Merlin Weekly Macro: Sunak talks tough on defence

The dog days of this Westminster Parliament cannot shake off the vicissitudes of its three prime ministers (let us not forget, not merely three prime ministers in one Parliament as if that were not amazing enough, but in 2022 three in seven weeks). A notably bruising night at the hustings for the Tories in the local elections and the Blackpool by-election; Boris forgetting his ID card and being turned away at the polling station. Leading her disruptive dissident Popular Conservatism ‘PopCon’ faction, Liz Truss remains addicted to the limelight: she conflates a bold-as-brass “everybody’s fault but mine” self-exculpating book-selling tour with some fantastical notion that her true destiny is as saviour of the West. If she is the solution, the West has a bigger problem than it imagined.

Then we have the curious juxtapositions of the Boris and Rishi show still playing out. One relates to climate change policy: this time by the outgoing head of the Committee on Climate Change, Sunak is still being blamed for the UK dragging its feet on the abolition of new combustion engine vehicle sales by moving the date back to 2035 from 2030; the reality is that four years ago Johnson had no business arbitrarily and without consultation slashing 10 years off the target date from 2040 with no hope of being able to deliver his ambition; in any case, 2035 realigns the UK with the EU, for both of us our biggest mutual vehicle export markets (the SNP abandoning its own 2030 renewable energy goal has just contributed to claiming the political scalp of the hapless Scottish First Minister; climate change policy is not uniquely a Westminster problem).

But the real focus of this article is defence policy.

Sunak wrests defence spending from the Treasury; things must be serious

Last week Sunak announced that UK defence spending will rise to 2.5% of GDP by the end of the decade. Despite his “I can announce today” introduction giving the impression this was something entirely new, it was nothing of the sort; his was shameless political appropriation. Boris announced the initiative almost exactly two years ago in June 2022. More is the pity there was no grip and urgency behind it then. Sunak knows it full well: he was Johnson’s Chancellor at the time. In the intervening period we have had three more chancellors: two (Zahawi and Kwarteng) were such short-lived tenants of No 11 they had barely unpacked their suitcases let alone their furniture before they were out on the street again and had no impact on the defence debate; the incumbent, Jeremy Hunt, has some vague notion that defence might be important (in that it was ring-fenced against cuts before the March 2024 budget) but he clearly did not and does not regard it as an urgent spending priority: as recently as March, he watered down the commitment from “2.5% by the end of the decade” to “2.5% when economic conditions allow”. Hunt has had no Damascene conversion.

Sunak is known throughout government as a prime minister who “does not do defence or foreign affairs”. You have a fair inkling therefore that the situation must now be serious if he himself has taken personal responsibility for the subject and, less than two months since the budget, has overridden his chancellor and wrested defence spending from the Treasury. It is also a political trap for Labour, challenging the old adage that “there are no votes in defence”. So far, and given plenty of opportunities, Labour has failed to take the bait.  Despite the obvious threat from the plethora of countries who would do us harm, Labour has refused to endorse the Tories’ new-found but late enthusiasm for defence spending; ahead of Labour’s planned defence review in 2025, Keir Starmer remains wedded to the Treasury’s recent stance of 2.5% of GDP but only “when economic conditions allow”; Labour sees the future of UK defence through the lens of pooling resources in closer cooperation with the EU.

Thus however welcome the news (“the commitment”, Sunak tells us, “begins today”), the problem for defence contractors is that there is considerable political risk in taking the announcement of incremental spending at face value. Even if contracts for new ships, aircraft, tanks, armoured fighting vehicles, guns, missiles, shells, bombs and bullets were placed today, with the clock ticking down inexorably towards the general election in the autumn, manufacturers would need cast iron assurances from Labour that in the event it were to win power at Westminster, those contracts would be honoured in full. No right-minded contractor would blindly take the risk of speculatively investing in new production capacity unless there was guaranteed work; the cost of having surplus or idle shipyard, factory and production line capacity is prohibitive, particularly in a highly sensitive industry in which finding alternative markets is exceedingly difficult and competitive, and is politically loaded and very heavily scrutinised as to whether the customers are the “right” people with whom to be doing business.

