The Budget has been the major focus for the defence sector in the UK in October, within the limitations of it being heavily signalled as something that would be quite limited in terms of effect. The big calls have been eased in the Spending Review in Autumn 2027.
In fact, there were 3 outcomes that should help implement the SDR and the UK’s contribution to NATO deterrence. The military and sub-threshold risks we see in such abundant evidence mean doing more, sooner. We know deterrence is the bargain that means fighting is avoided. This Budget is only a small step towards answering some very hard questions, but it is a start.
First, the Chancellor - as expected - identified where the money will come from across Government to fund the already promised but unidentified £4.7 billion in the first four years of the MoD plan. This removed the worry that in the absence of knowing where the money was coming from, it might never materialise. There must be several other Government Departments not thrilled that they have taken the hit for Defence this week.
Second, and I think this is a bigger deal than many accept, the Chancellor committed to Defence reaching 3% GDP in 2030, the major waypoint to NATO’s 3.5% of GDP target in 2035. Where that money will actually be found from is now left to the 2027 Spending Review, but as a solid working assumption MoD and therefore industry can now plan around this trajectory with appropriate confidence.
Third, a new development, the Budget calls for an ‘innovative defence funding Task Force’ to work between now and the Spending Review. This is potentially a really big deal because it will bring together the Treasury, the MOD and the private sector (especially the City) to establish how potentially very large sums of private capital and private sector expertise can be mobilised into defence. There is some tricky ground to cross because bringing in private capital cannot generally be done as just more borrowing: this disturbs the fiscal rules (‘on balance sheet’) and thereby potentially Goverment increases borrowing costs. Nobody wants that.
The heart of this conversation is not going to be how much capital can be found (there is tons of it about) but around what the accounting treatment rules changes need to be that make as much as possible of this ‘off balance sheet’. The solutions will draw on the language of co-investment, dual-use, long term leasing etc that deliver defence outcomes, rather than standard borrowing talk of ‘money for assets’. If this works out as it should, then it will be possible for very significant amounts of private sector capital (100s £bn) to seed some parts of the Defence Investment Plan (DIP) that are currently quite undernourished, and also begin to tackle some really huge, strategic defence issues that come with a price tag impossible to contemplate getting into the DIP for the money that was remotely likely to be available. We need to get this argument won to really fix defence infrastructure, the digital estate, and get into building an ‘Iron dome’ for UK. Elbows out now.
UDSS is working with our industry clients to help them to understand what all this means for the programmes they are interested in and how to access and compete. We are supporting investors and Funds that want to how to put their capital in the most promising places. My role as Co-chair of TheCityUK Defence and Resilience group is turning out to be a very powerful conduit for connecting up Defence, Government and Industry, partly because it is not a profit-making body. We also hope that Parliament is going to take a close interest in this private/public sector partnership conversation. If it works out (it must be made to work out) it will be good for jobs and growth, higher GDP and therefore more money for defence.