an extra total from one budget to protect another could have long term repercussions.

Against all of this is the real challenge of delivering defence outputs and balancing the budget against the wider complexity of maintaining international relations and defence relationships. For example, there is clearly huge interest in NATO matters at the moment as Russia is brought to account for its atrocious activities in Ukraine. The UK has played a leading role in both supporting Ukraine and leading the international coalition to deliver aid, training and military assistance. It is clear that in the short term, NATO is a key security policy priority for the UK.

But in the medium term, after Russia is defeated and NATO seeks to identify the threats posed by an economically broken nation unable to rebuild its advanced military stockpiles, then is NATO still a key priority, or is it more important to focus on the Indo-Pacific region -  in particular key relationships like FPDA or AUKUS? There is no doubt that the USA sees China as its key threat (as can be seen from the recently published US National Security Strategy) and they are focused on securing dominance in the Pacific first. Looking forward 10-15 years is it better for the UK to have spent this time engaged in building military links in the region to add value to the US (which in turn helps ensure continued smooth running of relationships like 5-EYES) and investing in cutting edge technology that will support the ability to operate in the most intense conflict environments as a ‘day one, night one’ partner of choice with the US?

These options will over time require different spending decisions that can be balanced in the short term, but over time as the UK embarks on one path or the other will become ever more  difficult to change course on. It is one thing to try to do both when budgets are growing, but when cuts loom this becomes far more difficult. This is even before you consider the wider impact of reductions to make books balance that may take years to undo – for example (hypothetically) removing a Defence attache here, or a training team there – soft power is only delivered by persistent presence and commitment for the long haul, not changing tack and priorities every 2-3 years. The MOD has made strong efforts to establish a meaningful long term RN presence in the Indo-Pacific region which will pay dividends in the years to come, but is the stated goal of ‘soft power’ that is so often intangible and not able to be defined in a powerpoint metric deliverable when real term budget cuts loom? How do you put a value on an intangible?

Image by Ministry of Defence; © Crown copyright 2023.

The last part of the puzzle is trying to work out how to develop a spending plan out to 2030 that is sustainable, affordable and meets the goals of the government of the day, while also being cautious that 2030 is at least two general elections away. Without expressing a political view, we cannot predict which party will be in Government in 2024 or 2029, and as such the MOD is having to develop longer term plans to deliver security when it may find, potentially at short notice, or later on when a lot of money has been committed to delivering a certain set of outputs, that political direction has changed and there is a need to start all over again.  Perhaps uniquely among Government departments, the MOD has to spend across so many different areas and on such ridiculously long timescales that a change in policy early on can  have repercussions that will be felt across many different areas for decades to come (think here of the challenges of withdrawing from East of Suez to focus on the NATO / North Atlantic and then back to global operations – 30 years of perpetually changing aspiration, with equipment usually catching up just in time to be obsolete or unsuitable for its new operational purpose).

In the weeks and months to come as debates on spending continue, often emerging into sharp public focus for a variety of reasons, there is likely to be difficult headlines and coverage. It is entirely likely that stories will focus on ‘capability to be cut’ – with the author putting money on there being at least one story predicting the end of an aircraft carrier, the scrapping of the Paras and the deletion of the RAF Regiment likely to be leaked as time goes by. What matters at times like this is not to give into the emotional turmoil, but remember that all leaks happen for a reason, usually to generate a response like that, and that until any announcement is made in the House, any leak should be treated as being as about as reliable as NAAFI rumours about the imminent arrival of a busload of nurses at the disco tonight…