From 2% to 2.5% of what?

As to the sums involved in Sunak’s ‘commitment’ measured in pound notes, it is less a case of being able to pin down a hard number than it is nailing so much jelly to a wall. First, the commitment is based on a percentage of GDP; whether the Treasury or the Office for Budget Responsibility, or the Institute for Fiscal Studies, everybody knows the confidence in accurately forecasting GDP beyond a year, let alone out to six, is abysmally low; it is little more than an informed guess. In a flurry of confusing numbers many of which do not appear to add up, Sunak indicated that defence would receive a nominal indicative extra £75bn over six years but even that is based on questionable assumptions about the baseline, GDP growth, timing of expenditure and what is already included. For example, does it include the £10bn recently announced to increase the UK production of artillery shells to replace those already shot away in Ukraine. £10bn would already account for 13% of the total. It remains unclear as to how the expenditure will be funded, whether through cuts elsewhere in public services, or taking on more borrowings.

And consider what was not mentioned in Sunak’s announcement: no commitment to reverse the immediate 10,000 reduction in the nominal establishment of the professional Army to 72,000; in terms of kit, no commitment to reverse similar reductions in the number of frigates and destroyers, or the number of fast jets available to the Air Force, or the number of tanks for the Army. Those latest cuts to our conventional forces were announced after Boris committed £16bn to our defence against cyber warfare; that particular pledge had to be largely self-funded from the existing defence budget. He failed to understand that cyber is not a replacement threat, it is an additional threat. Ben Wallace, his Defence Secretary at the time was complicit: his reaction was “’tis what it is”. Sunak appears similarly blinkered.

Expenditure: bang for buck

But as we have pointed out ad nauseam in these columns, outputs from public expenditure are every bit as important as the inputs. It is not just about how much money you spend as it is how efficiently and effectively the money is spent. In the case of defence, almost literally how much bang do you get for your buck. Here the challenge is daunting.

Today, there are many parallels with where the UK found itself in 1936. There are also significant differences. By the mid-1930s after a decade and a half of strategic defence cuts arising from the League of Nations arms limitation treaties after WW1, the Army and the RAF were at their then smallest peace-time establishment levels; their equipment was so obsolete as to be almost entirely useless (in 1936, RAF Fighter Command responsible for the Air Defence of Great Britian was still entirely equipped with bi-planes; despite our inventing the tank, armoured forces were barely nascent and with inadequate vehicles; several cavalry regiments were still mounted on horses rather than in tanks); only the Royal Navy retained its world-leading position but it too was on a steady path to relative obsolescence and competitive disadvantage as other navies swiftly caught up building newer ships with more modern technology.

Contrast with 2024, today we are a small island member of a big, 32-country mutual protection and defence alliance, NATO. In 1936 NATO did not exist; Great Britian was the global super-power of its day, supported by all the economic, human, natural and military resources of its empire and dominions. Today’s national defence conundrum is not a question so much of poor or out-dated kit (though a number of our fighting ‘platforms’ are a generation behind and many units whether ships, aircraft or vehicles are worn out): most of what we have is of decent quality, there is just far too little of it. We have large gaps in our defensive capability: unlike 90 years ago when the UK was still one of the world’s leading industrialised powers with significant capacity for steel production, shipbuilding and designing and producing military hardware which could be relatively quickly upscaled, today that capacity simply does not exist. As Ben Wallace said in an interview a few days ago, even if he had been allocated “another £10bn or £15bn to his budget, it would have been very difficult to spend it and impossible to spend it quickly”.

