Rationale for a United Kingdom defence industrial strategy

INTRODUCTION

  1. It has been cogently argued by the Chair of the Public Administration Select Committee (PASC), The Hon Bernard Jenkin MP, that Her Majesty’s Government (HMG) does not have an articulated Grand Strategy for the UK. Although the Prime Minister has been forward looking and energetic in setting-up the National Security Council (NSC) there is little evidence of a cohesive ‘overarching’ strategic policy to inform principle business plans across the departmental divide and it is difficult to discern in current government structure a single individual or organisation responsible for formulating a cohesive UK Grand Strategy. Indeed, in evidence to the House of Commons Defence Select Committee, the Rt Hon Oliver Letwin MP, Minister of State for Policy in the Cabinet Office, indicated that his role was one of coordination between departments. Which leaves open the question: ‘if not the Minister of State for Policy in the Cabinet Office, who, in government is responsible for formulating and setting UK Grand Strategy’? In the important high profile area of government financial policy it would be good to know because several departments of state and the UK commercial sector would benefit from a cohesive approach.

BACKGROUND

  1. The UK is in the process of restoring its finances following the banking crisis which, some argue, along with excessive public spending, precipitated a major recession and burdened the economy with an unsustainable level of structural debt. In these circumstances the Coalition Government has rightly accorded the tackling of this debt crisis top priority. To achieve this, it is the stated policy of the Government to rebalance the economy away from the public and service to private sector using a manufacturing and export led recovery strategy to spearhead industrial growth. This policy makes economic sense, especially as it is essential to keep unemployment as low as possible in order to prevent welfare payments spiralling out of control thereby consuming tax receipts that could be better spent elsewhere stimulating growth. The positive economic multiplier effects of steady growth in GDP being accepted by most mainstream economists – national wealth and overall tax revenues rise and the need to borrow is offset providing the conditions for stable low interest rates to be maintained at levels that do not add excessively to the debt repayment burden.
  1. One of the major contributors towards this aspiration for an export led growth strategy is the UK defence industry. For example, BGC Partners reported in September 2011 on the latest survey from the UK’s principle aerospace, defence and security trade organisation, ADS, which showed that employment in their area of UK defence generates around £22bn in annual revenues for the nation directly employing more than 110,000 people. They went on to say: “Defence manufacturing is a hugely important business for the United Kingdom and it is something that despite the surge in growth of service industries over the past twenty years that we are still very good at. In fact we are the second largest exporter of defence equipment in the world and ‘Oxford Economics’ estimated that including all those indirectly employed in the industry the total number defence related jobs total 314,000 in 2010”. According to a Kings College London report dated April 2015 this total employment figure is now 371,000 – 162000 directly employed in defence production, 114,000 in the supply chain and a further 95,000 in related industries.
  1. In 2010/11 defence business added £35bn of economic value to the UK as ‘high-tech’ manufacturers, supported by supply chain industries, exported 22% of output making the defence industrial complex 10th in a league table of 27 major UK exporting areas. However, viewed from the perspective of the past decade of limited funding for defence – as opposed to some very kind years for budgets like education and health – the position of UK defence manufacturing could have been much healthier.
  1. Indeed, the Chairman of ADS made the following comments at the end of his response to a 2010 speech by the then S of S for Defence. He said: “Although defence should contribute to solving the current financial difficulties, Dr Fox would be justified in looking around the Cabinet table to challenge other departments to match the contribution to budget savings that defence has already made over the last two decades. Defence spending is half the percentage of Government spending and of GDP that it was twenty years ago. Other departments, where budgets have grown substantially over the same period, should be challenged in the same manner before more is asked of defence given that the demands on our Armed Forces exceed what was originally planned within the current budget.”

