WESTMINSTER REFLECTIONS

Decisions to increase defence spending are causing splits and feuds within all the political parties.  The idea that overseas development aid would be sacrificed to pay for defence would have been anathema to the pre-election Labour party, and many MPs are finding it very hard to stomach, including some Tories.  But this is just the beginning of the debate. 

So far, Prime Minister Sir Keir Starmer has announced only that his government will achieve 2.5 per cent of GDP on defence by 2027, and then 3.0 per cent by the 2034 (the end of the next Parliament).  This served well in his discussions in Washington with President Trump, and Sir Keir deserves every credit for the positive tone of those meetings.  

Defence chiefs, however, have already warned that the uplift to 2.5 per cent will “barely touch the sides.”  Even 3 per cent is far from the transformation that UK defence requires to restore the UK armed force’s ability for sustained warfighting. 

Kemi Badenoch quickly upped the pressure, by pointing out that even 3.0 per cent by 2034 was a trajectory that lacks the necessary urgency.  She is pressing for 3.0 per cent by 2030.

In both these pitches, there is still something unreal about an argument that turns on these rather artificial percentages of GDP.  

The measure of the Russian threat is now off the scale for European members of Nato, without the cast iron commitment of the US to Article 5, and their preparedness to use short and medium range tactical nuclear forces in any response to a Russian attack on a Nato nation.  The urgency is for European nations to re-engage Trump in Nato.  Trying to replicate US military capabilities in Europe will be far beyond 3.0 per cent of GDP across the board, and take far too long.  

Our mantra should be that we must spend whatever it takes to achieve meaningful deterrence against Russia, and to provide protection for our cities and critical national infrastructure from Russian attack.  This will take years to build up, but the sooner and more urgently we start, the quicker we can achieve this.  In the meantime, Europe might have to pay the US to stay in Europe – more demand for cash.

The cuts in UK overseas development aid are only just a down payment.  Where will the rest of the money come from?

Some advocate more taxes, but UK taxation is already so high, and placing such a growth-sapping burden on the UK economy, that this is not a realistic option. 

The EU is talking about borrowing £100 billion outside the Maastricht debt criteria, but borrowing more carries other risks, as discovered by the Liz Truss budget.  The bond markets are already edgy, and the Russia-China axis could choose to pick on this vulnerability.  The UK cannot afford to borrow more to fund defence.

So it will have to be public spending that takes the hit.  The UK is a wealthy country, and government is spending is at record levels.  It is time to make painful decisions on public spending to free up cash for defence.  But where is there scope for cuts?  This is what will bring grief to the parties of big government, particularly Labour.  

Conservatives advocate a crackdown on benefits paid to people of working age on incapacity and disability benefits.  The increase in working-age spending has been mostly driven by an increasing caseload: from 2.2 million in 2019–20 to 3.2 million in 2023–24 for disability benefits (39 per cent growth) and from 2.5 million in 2019–20 to 3.2 million in 2023–24 for incapacity benefits (28 per cent growth).  Conservatives believe savings could build up to some £40 billion per year, but this kind of crackdown will be bitterly opposed by many Labour MPs.

The other obvious target is the cost of Net Zero, but many in Labour and the Conservatives regard net zero as sacrosanct.  Reports suggest that the Chancellor of the Exchequer and others in cabinet are objecting to the exorbitant costs being inflicted on households, businesses and the taxpayer, so Labour is again split.  After 20 years of pursuing renewables instead of gas, UK electricity costs 33.3p per kwh, by far the highest in Europe, compared to 13p in the US, making energy intensive industries wholly uncompetitive.  It is estimated that attempting to achieve ‘clean power’ by 2030 will add £925 to the average electricity bill to fund the necessary infrastructure and system balancing costs.  Setting targets for cheap energy instead of for Net Zero would bring prices down much faster.  

Promoting North Sea oil and gas production would boost the economy and energy exports, generating tax revenues for defence spending.  The government should abandon £22 billion for carbon capture and storage.  The technology at scale is unproven.

The third area for savings rests between the Treasury and the Bank of England, which is realising huge losses by selling QE bonds into the market.  The Treasury has volunteered to fund these losses which fall on public purse.  This process should be suspended, to make it easier to refinance maturing debt, and to free up the money for defence.  Perhaps we would find this easier than welfare cuts or net zero, but the Treasury and the Bank will hate it.