The MoD: a sorry tale of persistent underperformance

With its reputation for wastage, project overruns and inability to manage budgets, the MoD has a long and unenviable record of being one of the worst performing spending departments in government going back decades. If the taxpayer is going to get maximum operational efficiency and the UK population the best protection for the resources spent, root and branch reform of the entire department and its culture is needed. This is not limited to:

• Strategic planning: there have been four ‘Strategic’ defence reviews in the life of this government since 2010, six since the Millennium. Most have been driven by political or economic expediency rather than addressing the strategic threat. The average duration of each under the Tories is 3.5 years and including Labour’s going back to 2000, 4 years. If it wins the election, Labour will hold another in 2025. Each with a vested and determining interest from their own points of view, in 24 years we have had: seven prime ministers; nine chancellors; 12 defence secretaries including Labour’s Des Browne who did it as a job share combing it with Secretary of State for Scotland; and on the usual 3-year-last-job-to-retirement travelator, nine Chiefs of the Defence Staff (and the same for each of the armed services). Less an environment for clear strategic planning, the reality is a breeding ground for muddling through.
• Procurement: As an example of how such an environment leads to hopelessly defective and inefficient decision-making in procurement, look no further than the excoriating 2021 Defence Select Committee review into the structure of UK armoured forces. It analysed in painful detail the tortured, nearly-three decade long process to replace the infantry’s Warrior Armoured Fighting Vehicle with Boxer (essentially an armoured bus), and the replacement of Scorpion and Scimitar in the light reconnaissance role with the Ajax light tank (after £5bn of sunk costs, still deemed unfit for purpose).
• Think laterally about indirect resources: aircraft carriers again. Two very big, very expensive shiny ships (and a handful of very expensive aeroplanes) need much support to keep them operational and safe.
• Internal organisation: “bring dynamite and a crane, blow it up start all over again”. Nearly 63,000 civil servants work in the MoD, four thousand more than are currently employed by the Royal Air Force and the Royal Navy combined. It employs an Alice in Wonderland accounting system which breeds accounting black holes. The defence property and infrastructure establishment is managed by the DIO, the Defence Infrastructure Organisation which has a monopoly on how the estate is managed; its internal transfer pricing system almost invariably inflates the cost of building and maintenance to significant percentages if not multiples of the true commercial cost of the work. The DIO’s propensity for profligacy and inefficiency is legendary throughout the services. The MoD’s internal management needs fundamental reform.
• Manning: all three armed services have recruitment and retention problems for their full-time regular establishments. The Army reserves have an acute shortage too. In the Navy, manning is so poor that ships are being mothballed for lack of crews. There are many complex factors at work (pay; housing; fatigue; lack of career prospects; not enough fighting to attract soldiers; too few opportunities to go to sea with the Navy; a divisive and badly botched recruitment programme for RAF pilots; the long and tortured application process in all three services in which the default recruit setting is “no” such that in the Army, amazingly, only 10% of applicants make it through; the perception the forces are involved in a government social engineering exercise etc).

“War footing”: chicken and the egg and other things to fry

Leaving aside how and when the additional expenditure should be deployed (i.e. does industrial capacity investment and capital equipment purchasing come before manpower recruitment or the other way around?), there are other urgent pressures being brought to bear in Sunak’s call to put defence on a “war footing”. Two examples: first, we have seen only too clearly the destructive potential of missile strikes in Ukraine, Israel and the Gulf, and the expensive resources required to give comprehensive protection (Israel has its Iron Dome; Ukraine is deploying US Patriot anti-missile missile systems etc). The UK has no such comprehensive anti-missile shield but there are calls for our own equivalent of the Iron Dome to be installed. The expense will be significant. A school of thought is that Russian-fired missiles aimed at the UK are most likely to be shot down by NATO allies before they reach these shores. Question: in the event of a full-scale continental war, is the direct defence of the UK homeland and its citizens something which ought to be delegated to neighbours who are quite likely to be preoccupied with their own similar problems at the same time? Discuss.

Second, UK military medical services: having been largely dismantled by the Thatcher government in Options for Change and the Peace Dividend, the UK has been fortunate that the casualty rates in post-Cold War conflicts such as Kosovo, the Gulf Wars and Afghanistan were very low by historic standards. Supported by a relatively small cadre of dedicated regular and reservist medics and nurses, injured troops benefited from significant high intensity care. However, in a major conflict with mass battlefield casualties measured not only in scores but probably hundreds at a time, experts who wargame such events say the current military medical care system would quickly collapse for lack of resources with lives being lost which could potentially have been saved. Question: should defence specific medical services be re-instituted and to what degree and cost? Discuss.

