“Buying British” could be smart politics but poor economics

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On many aspects of economic policy, we should expect an Andy Burnham-led government to provide continuity. The same fiscal rules. The same manifesto promises on tax. The same belief in the importance of an active state intervening in the market, and in the need to reindustrialise. A bit more ambition on the devolution of tax and spending powers, perhaps, but pushing in the same direction. 

And, perhaps under-discussed, the same promotion of “Buying British”. Burnham argued last week that “for too long, UK public procurement policy has been based on chasing cut-price deals around the world rather than helping our own British-based suppliers become more stable and competitive.” 

In this, he sounded very similar to Rachel Reeves, who has spoken about how the government should no longer be “agnostic about where things are made and who makes them”, and who has admonished her Cabinet colleagues for failing to “Buy British” in critical sectors. The recently published Defence Investment Plan promises a package of “backing British” measures and a “buy British by default” approach – defence being an area where Burnham said he wants to “make sure British-based companies are in a better position to win contracts”. 

This line of thinking is understandable. To justify higher defence spending to disgruntled voters, the government wants to point to economic benefits – jobs most of all. On top of that, there are sovereignty arguments, national security arguments, and appeals to national pride. 

But this sort of thinking, replicated across Europe, will make rearming against an intransigent Russia more expensive and less effective. 

Home bias in procurement – with every country wanting to back its own national champions – makes for a more fragmented defence industry across the continent. The British government buys British, the Italian government buys Italian, the German government buys German, and so on. The result is that whereas the US operates with a single type of battle tank, EU countries operate 12 types. And while the US provided two types of infantry fighting vehicles to Ukraine, Europe provided seven. The US provided two types of self-propelled howitzer; Europe provided nine. 

This fragmentation, in turn, makes things more costly. National players which operate mainly in domestic markets are shielded from the disciplining effects of foreign competition, and struggle to achieve the economies of scale that come from producing in larger volumes. Fragmentation also makes it harder to secure common technology standards. 

Bruegel, a Brussels-based think tank, estimates that unit costs in defence could be cut in half, if European countries (including the UK) were able to better integrate their defence markets and do more joint procurement without home bias. Economic nationalism – whether from the UK, France (whose efforts are often couched in terms of préférence européenne), or others – makes such coordination all but impossible. 

In other words, whatever the political merits of a promise to “Buy British”, I think the economics is sketchy. 

On a cheerier note, there is growing evidence to suggest that higher defence spending could bring economic benefits. A recent paper by economists Juan-Antolin Diaz and Paolo Surico found that military spending boosts innovation, private investment, productivity and GDP – at least in the long term. Crucially, it does this by shifting public spending towards R&D. 

Another paper, this one by Enrico Moretti, Claudia Steinwender and John van Reenen, found that public spending on defence R&D can “crowd in” private sector R&D and, in doing so, produce productivity gains. When defence firms are allowed to suggest ideas, rather than simply produce what they’re told, the innovation gains are even bigger, according to another study by John van Reenen and colleagues. 

History is littered with examples of military R&D spilling over into the wider economy. The classic example is GPS. My favourite is the three-point seat belt, originally derived from harnesses designed for military jet pilots. The hope this time around will be that investments in things like drone technologies and artificial intelligence will similarly turn out to have valuable civilian applications. The government’s Defence Investment Plan promises £3bn of investment per year in ‘novel technologies’ – not enormous in the grand scheme of things, but not nothing. 

Of course, that’s money that could, in an ideal world, be used on something else – cutting taxes, investing in transport, or early years interventions. But we’re not in an ideal world. Given that defence spending almost certainly needs to go up, the focus should be on making it as efficient and growth-friendly as possible. That means going big on R&D. It doesn’t mean going big on “buying British”.

Photograph by Daniel Leal/AFP via Getty Images