Reconsidering Pressures on UK’s Defence Expenditure

JE: The short-lived Liz Truss government envisaged an annual budget of perhaps £100 billion by the end of this decade, by ramping up defence expenditure to 3% of GDP. A pipe dream now?

MC: That commitment was part of a wider unaffordable package that Liz Truss put before the country and the bond markets made their decision on that overall package. When I wrote a paper on the 3% target during the summer, I made clear that this was only credible if the government explained how it was going to pay for it, probably through increased taxes and possibly by cuts in spending elsewhere. And, of course, Liz Truss not only promised 3% of GDP to defence; she also promised very significant tax cuts up front, with unspecified public spending economies to follow later. It was never very credible. The 3% target has fallen by the wayside. Prime Minister Rishi Sunak said recently that he wasn't committed to the target of his predecessor, nor was he committed to the remarks Boris Johnson made just before he left office of aiming for 2.5%. It's possible that one of these could be revived. But, if the 3% target were to be resuscitated in one way or another, it would have to be associated with a new earmarked tax to be fiscally credible, and would have to be sold to the public on that basis. Without that commitment, I don’t think it would be credible.

JE: Now we have the Autumn Statement from the chancellor. You are on record as saying that the envisaged flat spending allocation for defence amounts to about an 8% real-terms cut. But hasn’t inflation been higher?

MC: That's an 8% cut over three years in the resource budget of the Ministry of Defence, in its running costs. So it's not about capital spending, which fluctuates much more from year to year, with the 2022/23 budget being especially anomalous for accounting reasons.

The real-terms calculation depends, of course, on what deflator you use. I am using the GDP deflator, which is a reflection of domestic costs and therefore excludes the direct impact of increased import prices on the whole economy. It’s the deflator which the government itself uses in calculating public spending in real terms, which is why I use it.

In his Autumn Statement, the chancellor said that the government would be looking at defence spending in the context of the Integrated Review refresh, which was due to come out in December, but it looks like it will slip into the early part of the new year. The key to all this will be the budget statement which the chancellor is due to give in March, and that will be the last opportunity for some time to revise the current budget allocation. If I were a betting man, I would say that defence will get something extra on top of what it was allocated in the 2021 Spending Review.

We are several months into a major European war which is throwing up all sorts of questions about the sustainability of the UK's armed forces, something which Defence Secretary Ben Wallace has been emphasising in almost every statement he's made on his spending priorities.

In the debate about future defence spending, the personalities of the key political protagonists are also important. The tradition in this kind of political debate is that it's the prime minister who, at least to some extent, sides with the defence secretary against the chancellor. But now we have a chancellor who was foreign secretary in a past life, who has a lot of experience of getting more money from the Treasury for the NHS when he was health secretary, and who is instinctively, I think, more sympathetic to the defence case than the prime minister, who has very little experience in this area and of course was previously chancellor. This could, therefore, be a case where the prime minister may press the Treasury’s case harder than the chancellor. We shall see.

Either way, there are essentially two distinct decisions that ministers have to make. The first is whether to introduce any change to the cash allocation which defence has been given for the next two years, 2023/24 and 2024/25, and leave allocations for subsequent years to a (probably post-general election) spending review.

Alternatively, the government could give a five-year settlement to defence covering both those two years and the three subsequent years. This would be a major concession because, although the chancellor has already indicated in his Autumn Statement the total level of government departmental spending across Whitehall for these three years, he hasn't broken it down by department. It would give the Ministry of Defence an advanced claim on any resources available in the next Spending Review, using the precedent of Prime Minister Theresa May’s 2018 decision to make a five-year spending settlement for the NHS outside the normal Spending Review cycle. Most of all, it would provide the medium-term predictability that is so important for efficient defence budget planning.

JE: Which leads us to the potential sacrifices that may have to be made. What about the very insistent discussions that the size of the F-35 programme might be curtailed in order to save money?

MC: The F-35 is going to continue to be produced probably two decades from now. The government never said it would buy 135 jets on a particular timescale. So, I don't see a reason why the government should make a deliberate announcement now that it's capping the number of buys. It just won't buy very many more in the 2020s if it doesn't have the resources to pay for them. And, as the decade goes on, the Tempest programme for the Typhoon replacement fighter aircraft, along with all sorts of valuable associated capabilities, will become a reality. But it will come with a considerable price tag attached. With limited resources, therefore, some difficult trade-offs across the combat air space will be required. And certainly the UK defence industry, especially BAE, Leonardo, MBDA and Rolls Royce but also others involved, will want to ensure that the Tempest programme is able to proceed at a good pace once it enters full development and then production.

JE: Let's turn to the Army for a second. Some are suggesting that perhaps axing the Ajax Armoured Reconnaissance Project, which has been suffering from a number of technical difficulties, may be an ‘easy win’ in terms of savings. Does this strike you as the right kind of discussion?

MC: One of the central problems with the Ajax programme is that most of the money has already been spent in terms of the capital spending. There could be some savings made if it were to be stopped now. But if it were to be cancelled at this very late stage, then the Army won’t have a vehicle to fill that slot unless it gets an extra slug of money to build something else.

Ajax is only one example of the challenges that the Army has if it wishes to recapitalise for a heavy mechanised warfare capability, because at the moment, while the UK is committed to providing an armoured division to NATO by itself, it has nothing like the capability to do so. I think most observers would say it barely has enough equipment to credibly supply a single armoured brigade, let alone a division. Even there, one has to question its ability to sustain that brigade in action at the intensity of operations we've been seeing in Ukraine. Defence Secretary Ben Wallace is therefore committed to putting a lot more emphasis on sustainability. But it remains the case that, the more money one spends on buying lots of new platforms, the less money there is for sustainability. There's a real trade-off between number of platforms on the one hand and having the munitions and spare parts to sustain them on the other. I recently chaired a speech by James Heappey, the armed forces minister, in which he made a convincing case for what he called a ‘boring Integrated Review’ – by which he meant one that didn't promise lots of extra headline-worthy new equipment, but focused on ensuring that our current forces have what they need to operate the equipment we have effectively.

JE: Can we continue with our commitments – both our expanded commitment to the defence of Europe, as well as having a footprint in the Pacific?

MC: From everything I can see, both this government and the Labour Party are clearly committed to meeting the 2% of GDP defence commitment to NATO. There is a bipartisan consensus on that. On this basis, the UK will continue to be the biggest defence spender in the European part of NATO for some time to come. But that doesn't mean that the UK won't have to make hard choices, for there are some very big cost pressures coming down the track. In reality, the main focus of UK defence continues to be the NATO area and the defence of the Euro-Atlantic region. That doesn't mean the UK can't operate globally on a limited scale. But some of the interpretations of the Indo-Pacific tilt seem to suggest we could have a second theatre of deployment and operations which is almost as important as Europe. I don’t think that that would be in the UK's interest, even if we had a lot more money. This is not least because the Indo-Pacific, in contrast to the last time we deployed on a large scale East of Suez in the 1960s, is now full of really well-equipped military powers. China and the US are the most important. But we also need to look at many of our potential allies, each of whom are already well-armed and are becoming more so, and who have the advantage of operating in their own theatre. We're not going to see the Japanese deploy their fleet in large numbers in the North Atlantic any time soon. Nor, I think, should the UK see the Pacific as its main theatre of operation, at least as long as Russia remains a significant conventional threat in Europe. Rather, if a growing China threat does see the US redeploying more of its forces to the Pacific, the UK should do more to backfill for US forces that have had to be withdrawn from Europe and neighbouring regions.

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