Head of Defence Duncan Cochrane-Dyet

 

The Chancellor re-stated his commitment to the Defence spending targets of 3.5% of GDP by 2035 with an interim target of 3% by 2030. But the ‘how’ has still not been answered, it has been deferred to the Spending Review next year, although there was an encouraging commitment that it would be fully funded and at least partly financed by cuts to investment plans in other government departments.

 

My concern is that next year, the fiscal pressures may be even higher, and an assumption that for example conflict in the Middle East will resolve and thereby inflationary pressure on oil and gas will reduce, is optimistic. Inflationary pressures create interest rate pressures, and a presumption that bond yields will fall such that the interest burden on the UK’s debt will be lighter so giving more headroom to fund Defence is also optimistic. That Spending Review is a long way from being a done-deal.

 

Some of this uncertainty over the ‘how’ was expressed in his intention to seek more ‘innovative funding’ alternatives, to be championed by the new Innovative Defence Finance Task Force. The government has already signalled that it will step away from the multi-national defence funding bank launched by Canada, instead to engage in the same in a venture with Poland/Finland/NL. This suggests concern over Europe’s Eastern borders, but will these banking partners have as much financial heft as the Canadian alternative? Time and detail will tell.

 

Importantly though, the British Business Bank and the newly created National Wealth Fund, will have a focus on Defence. That’s very welcome.

 

Other ‘innovative funding’ options include an expansion of public/private defence partnerships is also welcome, albeit we do not know what form that would take (remember PPF anyone?). This does indicate more funding and contracts for UK businesses, and following on the heels of the Chancellor’s earlier comments about channelling government spending in general toward UK businesses, bodes well for the UK Defence Industry. Technology will form a big part of the future we know, and the announcement of Founder’s Relief (a 10m founder lifetime gains relief) is a decent support for start-up business in the Defence sector. Other more elements of support such as EMI incentives to attract and reward top talent into UK SMEs are also helpful and supportive – a part of the Chancellor’s job is to give those indications of support both now and in the future to strategically important commercial sectors. Defence is clearly one of those. Initiatives over AI such as data centres support (the British Data Centre Covenant), also helps underpin data security and capacity to support UK tech in Defence.

 

So in summary? Consistency toward Defence in other areas of the Budget announcements, a clear expression of support and an intention to meet eventually that 3.5% of GDP spending target. But the immediacy of the need for a vastly better Defence capability for the UK has not been addressed, and the ‘how’ has been kicked further down the road also.

 

Remember – there is a long ‘flash to bang’ delay between the money being made available, and the necessary weaponary and tools being contracted, designed, made and deployed.

 

So the question I asked ahead of this budget remains – in the face of threats from Russia et al, are we going to get there fast enough?