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Defence spending is casting a shadow over Downing Street. Military officers are in a state of despair. The choices facing Sir Keir Starmer are stark.
The political calculus for the Chancellor, Rachel Reeves, has become more complicated than ever as the Iran war puts public finances in danger.
City AM's Politics and Economics Reporter, Mauricio Alencar, breaks down the scale of the challenge with 14 charts.
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0:00
Defense spending is becoming a very
0:02
serious problem for the Prime Minister.
0:04
In fact, it already was. But with the
0:06
war in Iran, Trump's threats against
0:08
NATO, and Russia's continued attacks on
0:11
Ukraine, the economic dilemma facing Sir
0:13
Keir Starmer's government is now stark.
0:16
Let me show you why it's such a massive
0:18
challenge through a number of charts.
0:20
You can see here why political
0:22
commentators and military officials are
0:24
trembling at hearing about Trump's
0:26
threats to leave NATO. The US spends
0:29
around three and a half times on defense
0:31
as the UK, Germany, and France combined.
0:34
It alone accounts for about 60% of total
0:37
expenditure across the 32-member
0:40
alliance. That financial might is
0:42
clearly of huge importance when experts
0:45
talk about security and things like
0:47
deterrence, or when they talk about
0:49
building enough capabilities to fend off
0:51
cyber attacks, or when they talk about
0:54
protecting shipping passing through the
0:55
Strait of Hormuz, or protecting undersea
0:58
cables that connect Britain to
1:00
continental Europe. NATO economists
1:02
don't use mass expenditure as a
1:04
reference when comparing contribution
1:06
levels by member states. They use
1:09
spending as a share of GDP, and that's
1:11
only fair. It's more of a political tool
1:14
to get every government to play fair
1:16
while reaping the benefits of peace.
1:18
This chart shows how the UK compares to
1:21
other major countries on defense
1:23
spending as a share of the whole
1:24
economy. On this measure, you can see
1:26
how things start to get even more
1:28
embarrassing for Starmer. The UK trails
1:32
the likes of Greece, Denmark, and Turkey
1:35
in defense spending as a share of GDP.
1:37
The British government has generally
1:39
argued that this reading was lower than
1:41
expected this year because GDP estimates
1:43
were revised up. That is generally fair
1:46
enough as well. The government allocates
1:47
defense budget uh in cash terms each
1:50
year. It would not be sensible to
1:52
suddenly keep changing those plans when
1:54
things move up or down.
1:56
But let's actually look at targets of
1:57
where the UK wants to be in the next few
1:59
years versus where their track is
2:02
already going. NATO countries have
2:04
almost all agreed to spend 3.5% of GDP
2:07
on defense by 2035. The UK is currently
2:10
spending around 2.3% and is projected to
2:13
get to around 2.6% from next year up
2:16
until 2029. When you show the linear
2:18
path and spending increases needed each
2:21
year as a share of GDP to get 3.5% you
2:24
can see even around the financial year
2:26
2028 to 2029 that the UK is falling far
2:29
behind the sustainable pace needed.
2:31
Economists who basically independently
2:33
mark the government's homework on these
2:34
kinds of policies have said that there
2:36
is a shortfall of at least 6 billion
2:39
pounds in that year between the smoother
2:41
path and the government's current
2:42
spending projection. Now, if the
2:44
Chancellor, Rachel Reeves, wants to
2:46
throw the kitchen sink at defense and
2:48
get up to 3.5% from today, that would
2:51
make for some really unpalatable and
2:54
economic political choices. Around 40
2:56
billion pounds more would be needed to
2:58
get to 3.5% today in today's money. That
3:01
is equivalent to the standard rate of
3:03
VAT going up to around 24%, income taxes
3:06
across all bands going up by 4p, the
3:10
whole budget for the Ministry of Justice
3:12
and Home Office being cut altogether, or
3:15
disability payments in the last year
3:17
being slashed altogether, or total
3:19
benefits for pensioners being cut by a
3:22
third, the total education budget being
3:25
halved, or spending on health, the NHS
3:28
in particular, being cut by a quarter.