A big hill to climb

An extra £75bn over six years is a considerable sum. However, the costs of the kit are enormous too. The Trident nuclear deterrent is due to be replaced in the mid-2030s: our share of the system development costs and the cost of building four new Dreadnought Class SSBNs (in the lingo, Ship Submersible Ballistic Nuclear) to replace the current Vanguard boats are currently estimated at £41bn, plus £3bn annual maintenance costs. The 6ᵗʰ generation fighter jet (Global Combat Air Programme, a British-led JV with Japan and Italy, prosaically known in the UK as “Tempest II”) will have total development costs of $25bn of which $10bn will be put up by the UK; that cost is before a single aircraft is purchased). It is not difficult to see how £75bn can be made to disappear very quickly, even in the unlikely event these projects run to time and budget.

Rishi Sunak paints this initiative as placing the UK on a war footing. Putting the 2.5% of GDP per year and/or an extra £75bn over six years in context, it is worth comparing the essential military capacity of today’s armed forces with when we were genuinely last on a war footing in 1990 at the end of the Cold War, and then spending over 4% of GDP p.a. on defence. In 1990 a significant proportion of the Army (and RAF) Order of Battle was committed to Germany with BAOR, British Army on the Rhine when the UK could field a fully equipped Corps comprising three Armoured Divisions plus support arms (artillery, engineers, signals etc); today 3rd Division is our sole designated warfighting division which it is freely acknowledged would struggle to match the combat strength of its 1990 equivalent:

a. The three Invincible Class Harrier-equipped Light Carriers of 1990 were barely a third of the displacement of the two current Queen Elizabeth Class ships, though without US reinforcements the latter are considerably short of their full complement of 24 F-35’s apiece due to cost

b. To be reduced again to 15 by Christmas 2024 with two ageing Type 23 frigates, HMS Argyll and Westminster, being decommissioned due to shortage of crews (so too the amphibious landing platforms, HMS Bulwark and Albion for the same reason). The first replacement for the Type 23s, HMS Glasgow, the new Type 26 frigate, will not be commissioned before 2028.

c. This figure includes the 30 Tranche 1 Typhoons to be retired from service in 2025; there are no planned replacements.

Note that for tanks (the front-line fleet is due to shrink next year too), ships and aircraft, these are the current nominal establishments, not what is operationally available; frequently a third is unserviceable or out for maintenance at any one time.

To get back to 1990 strength would require considerably more than 2.5% of GDP per annum.

Dynamic threats: hope for the best, prepare for the worst

When making these comparisons it is undoubtedly true that thanks to Ukraine, Russia’s armed forces have been depleted, particularly its tank fleet. However, that cannot be assumed to remain the case. The Russian economy is formally on a war footing and this year will spend close to 30% of GDP on defence. And in contrast with 1990 when the Soviets were the principal enemy, today China, Iran and North Korea present real threats to world security.

But even if we and other NATO members are beginning to take the threat seriously, and the possibility of a Trump administration in the White House with all its potential flakiness towards America’s NATO obligations (a subject to which Trump returned this week), arguably the period of greatest military risk is the next five years and a Trump presidency. It will take the western European members of NATO (the UK, Germany, France etc) years to build up their deterrent resources. Meanwhile, were Putin to succeed in Ukraine thanks to a deal with Trump, even taking time to replenish his offensive capability, he might then feel emboldened to act quickly in the Baltic States, or Finland, or Moldova, or anywhere along his western border with NATO. Simultaneously, if the intelligence interpretation of China’s recent amassing of gold reserves ahead of a potential invasion of Taiwan is correct, NATO and its southern hemisphere allies would be hard pressed confronting such threats on both sides of the world. Iran and North Korea could also feel it was a party they could not miss and would probably be tempted to join in too.

Hopefully this will never happen. But three years ago, few were predicting either a major war in eastern Europe or Israel and Iran in direct conflict; today we have both. Wishing it not to happen does not mean it will not happen. History says that is not how it works: Czechoslovakia and Poland in the 1930s and Ukraine today tell you everything you need to know about what happens when the bullies are allowed to get away with it.

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