UK Defence Spending Decisions Can’t Wait for the Strategic Defence Review

On 16 July, Prime Minister Keir Starmer launched the government’s Strategic Defence Review (SDR), led by Lord Robertson, previously NATO Secretary-General. The Review has begun by commissioning written submissions from within the Ministry of Defence (MoD), as well as from industry, think tanks and others. This will be followed in October and November by a period of ‘Review and Challenge’, after which the Reviewers are due to submit their final report to the prime minister in the first half of 2025.

The sequence of events after the submission of the Review has not been made public, but it seems likely that the government will use the SDR to inform the decisions of its multi-year Spending Review, the outcome of which is due to be published in spring 2025. Once its budgets for the rest of this parliament have been agreed, it will then be up to the MoD to translate the Review’s broader judgements into detailed resource allocation decisions for the years ahead. On this timetable, some of the most difficult capability choices – that is, where to spend more or less – may therefore not be made until the summer of 2025.

The Funding Gap

But not all decisions can wait until then. The MoD faces a large funding gap in the current (2024/25) financial year, and in 2025/26. In December 2023, the National Audit Office identified a deficit in the equipment plan of £3.0 billion for 2024/25 and a further deficit of £3.9 billion in 2025/26. The MoD will also need to find an extra £1 billion each year to fund the above-budget costs of the 2023 and 2024 pay settlements for the armed forces. It is an indication of the seriousness of the situation that the MoD has already asked defence contractors for any immediate ideas that they might have for reducing the pressure on this year’s budget. All new contracts valued at more than £50,000 now reportedly require ministerial sign-off, with all the additional paperwork which this involves.

The main effect of these and similar measures will be that more spending is deferred than would normally be the case. This will risk increasing lifetime project costs (through spreading work over a longer period), delaying the introduction of new capability and forcing the armed forces to extend the lifetime of older, less effective kit. These effects can be minimised if ministers use their enhanced scrutiny role to identify projects that can be cancelled (rather than delayed). But doing so will require decisions – explicit or implicit - to be made on relative priorities well in advance of the conclusion of the SDR.

There may be a temptation to ‘muddle through’, saving money in the short term by cutting maintenance and training, delaying new contracts, and stretching delivery schedules. But such a path – likely to extend well into 2025/26 – would be bad value-for-money and would risk spreading ‘planning blight’ across the department. It would threaten the MoD’s ability to invest in key priority areas, including those most relevant to its response to Europe’s ongoing security crisis.

To avoid such a path, the government needs to make tough calls soon on what to prioritise, and what to cut.

What the Budget Could Tell Us

The new government’s first Budget is due to come out on 30 October. It will set the spending totals for the MoD, and for other government departments, for both 2024/25 and 2025/26.

In the Public Spending Audit, published on 29 July, Chancellor Rachel Reeves estimated that unfunded resource budget pressures for this financial year totalled some £22 billion. In response, she announced cross-government cuts in spending on consultancy and administration, both of which will affect the MoD’s current budget. But she also signalled that she would raise taxes. The MoD will argue that it deserves some share of the extra resources that should become available. Its case will be strengthened by the government’s commitment to increase defence spending from its current level of 2.32% of GDP to 2.5%, albeit without a timescale for doing so.

The commitment to 2.5% first became government policy in the Integrated Review Refresh, published in March 2023 under former Prime Minister Rishi Sunak. It remained an ‘aspiration’, to be met ‘over time, as fiscal and economic circumstances allow’. Then, on 23 April 2024, his government announced that it intended to meet the 2.5% target by FY 2030/31 and would increase the level of spending at a steady pace to do so. One month later, a general election was called.

Labour has promised to match the 2.5% commitment, while declining to set a timetable for doing so. There are other differences. While part of the promised Conservative increase was pledged to help finance its National Service plan, Labour has shown no appetite for this idea. The Conservatives also promised to fund the increase to 2.5% by cutting civil R&D spending and reducing civil service numbers. Neither of these ideas is likely to be palatable for the new government. Indeed, as part of the July Spending Audit, the government announced it was lifting the civil service headcount cap.

So the Labour government will need funding from elsewhere to meet its 2.5% commitment. The October Budget will be key. Over the next two months, the prime minister and chancellor will have to decide how far, if at all, to go in providing extra funds for defence and other public services, and how they intend to fund these increases. Although the Budget will only announce allocations for two years – revised departmental totals for 2024/25 and new spending limits for 2025/26 – these decisions will be a big step towards setting the budgetary priorities for the rest of the parliament.

