How far and how fast to increase defence spending is one of the most contentious questions to be resolved ahead of Wednesday’s spending review
For a long time, Britain has pared back the warfare state to fund an ever-growing welfare state. Theoretically, there’s nothing stopping it from putting that into reverse. Practically and politically, making spending cuts on that scale looks harder. How far and how fast to increase defence spending is one of the most contentious questions to be resolved ahead of Wednesday’s spending review.
Unlike most other public services, the UK already has a sense of how defence spending is set to change after this year: the prime minister has committed to raise spending to 2.5% of national income by 2027.
The government could argue that the matter is settled and leave this plan unchanged in the spending review. After all, this increase would be significant, and historically unusual. Defence spending last rose as a share of national income for a sustained period in the 1980s – more than 40 years ago. But there is pressure on the government to go further. It has stated a broad ambition to increase defence spending further, to 3% of national income, in the next parliament.
The Strategic Defence Review, published on Monday, was predicated on this ambition being realised. This would imply between £17bn and £20bn of additional spending. And there was a telling caveat in the defence review’s introduction: “As we live in such turbulent times, it may be necessary to go faster.”
At this month’s Nato summit, Mark Rutte is widely expected to propose increasing defence spending to 3.5% of national income by the mid-2030s. Starmer seems likely to agree to this, particularly given the Strategic Defence Review’s emphasis on a “Nato-first” defence strategy.
Defence spending was last at around 3% of national income in the early 1990s, and 3.5% in the late 1980s. It would certainly be possible to get back to that level. But higher defence spending would need to be paid for. In the end, it would transform the state, whether by increasing its size or changing its shape. Welfare becomes a target.
Higher defence spending would transform the state, whether by increasing its size or changing its shape
What about borrowing? The existing fiscal rules allow the government to borrow to invest – within limits. So, if any extra defence spending was classified as capital investment (for example, spending on ships and planes, rather than soldiers’ salaries), the government might be able to borrow for it without breaching the chancellor’s “non-negotiable” rules.
Conveniently, of the additional defence funding committed at the Spring Statement (to get to 2.5% of GDP), more than 90% was capital spending. The Strategic Defence Review heavily focuses on investment, too, making clear that an increase in the size of the army – classified as day-to-day spending – would take place only “when funding allows”. But the scope for additional borrowing is limited – by a secondary fiscal rule, and ultimately by financial markets. Taxes might have to be part of the conversation.
The government has consistently ruled out raising “taxes on working people”, which it defines as the three biggest revenue-raisers (income tax, national insurance, and VAT). But if international pressures continue to mount, and the Nato spending target jumps to 3.5% of GDP, the Autumn Budget might be the moment that pledge comes under most pressure. The Spending Review won’t be the final word on the future of UK defence spending – far from it.
Indeed, no matter what’s in the Spending Review, there’s every chance that global events will end up forcing the government back to the drawing board. It will, however, be the first test of the seriousness of the ambitions set out in the Strategic Defence Review, and a moment where hard-hitting rhetoric comes up against tough fiscal reality.
Bee Boileau is a Research Economist at the Institute for Fiscal Studies.
Photograph by Sgt Brian Gamble/Defence Images/MOD
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