A Guest Post By Martin
We have become accustom to defence reviews being simply budget cutting, salami slicing exercises dressed up as strategy. This is principally due to the fact that over the last 25 years the armed forces budget as a percentage of GDP has been cut in half, from roughly 4% to 2%.
Many of the historic cuts took place at times when government finances were in a far better shape than they are today. The prevailing wisdom at the MOD seems to be assuming a further cut to the forces budget of 10% after the next SDSR. However there are three potential factors which may see SDSR 2015 become not a budget cutting exercise but a budget increasing exercise.
The first potential factor is the UK dropping below the NATO threshold of 2% of GDP on military spending. If you had asked me a year ago I would have said that there was no chance of the UK ever failing to make the minimum NATO spending commitment. The UK has even led the campaign amongst European NATO members to meet this target. However even as the UK was holding a NATO summit aimed at getting others to make a 2% of GDP pledge, David Cameron steadfastly refused to make the same commitment. On several other occasions in Parliament he has also failed to make this pledge.
That being said he did not really need to make the commitment at the time as the UK was still above the required level. It could be a case of simply not making a political commitment that he did not need to make. There are few votes in defence spending and even fewer in pegging its budget to a target the public does not understand. Why back yourself into a future political corner when you don’t have to.
On current spending assumptions, The Royal United Service Institute predicts that the budget will fall to around 1.8% of GDP in the next parliament and may fall as low 1.5% in the one after that. Those figures assume no cuts in SDSR 2015 and the honouring of the government’s commitment to increase the equipment budget by 1% above inflation after 2015. If we do go ahead with a 10% real terms cut then we could drop to 1.6% in the next parliament and 1.4% after 2020.
The UK government has a quite unmatched record of meeting its international obligations. The UK was one of only two countries to meet its Rio Earth Summit greenhouse gas reduction targets and the UK is the only G7 country that actually meets the 0.5% of GDP on foreign aid spending.
There is still a chance that it could become politically untenable for a British Government post 2015 to allow defence spending to fall below 2% of GDP, especially if the USA starts to apply significant pressure.
The budget could be found without raising any additional money by simply reallocating the additional funding given to DFID. This would allow the UK to meet the NATO 2% of GDP target while continuing to meet the pledge given to the G7 of spending 0.5% of GDP on foreign aid.
The second factor that could see budget increases in SDSR 2015 is the country’s finances. In 2010 the budget deficit was predicted to have dropped to zero by 2015. Instead it has been cut by just over half. This is a serious matter because it is beginning to appear that the deficit is structural in nature rather than cyclical.
The latest economic research is now of the opinion that the main reason for the deficit’s existence is the collapse of income tax revenues. All other taxes are delivering more revenue now than they were pre-recession. Income tax receipts have dropped for a number of reasons but the biggest factors are the low pay of many new jobs, the big reduction in remuneration of very high earners and the tax credits the government gives to low paid workers.
As we have seen in the US economy, this situation could improve relatively quickly. Bonuses can return and more people can start to work overtime. Another factor that might play out is the cost of debt servicing. The British government is predicted to be spending around £70 billion a year on debt servicing. That is one of the governments largest costs with a budget of double what we spend on defence and around the same as the Department for Education. As inflation has dropped over the past few years so have government bond interest rates. The Government could start to see significant savings on its borrowing costs over the next 5 years. So it may be that in a year or two with no action from the government the deficit will begin to reduce of its own accord.
The third factor that may come into play is the current security situation. This is by far the least important factor of the three when it comes to government decision making but it will certainly help.
The past five years have seen more turmoil in our neck of the woods since perhaps any time post 1945.
The Arab world is on fire along the entire southern shore of Europe. Defence assumptions in 2010 were very much based around the notion that once we were done with Afghanistan we would not be getting involved in another Muslim country. However just a few months later we learned that like Sean Connery, we can “never say never again”. Since 2010 we have become engaged in two military operations in Islamic countries and perilously close to two more in Syria and Mali.
In addition, Russia, the only country that could ever really be considered a material threat to Europe has invaded its neighbour and annexed a fair chunk of its territory. At the same time they continue to not only fight a proxy war for an even bigger chunk of that country but increasingly make provocative moves towards both us and other NATO allies. They have also increased their military spending by around 60% over the same time period.
In SDSR 2010 there was much talk of Europe becoming a strategic backwater with the focus moving towards the Pacific. Europe and the UK were to become “security exporters” only fighting in “discretionary wars”. The “cold war dinosaurs” of fighter aircraft, anti-submarine warfare and armoured divisions were no longer required.
Most of the defence assumptions made in SDSR 2010 were wrong. It would certainly not be difficult for a government in 2015 that had a bit more economic freedom and was in danger of failing to meet a key international target to justify a slight up lift in the MOD’s budget, especially given the current security threats the country faces.
It is open to debate just how much the UK will fall below the 2% threshold on current spending assumptions. No one really knows just how much the UK economy will grow and it’s this growth that is likely to push us below the 2% figure. At the same time we don’t know how much contingency spending there will be on operations.
RUSI puts the figure at 1.8% of GDP which would translate into a short fall of 0.2% of GDP or close to £3 billion a year.
Assuming that the good people of the Royal United Services Institute are probably over stating the amount let’s assume its £2 billion a year. This level of spending certainly won’t revolutionise the UK’s armed forces but it could allow us a chance to fill many of the gaps in our capabilities and enhance our forces in both quantity and quality in a few key areas. These funds could be even more transformational now that the MOD has gotten a fairly good handle on its finances, So the money won’t simply go into the same leaky bucket as before.
Indeed even if the budget is simply maintained at current levels the MOD could have up to an extra £2 billion a year in underspend, unallocated funding and contingency budgets so adding an extra £2 billion on top of that could really make a difference.
In the next parts of this series I will be looking at the few key areas we might spend the money on to generate the best uplift in capabilities that will help to better meet our current security threats.