The current forecast allocation to the MoD for 2024/25 is £57.1 billion, including spending on assistance for Ukraine. Once other qualifying spending is added, this amounts to some 2.32% of GDP on the NATO definition. If the chancellor decides to use the Budget to finance the full costs of the public sector pay settlements announced in July, then the MoD could expect to benefit to the tune of an extra £1.1 billion on top of this year’s allocation, bringing the total to some £58.2 billion, or 2.36% of GDP.

If the settlement is less generous, rapid action will need to be taken to rein in current commitments well in advance of the SDR. Given the need to spend much more in some priority areas (such as munition stocks), the pressure to find short-term savings will be intense and immediate.

The last government pencilled in a real-terms increase in NATO-qualifying spending of some 3.3% for each of the next six years, starting in 2025/26. If the government decides in the Budget to fund the costs of the pay settlements in addition to these plans, then 2025/26 MoD spending would amount to some £61.1 billion, with NATO-qualifying spending reaching some 2.39% of GDP. This would be a significant downpayment towards reaching the 2.5% target as soon as possible. If the Budget falls far short of making such a commitment, substantial deletions from the 2025/26 programme would be needed.

The Spending Review and the SDR

The Treasury has announced that there will be a full Spending Review after the October Budget, to be finalised in spring 2025. This will probably set a revised resource budget for 2025/26, together with allocations for 2026/27 and 2027/28. Like other investment-focused departments, the MoD will also argue for a five-year capital allocation, stretching through to 2029/30, following the practice in previous reviews. In combination with the Budget, therefore, the Spending Review will provide a clear indication of how rapidly the government intends to reach the 2.5% target.

It should not be assumed that the allocations for defence will follow the same trajectory as the October Budget. By the time of the Spending Review, we should know much more about the new US president’s approach to Ukraine, and to NATO more generally. It could also be a critical moment for the Ukraine war. The central planning scenario, at present, must be for a long attritional struggle. But both sides are facing heavy losses, and both are attempting decisive breakthroughs. A rapid change in the dynamic of the conflict is therefore possible. If Russia were to break through Ukraine’s defensive lines, for example, then the pressure on the UK to spend substantially more on military aid to Ukraine – and on defence more generally – could accelerate.

If the Spending Review confirms that the UK is on track to be spending 2.5% on defence by 2029/2030, this would entail significantly more funding than would be needed to keep spending at 2.32% of GDP – some £6 billion per year by 2029/30 according to the author’s own calculations. But not all of this will be available for additional investment in conventional forces. Nuclear and submarine spending, which now accounts for almost 40% of planned equipment spending, is due to rise further in the coming years, squeezing the resource available for other areas.

The new government will also need to factor in more generous assumptions for pay, both in the MoD and across government. In the period after 2010, successive Conservative governments generated substantial savings through real-terms cuts in public sector pay, including for the military. Today, it is reasonable to assume that the Labour Treasury will revert to the pre-2010 assumption that, broadly speaking, public sector earnings will track private sector earnings. The pressure on the resource budget will also increase if ministers decide that there will be no further cuts in regular service personnel numbers.

A Time for Decision

It is a common misconception that most major decisions on MoD priorities and programmes are taken in defence reviews. History suggests a more mixed experience. The 1964–70 Labour government conducted a major Defence Review in 1966, but its conclusions were substantially revised when the government moved to withdraw military forces from East of Suez, a decision announced in 1967 and 1968. The 1997–2010 Labour government only published one full-scale review, in 1998. Yet its time in office saw many further strategic decisions on UK defence priorities, including the 2006 decision to renew the nuclear deterrent.

Although several of their decisions proved to be misguided in retrospect, the Strategic Defence and Security Reviews of 2010 and 2015 were important landmarks in shaping defence priorities. Significant savings were made by delaying key investments in nuclear modernisation, by reducing the size and readiness of conventional forces, and by cutting real-terms service pay. During this period, the withdrawal from Afghanistan and the still-recessed nature of the great power threat combined to reduce the perceived urgency of investing in defence.

There is less room for taking risks with defence planning today. The Integrated Review in 2021 began the shift by announcing a large increase in capital spending, much of which was needed to fund an accelerated nuclear programme. But its unwillingness to focus on European security, together with the underfunding of day-to-day costs, helped create the crisis of readiness for NATO roles which the armed forces are now having to address. The Integrated Review Refresh corrected the foreign policy imbalance of its predecessor, but its accompanying Defence Command Paper, published in July 2023, failed to provide the new resources needed to meet its ambitious aspirations.

Now the chickens have come home to roost. The conjunction of a dangerous geopolitical environment and a severe domestic fiscal crisis is more serious than that faced by any defence review since the 1960s. Given this reality, there is no time to lose before the UK starts to take the difficult decisions on strategic priorities that are necessary to best safeguard its security in the years ahead.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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