Some costs of remilitarization

Raising military spending is economically and politically damaging

Among all the speculation about next month’s Budget, there’s one part of government policy that hasn’t been criticised as much as it should - the decision to increase military spending.

This is planned to rise in real terms by 3.8% a year until 2028-29, far more than the economy generally. And the government plans for it to hit 3.5% of GDP by 2035 - a full percentage point more than now. Defence Secretary John Healey recently told the Labour Conference:

We’re making defence an engine for growth – with a “defence dividend” measured in good jobs right across the United Kingdom.

But there’s a big problem with this. It’s not 1982 any more, when shipbuilding could have lifted us out of recession. There aren’t long dole queues from where workers can go into these good jobs. Although unemployment has increased recently it is still close to historic lows and the Bank of England estimates that there is only “a small margin of spare capacity” in the economy. This means that more good jobs in the military sector must mean fewer elsewhere - in other public services, or in civilian construction, or in greening the economy.

When Zarah Sultana recently said “every penny spent on bombs, tanks and missiles is stolen from our homes, schools and hospitals” she was displaying an awareness of the concept of opportunity cost - an awareness lacking in this government.

To put this another way, increased military spending - being an addition to aggregate demand - would tend to increase inflation. Offsetting this would require some combination of three counter-measures.

One could be lower government spending elsewhere. That would entail a further ruination of public services: crumbling schools, longer NHS waiting lists and a collapsing criminal justice system.

Another could be higher interest rates - which means less housebuilding and potentially productivity-enhancing private capital spending.

And a third would be increased taxes. The cost of these, however, goes far beyond mere (!) political unpopularity. In cutting private consumption to fund military spending, the government will be transferring resources from competitive sectors of the economy such as retailing and hospitality towards monopolistic ones such as military contractors. That would tend to further depress aggregate productivity growth. Also, lower private spending would accelerate pub closures and the decline of high streets, both of which have - as Diane Bolet and Thiemo Fetzer have shown - fuelled the rise of the far-right.

These drawbacks wouldn’t be quite so horrible if we were to get value for money for increased military spending. But the recent record suggests we won’t. The NAO says (pdf):

Over many years, MoD has regularly experienced difficulties delivering many of its projects to required performance, cost and time...Among the causes of the problems are supplier under-performance; weaknesses in MoD programme, contract and financial management; MoD and suppliers underestimating project scope and technical complexity; and MoD prioritising short-term solutions given its affordability challenges.

It estimates that of 52 of the latest major procurement projects only two were delivered on time and within budget. Failures include “the next generation fighter aircraft, the programme to deliver nuclear submarine reactor cores, two programmes providing missiles to the RAF, and MoD’s base information and communications technology.”

All this is true even in favourable times. And the next few years won’t be favourable. With almost all European countries raising military spending, the cost of men and materiel will rise, making it even less likely that we’ll get bangs for our buck.

One simple fact tells us as much. It’s that BAe Systems share price has risen more than 40% in the last year. Financial markets are telling us that increased military spending will be good for contractors’ profits. You don’t have to be an anti-capitalist to suspect there might be better ways to spend public money.

There’s a counter-argument here, however. Military spending can be good for civilian innovation. GPS, digital cameras and the internet were all spin-offs from military research.

But, but, but. Innovations cross borders; we all use the internet and GPS which Darpa helped develop. If there are spillovers from future military spending, the UK can benefit from them even if they are not developed here. Why not be a free rider?

This is especially true because we again run into opportunity costs. Spending on decarbonization could increase innovation in green technologies, or construction spending might increase our knowledge of how to do projects more efficiently. Military spending would squeeze out these posibilities. As the IFS says:

It is far from obvious that defence spending is more growth-friendly than other areas where public money could otherwise be spent, such as transport or education.

In fact, we don’t have to look far to see that falling military spending can be a good thing. After the fall of the USSR western countries cut it and they enjoyed not just what Mervyn King called a “nice” decade (”non-inflationary consistently expansionary”) but also political stability marked by the quiescence of the far-right.

One reason for this was that lower military spending allowed governments to raise spending on welfare and healthcare without tax increases. And in taking pressure off the public finances, it helped contribute to falling real interest rates, which helped to increase capital spending. In the 90s, we spoke of a “peace dividend”: the IMF and World Bank both regarded falling military spending as a good thing. We now face a reversal of these gains.

History warns us of the dangers here. When the Korean war began in 1950 the Attlee government greatly increased military spending. This damaged the economy as real resources were shifted away from exports and investment. And it helped Labour lose office (pdf) in 1951 as rationing was prolonged in order to mitigate the inflationary impact of that extra spending, and as Hugh Gaitskell imposed prescription charges to help pay for it. Granted, the planned rise in military spending now is much smaller and more gradual than that of the early 50s. But the effects might well run in the same direction.

By now, you might be screaming that such spending is necessary to contain the threat of Vladimir Putin. I don’t deny it. What we have here is yet another example of Isaiah Berlin’s point, that great values collide, and that there are tragic trade-offs - in this instance, between security and prosperity. Our problem is that our political discourse is incapable of coping with this fact - hence the abuse to Ms Sultana for telling a truth and Mr Healey’s talk of a “defence dividend” in a feeble effort to have both the penny and the bun. Unfortunately, though, awkward facts don’t go away merely if you ignore them.