MNI INTERVIEW: Private Cash To Partly Fund UK Defence Boost

The UK government appears to be aiming to fund some of its planned increase in defence spending with private money, taking some of it off-balance sheet and easing upward pressure on debt issuance as it tries to meet enhanced NATO targets within its overall spending envelope, economics Professor Ron Smith, who has a long history of defence advisory work, told MNI.

With the UK set to sign up to a new NATO target lifting defence spending from its current 2.5% to 3.5% of GDP, with another 1.5% of GDP to be spent on defence-related infrastructure, Smith noted that the government can cushion the fiscal impact both by applying a broader definition of what constitutes defence spending and by bringing in private money.

"I think they're trying to get some of it financed off Budget," Smith said, noting that the Ministry of Defence owns 1% of UK land, and that the ministry is also set to recover its responsibility for approving exports of military materiel. Private finance can also be brought into the manufacture of weapons and equipment, he said.

"If the government can get some clever wheeze by which financial institutions do it and avoid it going on to the government books" it will, according to Smith, though he noted the similarity  with the UK’s previous Private Finance Initiative deals, some of which "were very bad value for money.”

The government has created a new Defence Investors’ Advisory Group, including venture capital and private equity members, and more detail on spending plans should come in an upcoming Defence Investment Plan which should "have a large amount of detail ... of what they're spending over a 10-year horizon," Smith said.

This month’s Strategic Defence Review referred to "a decade of consistently rising defence spending" which would "encourage more private finance" without going into details on the latter.

DEFINITIONS KEY

Definitions of defence spending are also key, with, for example, the UK’s funding for military operations and supplies to Ukraine coming out of a Treasury reserve rather than the standard defence budget. The amount of UK defence spending reported to NATO was GBP60 billion, compared to an allotment of only GBP54 billion to the category in the government’s budget.

The likely new requirement for 1.5% of GDP to be spent on defence-related infrastructure will be met in part via spending not normally accounted for as military, in such areas as increasing cyber security around the national grid, Smith said.

Political optics may be key, as governments "find it hard to persuade the British public to spend more on defence. Instead, they then try and justify defence as providing growth,” he said, noting the temptation for government to "start making defence decisions with growth as an objective, rather than defence."

One of the government's core objectives is to raise productivity and recent media reports have floated the idea of military Keynesianism. But defence outcomes are hard to categorise in productivity terms, said Smith, who presented a paper on the subject at the Economic Statistics Centre of Excellence (ESCoE) conference in May.

"There are general issues in measuring output. Defence, I think, is particularly extreme," he said. (See MNI INTERVIEW: Employment Law Hit To UK Productivity - Haskel)

Nevertheless, the UK is "under very strong pressure to get the sharp end a lot sharper ...for instance, there are very obvious gaps in air defence," Smith said.