3:30
The other option would be to get the
3:32
government to aim for a cut in debt
3:33
interest payments to lenders in bond
3:36
markets, but that would effectively mean
3:38
the government would need to change its
3:39
whole approach on borrowing, spending,
3:41
and taxes anyway.
3:43
The likely option is obviously a mix of
3:45
multiple options around spending and
3:48
taxes taking place over multiple years.
3:51
But nine years can whiz past, and I
3:53
think politicians and top
3:54
decision-makers doubt that voters would
3:57
even be able to stomach some of these
3:58
pretty radical changes. Perhaps the only
4:01
way to get them onside is to show how
4:03
far behind the UK is to what security
4:06
officials tend to deem to be hostile
4:09
countries. After the Cold War ended in
4:11
the '90s, there was a feeling that
4:12
Russia could be a friendlier country and
4:14
that the world would become more
4:15
peaceful. But Russia never really
4:17
loosened its military ambitions. The UK
4:20
has never spent more as a share of the
4:22
economy than Russia has. In raw spending
4:24
alone, China and Russia are racing ahead
4:27
of the UK despite taking very different
4:29
approaches on defense. For instance,
4:31
China spends less as a share of GDP on
4:33
defense than the UK. But as Chinese
4:36
state-backed actors attacks on British
4:38
businesses have shown, and not
4:40
forgetting multiple stories about
4:42
espionage in Westminster, or the threats
4:44
leveled against Taiwan, which, remember,
4:46
is so critical for the technology that
4:47
we use on a day-to-day basis, you can't
4:50
underestimate China's geopolitical
4:52
ambitions. NATO in this light is
4:54
absolutely essential for securing
4:56
Western interests. With the US involved,
4:59
that axis lines between Russia, Iran,
5:02
and China seems less of a threat. But
5:05
let me show you two more charts that are
5:07
exactly why there is such an issue with
5:09
defense spending in this country.
5:11
Without the US's investment accounted
5:13
for, the distance between NATO and those
5:16
three chosen countries narrows quite
5:19
considerably. These figures don't
5:21
actually even account for the full
5:23
military might of Iran. It all leaves
5:26
Europe and Canada far more exposed, and
5:29
Trump's backing is clearly essential.
5:32
But things are worse than you even
5:35
think. I showed you earlier on how the
5:37
UK was slightly behind Russia and China
5:40
in raw military spending. But now, look
5:42
here. The dark blue bar shows the raw
5:45
expenditure by each country, but the
5:47
light blue bar shows the purchasing
5:49
power parity of each country when
5:52
spending on military is considered. It
5:54
essentially estimates how much value for
5:56
money countries can get on military
5:58
spending. This is from research from
6:00
military think tanks.
6:02
In raw spending, the UK spends around
6:05
half of what Russia does on defense. But
6:07
when this kind of bang for buck measure
6:10
is taken into account, the UK's power is
6:12
a fifth of Russia's. Think about it like
6:15
this. While a tank might cost Russia
6:17
something like $5 million to build, it
6:19
would cost the UK something like $25
6:22
million to build. You might have seen
6:24
reports of military officials telling
6:26
Starmer that there is a massive
6:27
shortfall in funding over the next few
6:30
years. And that's because costs to build
6:32
the same things as previously planned
6:34
have shot up. Wages to pay staff,
6:36
materials to get weapons together. Of
6:39
course, not everything in the military
6:40
comes down to spending. The UK prides
6:43
itself on its strategic planning
6:45
expertise and intelligence. But as the
6:48
resources run dry, those advantages
6:50
vanish, and in turn, the UK is left more
6:53
vulnerable to threats from foreign
6:55
powers. If you would like to read more
6:58
in-depth analysis on defense spending, I
7:00
wrote about this for City AM, and you
7:02
can read about it on cityam.com.
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