MAIN DISCUSSION

  1. The first priority of the UK Government is pursue British National Interests (BNI). This should be articulated through a UK Grand Strategy and its absence makes the formulation of national policy incoherent, difficult to justify and virtually impossible to prioritise resources and investment. Ultimately the security and safety of the UK rests upon the top national vital interest of political engagement with other nations and a willingness to underpin political status, the only legitimate coinage in international relations, with the ultimate use of armed force to police the international stage to enforce agreed political agreements. It is accepted that the size, structure and composition of these forces will always be constrained but this is most certainly underpinned by economic and technological wherewithal within an overarching UK Grand Strategy. Indeed, a dynamic economy and technological advancement are part of the triad of vital BNI and the essential symbiotic role that British manufacturing plays in defending British strategic interests by ensuring international security through well equipped armed forces must be acknowledged too. Underpinning this is the production of UK patented Defence inventions, platforms and systems which are the foundation of the strength & reputation of UK Defence industry. A reputation, hard won over the years, which is in jeopardy through incoherent Grand Strategy and lip service to an Industrial/Defence strategy all leading to stagnation in essential national high-tech manufacturing and export base.
  1. In a speech to the Royal United Services Institute (RUSI) on 9 December 2011, Philip Hammond, the then Secretary of State for Defence (S of S) said ”… that is why it is my firm belief that when the Government asks our Armed Forces to put themselves in danger in pursuit of our national security, it is our duty to make sure they have the proper support and the best tools we can give them to do the job…we now have a clear programme to deliver on this pledge. Our future Defence will be secured by the partnerships we make and the platforms we invest in”.
  1. In other contemporary statements the S of S and Chief of the Defence Staff (CDS) agree that sound government finances are a national strategic priority. The question is, how, in financially straightened times, to pay for the personnel and equipment identified by the S of S and as priorities in the Strategic Security and Defence Review (SDSR) and National Security Strategy (NSS)? The answer, often too hastily expressed by government sources, is “ we would like to bolster defence but just can’t in the current financial climate”. So it would be helpful if the Government were to examine all options most especially those that offer strategic benefit to the country as part of the implementation of Grand Strategy.
  1.  One such strategic partnership suggested by ‘Oxford Economics’ postulates that an industrial/defence strategy that strengthens defence and commerce whilst at the same time providing impetus to assist the economy to recover should be considered by HMG. Increased spending on defence budget projects stimulates other commercial activities and visa versa. In fact when ‘Oxford Economics’ collated the available data in respect of all UK’s major commercial and industrial areas they concluded that defence ranked 3rd out of 27 in the UK behind publishing and machine tool manufacture. This is what ‘Oxford Economics’ said: “The outcome…is that the strongest economic case (excluding capacity considerations) for increasing Government investment in order to stimulate the economy can be made for the publishing, machine tools and defence sectors, as these sectors have the three lowest average rankings. However, once capacity is taken into account, the case for supporting the defence sector is strengthened, as it has greater spare capacity than the other sectors.
  1. These references to ‘Economic Stimulus’ and ‘Capacity’ are surely the crux of the issue as an industrial led economic recovery must, in part, provide short term returns for Government investment. In the case of the UK, Confederation of British Industry and EUROSTAT surveys on industrial trends confirm that the defence industries are running below capacity, the irregular nature of demand in the defence sector accustoming it to increasing production rapidly in order to meet client procurement targets. This assessment was confirmed in the ‘Oxford Economics’ study which indicates that of the eleven sectors for which capacity data were available, the defence sector ranked 3rd in the UK for spare capacity to allow for rapid expansion. Therefore, for UK, extra investment driven by the potential for rapid expansion would be the key to producing short term but sustainable growth in the economy, not least by increasing ‘skilled and semi-skilled’ employment opportunities for directly and indirectly employed labour. ‘Oxford Economics’ calculated that for every job directly created in the defence sector 1.6 jobs are created elsewhere and that for every £1 spent £2.7 accrue throughout the economy. This latter multiplier was reassessed in the April 2015 KCL study at 2.3 but this still means that £230 accrue for every £100 spent. All of which can fuel a virtuous economic circle as multipliers kick-in through reduced welfare payments and increased tax revenues from incomes, corporate taxation and boosted exports.
  1. It is recognised that HMG must target and prioritise its limited financial resources in such a way that the burden of borrowing is kept within strictly defined fiscal limits. Therefore, spending to create growth in the economy – harvesting the proceeds of increased GDP – must be targeted at those industries identified by ‘Oxford Economics’ with the best potential to realise short and medium term returns on investment. To be realistic, if borrowing is to be avoided, this entails the Treasury revisiting its collective spending priorities with a view to rebalancing spending between the less productive ‘cash consuming’ areas of state in favour of those areas of state spending that support the ‘cash generating’ sectors of the economy. The top 10 of these industries, according to an ‘Oxford Economics’ report from 2009 are, in order of size by total turnover: Motor Vehicles employing 272000 workers – Construction employing 2,356000 workers – Pharmaceuticals employing 129000 workers – Telecommunication employing 270000 workers – Banking and Finance employing 559000 workers – Defence directly employing 160000 workers (another 145000 in related defence supply chain activity) this figure now having been revised up in April 2015 by KCL to 371,000 – Manufacture of steel employing 106000 workers – Manufacture of electrical components employing 50000 workers – Manufacture of machine tools employing 30000 workers – Manufacture of apparel employing 53000 workers.
  1. The ‘Oxford Economics’ study does not specify what the negative effects on the economy and defence industries might be if the decision of the Treasury were to reduce MOD’s ability to invest in and sustain its current level of contract activity. However, we do not need to speculate too much. Evidence is there that a loss of confidence has led to redundancies, a reduction in R&D expenditure, erosion of reputation and the inexorable decline of areas of manufacturing and innovation as demonstrated by the case of BAE Systems. The decision to scrap Harrier and move Hawk production overseas has caused a recessionary chain reaction around Hull in an area acknowledged to be socially depressed; the BAES site at Woodford is derelict following the cancellation of the Nimrod MRA4 project and shipbuilding has all but ceased in yards outside of Scotland. In the process national and local economic multipliers are lost.  
  2. The long term effect of underinvestment being to emasculate one of the UK’s most successful wealth and employment generating areas of expertise. As the economy recovers more slowly than need be – as it is – the British Armed Forces may have to look evermore to overseas companies for the hardware it requires with the knock-on consequences to balance of payments and employment prospects at home. Once the capacity, infrastructure and world leading expertise to build ships, aircraft and sophisticated weapons platforms is lost it will be difficult to regain in a meaningful time frame and – probably financially impossible.

CONCLUSION

  1. The UK is still experiencing a financial debt crisis but is emerging from recession – perhaps more slowly than would have been the case if a cohesive Industrial/Defence strategy had driven Treasury policy. The Coalition Government rightly set its first priority to reduce the debt burden but at the same time indicated that it wished private industry and commerce to lead the way to recovery through increased export growth. Nevertheless, the Treasury has taken the view that major cuts in public expenditure are still necessary as current rates of growth are insufficient in themselves to alleviate the debt burden within a reasonable time-frame.
  1. To this end all departments of state (excepting overseas aid and the NHS) have been tasked to save up to 40% of their departmental budgets. This was a huge domestic challenge and one that had the potential to reduce growth in the economy unless counterbalanced by increased commercial investment. Within this stricture the MOD was tasked to find 8% savings in financial year (FY) 2011/12 and the jury is out beyond FY2015/16 as to what further savings will be asked for. If the department had not been starved of funds for over a decade or more this might be portrayed by some as the MOD getting off lightly, however, the results of the SDSR, and NSS, which were not strategy led, have compounded the pressures on both the British armed forces and industry – to a great extent ‘situating the appreciation’ and chancing the UK’s prosperity and security for incoherent and dubious short term fiscal reasoning.
  1. That the MOD must put its own house in order and operate in the most cost effective way possible is not disputed, nor is the need for the UK Armed Forces to be restructured to meet the requirements of Future Force 2020 as identified in the SDSR. Only the lack of a strategic rationale for financing our armed forces and the essential industries that serve them is in doubt. The absence of a coherent UK Grand Strategy and unclear lines of Government responsibility for formulating such a strategy needing urgent attention.
  1. Nevertheless, in one area of UK Strategy there is a way forward being proposed by those most closely associated with the economics of the defence industrial complex. They cogently argue that an articulated Industrial/Defence Strategy – part of a wider UK Grand Strategy – should form part of the mix that ensures the future security of the United Kingdom by promoting prosperity through a vibrant defence industrial complex that is able to directly support the wider UK economic recovery. This thesis postulates that if the British economy is to recover more rapidly than currently forecast and the Armed Forces are to be structured and equipped to meet the requirements of Future force 2020 then Government investment in the various indigenous defence support industries is not only vital to help kick-start economic recovery but to ensure British strategic security; British National Interests (BNI) being underwritten to fulfil the government’s primary responsibility.
  1. For HM Government, who have responsibility to ensure sound public finances, there is a clear imperative – The first priority of the UK Government is pursue British National Interests (BNI) in defence of the Realm. In this latter respect it is their duty to provide the country, not just with sound finances, as the S of S for Defence and more recently CDS have alluded, but also to strategically target and prioritise those public finances. Indeed, 2 years ago the Rt Hon Justine Greening, then the Transport Secretary, despite continuing opposition and some doubt, announced her decision to move ahead with the HS2 rail project quoting the ‘Strategic importance’ of the decision and the economic multipliers that would accrue as part of her business case. As we have detailed above there is a strong evidentially based case for HMG to invest in the UK’s commercial (defence) sector too, thereby, not only ensuring that our armed forces are appropriately equipped and capable of deterring aggressors but providing a solid economic base from which national prosperity (another strategic interest) can grow.
  1. HMG must articulate UK Grand Strategy that guides Industrial/Defence strategy to secure the security of the UK through the twin pillars of a strong economy and credible defences – these facilitating the top national vital interest of political and diplomatic engagement with other nations who are more willing to listen or bend to our will. In effect, the government acting wisely by aiding economic recovery to ensure peace and future prosperity domestically and projecting international influence globally. We would argue that such a Strategy does not exist; the government and, in particular, HM Treasury must recognise this and change course. Few would argue with the maxim that deterrence though credible international influence always costs far less in lives and treasure than war.

DefenceSynergia

Updated April 2015